REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the appropriateness of the development of a European creditworthiness assessment for sovereign debt
Date: 2015-10-23
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: access to EU information, benchmarking, credit, disclosure of information, economic stabilisation, financial control, macroeconomics, monetary crisis, public debt, public finance

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 23.10.2015  COM(2015) 515 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the appropriateness of the development of a European creditworthiness assessment for sovereign debt  
 
 
I. Introduction 

The  recent  EU  sovereign  debt  crisis  revealed  macro-economic  imbalances  and 
highlighted the risks associated with over-reliance on external credit ratings of sovereign 
debt. Credit ratings of sovereign debt play a role in determining the borrowing costs of 
governments. During the crisis, over-reliance on credit ratings created market disruption 
which could, under certain circumstances, undermine financial stability in the EU.  

The  negative  impact  of  over-reliance  on  sovereign  credit  ratings  can  be  mitigated  if 
investors  in  the  European  sovereign  bonds  market  assess  the  creditworthiness  of 
European  sovereigns  themselves,  instead  of  relying  solely  and  mechanistically  on 
external  credit  ratings.  To  do  so,  they  should  be  equipped  with  accurate  and  relevant 
information to carry out their own credit risk assessment of sovereigns. 

A  good  appreciation  of  the  creditworthiness  of  European  sovereigns  facilitates 
investment in EU Member States' sovereign bonds. This contributes to investors’ overall 
market  confidence  in  individual  Member  States,  which  influences  their  investment 
decisions towards other asset classes in those Member States, for example investments in 
corporates  and  financial  institutions  incorporated  there.  The  availability  of  appropriate 
and  accurate  information  on  the  creditworthiness  of  European  sovereigns  could 
contribute  to  President  Juncker's  Political  Guidelines  as  an  underlying  element  for 
stimulating investment.  

This  report  describes  the  risks  observed  due  to  over-reliance  on  ratings  of  sovereign 
bonds (section II) and the policy response to date (section III). The report subsequently 
analyses if the existing sources of information are sufficient and adequate for investors to 
allow  them  to  carry  out  their  own  credit  risk  assessment  of  sovereigns  (section  IV)  or 
whether,  an  additional  tool  -  possibly  in  the  form  of  a  European  creditworthiness 
assessment  for  sovereign  debt1  –  is  appropriate  and  could  complement  the  existing 
information (sections V and VI). 

II. Over-reliance on external ratings in sovereign bonds markets 

1. Risks of over-reliance on sovereign bond ratings 
The recent sovereign debt crisis highlighted the risks of over-reliance on sovereign credit 
ratings.  The  crisis  showed  that  under  certain  economic  conditions,  this  over-reliance 
could create “cliff effects" whereby investors reduce their exposures to certain sovereign 
bonds and other debt instruments with the potential to undermine financial stability. Such 
"cliff effects" can occur following a credit rating downgrade, in particular below a certain 
threshold. This can have an additional liquidity effect due to the need to meet regulatory 
capital  requirements.  This  became  evident  during  the  most  recent  financial  crisis  when 
worsening economic forecasts put pressure on public finances. This led to downgrades of 
sovereign  bonds  causing  a  simultaneous  selling  off  of  debt  instruments  by  financial 
institutions  and  investors.  These  market  reactions  were  re-enforced  by  references  to 

1   Article 39b(2) of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 

September 2009 on credit rating agencies, OJ L 302, 17.11.2009, p.1 ("CRA Regulation"). 

2 

 
                                                            
ratings  in  some  financial  legislation2  as  well  as  contractual  over-reliance  on  ratings  by 
financial institutions.  

The potential impact of sovereign ratings goes far beyond the immediate effects on the 
sovereign  bonds  of  the  rated  countries  and  can  result  in  negative  spill  overs  across 
markets  and  even  across  countries  which  have  significant  economic  links  ("contagion 
effect").  These  effects  are  strengthened  by  the  inter-linkages  between  sovereign  credit 
ratings  and  ratings  of  entities  within  those  sovereigns.  These  links  result  from  the 
methodologies used by credit rating agencies which often limit the most favourable credit 
rating  of  any  financial  instrument  within  a  given  jurisdiction  to  the  rating  of  the 
sovereign (often referred to as a "sovereign ceiling"). As a consequence, the downgrade 
of  a  sovereign  often  triggers  downgrades  of  other  financial  instruments  located  in  the 
sovereign, including corporate bonds and financial institution ratings.  

2. Observations on sovereign debt ratings and EU bonds markets 

Empirical  evidence  from  the  EU  sovereign  debt  crisis  has  shown  "[...]  a  significant 
response of government bond yield spreads to changes in both the rating notations and 
the  rating  outlook,  particularly  important  for  the  case  of  negative  announcements"3. 
Furthermore,  it  has  been  demonstrated  that  "[…]  sovereign  rating  downgrades  have 
statistically  and  economically  significant  spillover  effects  both  across  countries  and 
financial  markets  implying  that  rating  agencies  announcements  could  spur  financial 
instability"4. 

Chart 1 shows that up to 2008, credit ratings of euro area Member States were on average 
higher  than  those  of  non-euro  area  Member  States.  While  the  average  credit  rating  of 

2   For  example,  references  to  external  credit  ratings  can  be  found  in  the  standardized  approach  for 
calculating capital requirements for banks (Directive 2013/36/EU of the European Parliament and of 
the  Council  of  26 June  2013  on  access  to  the  activity  of  credit  institutions  and  the  prudential 
supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing 
Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27.6.2013, p. 338 (CRD IV) and Regulation (EU) 
No 575/2013  of  the  European  Parliament  and  of  the  Council  of  26 June  2013  on  prudential 
requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, 
OJ L 176, 27.6.2013, p. 1 (CRR)) and in capital requirements for insurance undertakings (Commission 
Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the 
European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and 
Reinsurance,  OJ  L  12,  17.1.2015,  p.  1  (Solvency  II))  and  in  margin  requirements  for  non-centrally 
cleared counter parties. 

3   António  Afonso,  Davide  Furceri,  Pedro  Gomes,  Sovereign  Credit  Ratings  and  Financial  Market 
Linkages,  Application  to  European  Data,  ECB  working  paper  series,  number  1347,  October  2011, 
available at: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1347.pdf 

4   Rabah  Arezki,  Bertrand  Candelon  and  Amadou  N.  R.  Sy,  Sovereign  Rating  News  and  Financial 
Markets Spillovers: Evidence from the European Debt Crisis, March 2011,IMF working paper series, 
nr WP/11/68, available at: http://www.imf.org/external/pubs/ft/wp/2011/wp1168.pdf; António Afonso, 
Pedro  Gomes  and  Abderrahim  Taamouti,  Sovereign  Credit  Ratings,  Market  Volatility  and  Financial 
at: 
nr 
Gains, 
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1654.pdf 

ECB  working 

1654,  March 

available 

series, 

2014, 

paper 

3 

 
                                                            
euro  area  Member  States  was  "AA+"5,  non-euro  area  Member  States  were  rated  on 
average  "A".  Only  after  the  financial  crisis,  in  the  period  2009-2010,  Member  States 
within  and  outside  the  euro  area  observed  a  limited  and  similar  deterioration  of  credit 
ratings of, on average, two notches. Furthermore, from the beginning of 2011, euro area 
Member States  observed steep downgrades, from an average of "AA" in 2011 down to 
"A-" in 2013. The average credit rating of euro area Member States is now stronger than 
non-euro area Member States after converging in 2013 to the level of "A-". 

Chart 1: Sovereign rating trends in the EU6 

Source: own calculations by the European Commission 

Chart  2  and  3  demonstrate  the  evolution  of  credit  ratings  of  a  selected  number  of  both 
euro area and non-euro area Member States, which supports the above analysis. Before 
2009,  the  sample  of  euro  area  countries  were  rated  "A"  or  higher  as  shown  in  chart  2. 
During  the  sovereign  debt  crisis,  a  number  of  Member  States’7  credit  ratings  dropped 
sharply in the period 2010-2012 and improved moderately since end 2013.  

5   To facilitate the presentation in chart 1, credit ratings issued by three different agencies (Standard & 
Poor’s,  Moody’s  and  Fitch)  were  mapped  towards  a  single  rating  scale  ranging  from  AAA  (lowest 
credit  risk)  to  D  (highest  credit  risk).  The  full  scale  employed  for  the  mapping  is  following:  AAA  
AA+,  AA,  AA-,  A+,  A,  A-,  BBB+,  BBB,  BBB-,  BB+,  BB,  BB-,  B+,  B,  B-,  CCC+,  CCC,  CCC-, 
CC+,CC,  CC-,  C+,  C,  C-  and  D.  It  should  be  taken  into  account  while  interpreting  chart  1  that  the 
underlying rating methodologies differ among the rating agencies employed in the sample. 

6 The chart displays a simple unweighted average of long-term foreign currency sovereign ratings for euro 
area  and  non-euro-area  Member  States  issued  by  Standard  &  Poor’s,  Moody’s  and  Fitch.  The  average 
synthetic  rating  was  obtained  based  on  the  distance  (number  of  notches)  from  the  triple-A  rating  and 
comprises the average rating of those credit rating agencies with sufficient cross-country coverage. Foreign 
currency ratings are favoured over local currency ratings for international comparisons because the  latter 
includes the exchange rate risk international investors are exposed to. 

7IE, EL, ES, IT, PT 

4 

 
  
 
                                                            
Chart 2:  Sovereign rating trends in the euro area  

Source: own calculations European Commission 

For  non-euro  area  Member  States  a  much  more  diverse  spectrum  of  credit  ratings  was 
observed  before,  during  and  after  the  sovereign  crisis  (Chart  3).  While  some  non-euro 
area Member States had a relative stable credit rating8, some others had a downward9 or 
upward10 evolution. 

8 PL, RO 

9 HR, HU, UK 

10 CZ 

5 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
Chart 3: Sovereign rating trends in non-euro area Member States 

Source: own calculations European Commission 

3. Yields of sovereign bonds 

The yields of sovereign bonds are an important indicator of investors' perception of the 
credit  risk  profile  of  a  sovereign.  Prior  to  the  sovereign  debt  crisis,  yields  of  euro  area 
bonds were broadly converging11, suggesting that investors had the same stance toward 
the creditworthiness of euro area Member States as demonstrated in Chart 4. During the 
crisis  this  changed  considerably.  Since  2008  investors  decreased  their  demand  for 
specific  sovereign  bonds12  or  required  higher  returns  as  reflected  in  the  evolution  of 
yields13. For some other euro area Member States a downward trend in sovereign bond 
yields  was  observed.  Since  2013,  euro  area  sovereign  bond  yields  have  been  gradually 

11 See Chart 4. 

12 ES, PT, IT, IE, EL and CY 

13 See Chart 4. 

6 

 
 
 
 
 
 
 
                                                            
evolving  towards  pre-crisis  levels.  However,  important  divergences  remain  across 
individual euro area Members States (Chart 4). 

Chart 4: Yields, 10-year government bonds, percentage  

35

30

25

20

15

10

5

0
2007

EL
PT
IE
IT
ES
BE
DE

2008

2009

2010

2011

2012

2013

2014

2015

Source: Bloomberg 

III. Policy response to mitigate risks of over-reliance on sovereign debt ratings 

1. Enhanced regulatory scrutiny over credit rating agencies   

Following  the  inadequacies  in  credit  ratings  observed  during  the  financial  crisis  and 
subsequent sovereign debt crisis, new rules for credit rating agencies (CRAs) were put in 
place  in  2009  which  included  registration  and  supervision  requirements  for  CRAs  at 
national level. In 2011, registration and supervision of CRAs in the EU was centralised 
within the European Securities and Markets Authority (ESMA). 

2. Enhanced transparency on sovereign debt ratings 

Following  the  sovereign  debt  crisis,  additional  measures  were  introduced  in  2013  to 
enhance  transparency  and  timeliness  of  sovereign  debt  ratings,  thereby  contributing  to 
reducing risks of market disruption.  

In  particular,  CRAs  have  to  publish  annually  a  calendar  setting  the  dates  for  the 
publication  of  their  sovereign  credit  ratings.  Sovereign  debt  credit  ratings  shall  also  be 
published  on  Fridays,  after  close  of  business  of  regulated  markets  in  the  EU,  to  avoid 
market disruption during trading hours. CRAs shall complement the credit rating with a 
full  research  report  which  provides  investors  with  more  information  on  the  underlying 
reasons  for  a  sovereign  rating  change.  In  addition,  CRAs  shall  inform  the  sovereign 

7 

 
 
 
 
 
 
 
during working hours, and at a least a full working day before publication, of the credit 
rating and the rating outlook. This provides the sovereign, just as any other rated entity, 
the opportunity to highlight any factual errors to the CRA. 

The  combined  effect  of  these  rules  has  enhanced  the  transparency  of  sovereign  debt 
ratings. Investors are now provided with more information on the underlying reasons and 
assumptions  of  sovereign  credit  ratings  issued  by  CRAs  as  well  as  the  data  they  relied 
upon.  The  additional  information  on  sovereign  ratings  could  facilitate  and  enhance  the 
ability of investors to carry out more accurate creditworthiness assessments of sovereign 
debt. 

Despite  these  regulatory  efforts,  a  2013  report  from  ESMA14  revealed  shortcomings  in 
the  sovereign  ratings  process  which  could  pose  risks  to  the  quality,  independence  and 
integrity  of  the  ratings  and  of  the  rating  process.  In  this  report,  ESMA  identified  risks 
relating  to  conflicts  of  interests  arising  from  the  role  of  senior  management  and  other 
non-rating functions in the rating process and from the involvement of sovereign analysts 
in  research  and  publication  activities.  The  report  outlined  the  risks  of  breaching  of 
confidentiality  of  sovereign  rating  information  and  the  controls  in  place  prior  to  the 
publication  of  ratings.  The  report  also  highlighted  the  risks  related  to  the  timing  of 
publication of sovereign ratings, including timely disclosure of rating changes. As part of 
the  supervisory  process,  ESMA  requested  CRAs  to  implement  action  plans  to  remedy 
this situation. Ultimately, ESMA is empowered to take supervisory action if appropriate.   

3. Reducing over-reliance on external credit ratings 

In response to risks and negative effects of solely and mechanistically relying on credit 
ratings (which includes sovereign credit ratings), action was taken at international level 
to reduce over-reliance on credit ratings, with the aim of restoring trust in the financial 
system.  The  Financial  Stability  Board  (FSB)  Principles15  to  reduce  reliance  on  CRA 
ratings in  standards, laws and regulations were endorsed  by G20 Leaders in  November 
2010 (Seoul Summit)16. The Principles aim to end mechanistic reliance on credit ratings 
by  banks,  institutional  investors  and  other  market  participants;  introduce  a  significant 
change  in  existing  practices;  and  to  establish  stronger  internal  credit  risk  assessment 
practices as an alternative.  

Effective  reduction  of  over-reliance  on  external  credit  ratings,  including  on  sovereign 
credit ratings, could reduce risks of cliff effects in case of sovereign downgrades. In its 

14   Credit Rating Agencies: Sovereign ratings investigation, ESMA’s assessment of governance, conflicts 
of interest, resourcing adequacy and confidentiality controls, Published 02 December 2013, reference  
ESMA/2013/1775 

15   Principles for Reducing Reliance on CRA Ratings, Financial Stability Board, 27 October 2010. 

16 

G20, 

Seoul 

Summit 

Document, 

p. 

8, 

available 

at: 

https://g20.org/wp-

content/uploads/2014/12/Seoul_Summit_Document.pdf  

8 

 
                                                            
response to the FSB17, the European Commission outlined its actions to mitigate risks of 
reliance of ratings. As a follow up, the European Commission will report on alternative 
measures  to  assess  credit  risk  and  identify  if  there  are  viable  alternatives  available  and 
determine  if  it  is  feasible  for  market  participants  to  implement  them.  Based  on  the 
outcome of this report, the Commission could consider removing remaining references to 
credit ratings in EU legislation by 2020.   

In  addition,  the  Commission  supports  the  G20  Data  Gaps  initiative18,  which  aims  to 
improve  the  availability  and  comparability  of  economics  and  financial  data  at 
international  level.  One  of  the  recommendations  (R17)  is  to  promote  timely,  cross-
country  standardised  government  financial  statistics  based  on  common  international 
accepted standards. 

4. Assessing a European creditworthiness assessment for sovereign debt 

As part of the policy response to reducing the over-reliance on sovereign credit ratings, it 
is necessary for investors to have appropriate information to assess the creditworthiness 
of  Member  States.  Such  information  should  enable  investors  to  make  their  own  credit 
risk assessment of sovereigns and not rely solely and mechanistically on external credit 
ratings issued by credit rating agencies.  

The  Commission  already  collects,  processes  and  publishes  data  on  the  economic, 
financial  and  fiscal  situation  and  performance  of  Member  States,  in  the  context  of  the 
surveillance of economic and fiscal policies. The Commission has been invited to explore 
whether this reporting should be complemented by additional elements or indicators and 
to  examine  the  possibility  of  developing  a  European  creditworthiness  assessment.  This 
could allow investors to make an impartial and objective assessment of Member States’ 
creditworthiness.  

The  Commission  will  therefore,  "taking  into  consideration  the  situation  of  the  market, 
[…]  submit  a  report  to  the  European  Parliament  and  to  the  Council  on  the 
appropriateness  of  the  development  of  a  European  creditworthiness  assessment  for 
sovereign debt."19 This report will feed into the upcoming Report of the Commission on 
the  appropriateness  and  feasibility  of  supporting  a  European  CRA  which  is  due  by  the 
end of 2016.20 

17   Commission  Staff  working  paper:  EU  action  plan  to  reduce  reliance  on  external  credit  ratings, 

available at : http://ec.europa.eu/finance/rating-agencies/docs/140512-fsb-eu-response_en.pdf 

18  •IMF-FSB,  The  Financial  Crisis  and  Information  Gaps.  Report  to  the  G-20  Finance  Ministers  and 
at:  
October 

available 

2009, 

Bank 

29, 

Central 
http://www.imf.org/external/np/g20/pdf/102909.pdf 

Governors, 

19   Article 39b (2), first subparagraph, of the CRA Regulation 

20   Article 39b(2), second subparagraph, of the CRA Regulation 

9 

 
                                                            
IV. Gap analysis between investors’ needs and information supply 

As  previously  highlighted,  access  to  sufficient  and  adequate  information  facilitates 
investors  to  make  their  own  creditworthiness  assessment  and  reduce  reliance  on 
sovereign  ratings.  This  section  outlines  the  type  of  information  used  by  investors  and 
compares  it with  the information  available to  determine  whether there  are  any  material 
information gaps.  

1. Investors’ information needs  

A) Types of investors and information needs 

A  distinction  can  be  made  between  large,  mainly  institutional,  investors  and  smaller 
investors.  Where  these  investors  seek  to  access  sovereign  bond  markets,  they  have 
similar information needs regarding those sovereigns but different capabilities to assess 
sovereign credit risk. 

For the purpose of developing this report, the Commission conducted interviews with a 
limited  number  of  large  institutional  investors  such  as  banks,  pension  funds  and  asset 
managers,  and  some  smaller  asset  managers.  Based  on  this  feedback  the  most  relevant 
information employed to assess creditworthiness of sovereigns is the data on the macro-
economic, fiscal strength and performance of sovereigns. This includes quantitative data 
such  as  the  change  of  gross  domestic  product  (GDP),  government  debt  levels  and 
maturity  structure,  government  deficit,  unemployment  rate  and  competitiveness. 
Furthermore,  qualitative  information  on  the  rule  of  law  and  good  governance  and  the 
political situation is considered of relevance.   

The  large  institutional21  investors  interviewed  reported,  that  they  assessed  the 
creditworthiness of sovereign debt for investment decisions and for prudential purposes 
and that there is a requirement for comparable data on sovereign debt globally, not only 
the EU, due to the global reach of their businesses and the needs of their clients. 

To  obtain  data  that  is  comparable  to  conduct  their  own  credit  risk  assessment,  the 
investors interviewed often employ the services of private data providers who consolidate 
information  on  sovereigns  from  multiple  public  and  private  sources  and  provide  an 
automatised  data-stream.  They  often  employ  their  own  analysts  and  some  assign  their 
own  internal  ratings  to  sovereigns.  Furthermore,  some  institutional  investors  indicated 
interacting  directly  with  national  authorities,  such  as  National  Debt  Agencies  and 
Treasuries.  

On the other hand, the smaller investors reported that they had more limited resources to 
conduct  their  own  credit  risk  assessment,  or  to  access  and  analyse  data  from  different 
public  and  private  data  sources.  Smaller  investors  seem  to  rely  more  heavily  on  credit 
ratings by credit rating agencies. They carry out their own additional assessment on an ad 
hoc  basis,  often  linked  to  current  events.  Furthermore,  these  smaller  investors  outlined 

21 Composed of pension funds, credit institutions and asset managers; 

10 

 
                                                            
that  the  information  on  creditworthiness  assessment  of  sovereign  debt  is  not  only  used 
for  investments  in  sovereign  bonds,  but  also  for  other  investment  decisions  and  asset 
allocation which could be of relevance for small investors.   

B) Market situation of sovereign bond holdings 

In  terms  of  market  impact,  domestic  institutional  investors  represent  a  large  portion  of 
holdings  in  euro  area  sovereign  debt.  As  shown  in  Chart  5,  in  particular  resident 
monetary  financial  institutions  (MFI’s),  insurance  corporations  and  pension  funds 
(ICPF’s)  and  investment  funds  represent  an  important  share  of  the  investments  in  euro 
area government bonds.  

Chart 5: Issuance and holdings of sovereign bonds, euro area, € billion 

Source: ECB and own calculations 

As  demonstrated  in  Chart  6,  in  2013,  Euro  area,  non-institutional  resident  investors 
accounted for 7.2 percent of total holdings in euro area sovereign bonds. Consequently, 
these  investors  represent  only  a  small  share  of  investment  in  sovereign  bonds.  In 
addition, non-resident creditors represent 57 percent of investment in sovereign bonds in 
the EU. This includes both investors from other Member States and from outside the EU.  

Chart 6: Holdings of sovereign bonds by type of investor, 2013, percentage of total government 
debt, European Union  

11 

01,0002,0003,0004,0005,0006,0007,0008,0002009201020112012201320142015Holdings by MFIsHoldings by ICPFsHoldings by investment fundsTotal issuance of government bonds 
 
 
 
 
7% 

13% 

22% 

2% 

57% 

Non-resident
creditors
Central banks

Other MFIs

Other Financial
Institutions
Other residents

Source: ECB, Government Finance Statistics, own calculations  

2. Information available to investors 

A wide range of information on sovereign debt is available to market participants through 
both public and private channels. This provides input for investors to carry out their own 
credit  risk assessment.  Information  from  public  sources  is published  by  Member  States 
themselves,  European  Institutions  as  well  as  various  international  organisations.  In 
addition,  a  number  of  private  providers  supply  information  to  investors.  This  includes 
specialised  data  providers,  trade  associations  and  CRAs.  The  type  of  information 
provided,  the  frequency  and  the  nations  covered  varies  widely  depending  on  the 
information channel. 

3. Information provided by the European Commission  

At  EU  level  a  wide  range  of  statistics  and  reports  on  the  economic  situation  of  and 
economic  developments  within  Member  States  has  been  publicly  available  for  some 
time.  The  Commission  publishes  government  debt  data,  quarterly  government  finance 
statistics and data reported under the Excessive Deficit Procedure (EDP) in a harmonised 
and comparable way. Furthermore, the Commission publishes economic forecasts, euro 
area, public finances and fiscal sustainability reports. The introduction of new European 
rules on fiscal and macro-economic surveillance within the European semester, together 
with  reinforced  requirements  for  Members  States'  reporting  on  government  finance 
statistics under the European  System of  National and Regional Accounts  (ESA 2010)22 
strengthened the information available to investors to assess the creditworthiness of EU 
sovereigns. 

22   Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the 
European system of national and regional accounts in the European Union, OJ L 174, 26.6.2013, p. 1. 

12 

 
 
                                                            
A) Enhanced fiscal and macro-economic surveillance of Member States 
At EU level, the rules governing the Stability and Growth Pact23 (hereafter referred to as 
the  Pact)  are  the  cornerstone  of  the  EU's  economic  governance  and  aim  to  ensure  the 
proper functioning of Economic and Monetary Union. The main objective of the Pact is 
to promote sound budgetary policies and to ensure the sustainability of public finances in 
the Member States.  

In  recent  years,  the  Pact  was  strengthened  to  address  shortcomings  in  economic 
governance  and  budgetary  surveillance  and  to  improve  the  monitoring  of  the  macro-
economic and fiscal performance of all EU Member States in general and of the euro area 
in particular. Following these initiatives, investors have access to additional information 
for their own assessment of the state of public finances. 

The reinforced European Semester of economic policy coordination and the six legal acts 
known  as  the  'Six-Pack'24,  adopted  in  November  2011,  strengthened  the  Stability  and 
Growth Pact (SGP). As part of the European Semester, the Commission analyses national 
plans  of  budgetary,  macro-economic  and  structural  reforms  and,  on  that  basis,  the 
Council adopts targeted recommendations addressed to each Member State. Furthermore,  
a  system  of  financial  sanctions  kicks-in  for  the  Euro  area  Member  States  in  case  of 
excessive macroeconomic imbalances and/or budgetary deficits. 

In the context of the European Semester25, a number of reports are published wherein the 
Commission takes stock of the macro-economic and budgetary situation of all  Member 
States. These include: 

1)  The  Annual  Growth  Survey  (November)  which  sets  out  the  EU  priorities  to 
boost growth and job creation;  

2) The Alert Mechanism Report in the context of the Macroeconomic Imbalance 
Procedure,  which  based  on  a  scoreboard  of  indicators,  identifies  the  Member 
States that require further analysis;  

3)  The  Country  Reports  (February/May),  in  which  the  Commission  publishes  a 
single  analytical  economic  assessment  per  Member  State  evaluating  their 
economic  situation,  their  reform  agendas  and  whenever  deemed  relevant  on  the 
basis  of  the  Alert  Mechanism  Report  and  the  possible  imbalances  faced  by  the 
Member State. For several Member States identified in a scoreboard, an in-depth 

23   The  Pact  is  anchored  in  the  Treaty  on  the  Functioning  of  the  EU  (TFEU)  and  consists  of  Council 
Regulation (EC) No 1466/97 (the "preventive arm", based on Art. 121 TFEU) and Council Regulation 
(EC)  No  1467/97  (the  "corrective  arm",  based  on  Art.  126  TFEU),  as  well  as  their  subsequent 
amendments and related legislation. 

24    The six-pack is a set of five Regulations and one Directive which entered into force on 13 December 
2011  and  covers  fiscal  surveillance  and  macroeconomic  surveillance  under  the  new  Macroeconomic 
Imbalance Procedure.  

25  An 

overview 

of 

the 

stages 

in 

the  European 

Semester 

can 

be 

found 

at:  

http://ec.europa.eu/economy_finance/economic_governance/the_european_semester/index_en.htm 

13 

 
                                                            
review  is  conducted.  This  review  includes  an  assessment  of  the  public  and/or 
private indebtedness in view of the future evolution and cost of borrowing; and 

4)  Country-specific  recommendations  (May)  are 
the 
Commission, for adoption by the Council; they provide tailor-made policy advice 
to  Member  States  in  areas  deemed  as  priorities  for  the  next  12-18  months.  The 
recommendations  are  accompanied  by  an  assessment  of  the  Member  State's 
Stability and Convergence Programmes.  

then  proposed  by 

For the euro area, an  additional mechanism was put  in  place. This  reform package, the 
so-called 'Two-Pack'26, has been in force since May 2013 in all euro area Member States 
and further increased the transparency on euro area Member States' budgetary decisions 
and improved the coordination of Member States’ debt issuance plans.  

To ensure the coordination of fiscal policies among Member  States sharing the euro as 
their  currency,  governments  (except  for  countries  under  a  macro-economic  adjustment 
programme) are also required by the Two Pack to submit their draft budgetary plans for 
the  following  year  to  the  Commission  by  the  15th  of  October  each  year27.  The 
Commission provides two assessments of the draft budgetary plans: an opinion on each 
Member State's plan and an overall assessment of the budgetary situation and prospects 
of the euro area as a whole. 

The opinion on the draft budgetary plan of each euro area Member State is based on the 
assessment  of  compliance  with  the  SGP  and  it  is  built  on  the  Commission's  autumn 
forecast.  If  the  Commission  finds  that  a  Member  State’s  draft  budgetary  plan  is  in 
particularly  serious  non-compliance  with  its  SGP  obligations,  it  can  ask  for  a  revised 
draft to be submitted. 

All European Semester related information is public. Hence, this provides investors with 
timely and periodic information, based on a common methodology. It complements the 
information already disclosed to the public by Member States' national statistical offices, 
national debt agencies and private information providers.  

The  European  Semester  has  streamlined  the  information  flows  available  to  investors. 
This allows them to have a better view of the macro-economic and fiscal performance of 
Members States. It also provides them with an additional information source and with the 
raw data to conduct their own credit risk assessment of sovereigns. 

In addition, some other tools have been developed at EU level to assess macro-prudential 
strengths  of  Member  States.  For  example,  the  Directorate  General  for  Economic  and 

26   Two Pack, which consists of 2 Regulations which introduced additional surveillance and monitoring 

procedures for euro area Member States. 

27   These  draft  plans  are  made  public  by  the  Commission  in  accordance  with  Regulation  (EU)  No 
473/2013 of the European Parliament and of the Council of 21 May 2013 on common provisions for 
monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the 
Member States in the euro area, OJ L 140, 27.5.2013, p. 11. 

14 

 
                                                            
Financial Affairs (DG ECFIN) has developed an early-detection index of fiscal stress for 
EU countries. 

Furthermore, every 3 years, the Commission publishes Ageing Reports which assess the 
economic  impact  of  demographic  changes.  These  are  complemented  by  reports  on  the 
fiscal sustainability of public finances in the Member States, against the background of 
financial, economic and fiscal impact of the demographic changes.  

B) ESA 2010 
With  effect  from  September  2014,  the  ESA  2010  has  replaced  ESA  199528.  ESA  2010  
clarifies  the  definitions  and  rules  regarding  Government  Finance  Statistics  (GFS), 
thereby enhancing the accuracy and comparability of such statistics.   

ESA 2010 defines and regulates Member States’ reporting of information on government 
debt and clarifies the reporting requirements for and treatment of some specific financial 
transactions  such  as  contingent  liabilities,  Public  Private  Partnerships  and  the  use  of 
Special Purpose Vehicles which previously were not always reported in the same way by 
Member States in the context of the GFS. As a result, the statistics collected on the GFS 
provide  for  a  comprehensive  view  of  the  outstanding  government  debt  of  EU  Member 
States. This allows investors to have accurate information on the state of the debt levels 
across the EU.  

4.  Conclusion  on  the  supply  and  demand  of 
creditworthiness assessment. 

information  on  sovereign 

Based  on  the  analysis  above,  a  wide  range  of  information  is  available  for  investors  to 
assess  the  creditworthiness  of  EU  sovereign  debt.  In  particular,  the  European 
Commission  publishes  a  wide  range  of  information  on  European  member  states.  This 
was  recently  strengthened  due  to  the  new  rules  on  fiscal  and  macro-economic 
surveillance of the Member States. Based on the interviews conducted with a sample of 
investors, as described in the section above, no material gap could be identified between 
the  information  published  and  the  information  used  or  requested  by  financial  market 
participants, for the purpose of assessing creditworthiness. 

V. Appropriateness of the development of a European creditworthiness assessment 
for sovereign debt 

A  potential  European  creditworthiness  assessment  of  sovereign  debt  could  achieve  a 
number of objectives and fulfil a number of conditions to be considered appropriate and 
proportionate.  It  should  contribute  to  reducing  over-reliance  on  external  credit  ratings 
when  assessing  sovereign  debt.  Furthermore,  it  should  improve  the  situation  on  the 
market 
to  assess 
creditworthiness of sovereigns. In addition, to determine if a European creditworthiness 
assessment of sovereign debt would be appropriate, the potential scope and mandate as 

information  sources  available 

to  stakeholders 

terms  of 

in 

28   Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national and regional 

accounts in the Community, OJ L 310, 30.11.1996, p.1. 

15 

 
                                                            
well  as  the  potential  economic  impact  of  any  such  system  on  stakeholders,  including 
investors, issuers, the rating industry and the taxpayers should be considered.  

1. Typology of a potential European creditworthiness assessment for sovereign debt 

A  European  creditworthiness  assessment  of  sovereign  debt  could  be  conceived  in 
multiple  forms  and  with  different  objectives.  The  scope  can  be  determined  in  terms  of 
information  (being quantitative or  qualitative information) on which it is  based and the 
level and robustness of the assessment provided to investors.  

A) Scope of the assessment 

An  EU  creditworthiness  assessment  could  entail  that  a  European  public  body  would 
publish  economic  indicators  and  research  reports  with  a  quantitative  and  qualitative 
assessment  of  EU  Sovereigns.  These  reports  would  provide  an  alternative  source  of 
information, though without a single indicator, as the one employed by CRAs. 

In a restrictive sense, it could be defined as a European public body which would conduct 
an assessment of the creditworthiness of European Union Member States based on a set 
of  quantitative  data  on  EU  Member  States  and  publish  periodically  the  changes  of  this 
quantitative data. This would provide an alternative source of quantitative information on 
the creditworthiness of sovereigns compared to the existing credit rating agencies.  

B) Governance of a European creditworthiness assessment  

For  any  European  assessment  to  be  considered  by  market  participants  as  a  credible 
measure of creditworthiness, it is necessary that it would be carried out by a credible and 
reputable body, either an existing entity or a new body. 

The  task  could  be  entrusted  to  existing  EU  institutions,  bodies  or  agencies  or  to  a  new 
public body to be established. For any existing body it should be considered that a new 
task would not affect the effective implementation of their current mandate. With regard 
to  the  European  Commission,  a  largely  similar  assessment  is  already  conducted  within 
the  current  framework  of  economic  and  fiscal  surveillance  of  Member  States  which 
includes quantitative and qualitative assessments of EU Member States. 

C) Costs 

The  various  options  set  out  above  for  a  possible  European creditworthiness  assessment 
would have differing, yet important, consequences for the determination of resources the 
assessment would need to be set up and the potential impact it would have on the market. 

In  particular,  the  creation  of  a  new  body  would  entail  important  set-up  costs  which 
should  be  weighed  up  against  the  potential  benefits  for  the  EU  sovereign  bond  market 
and  the  European  economy  as  a  whole.  The  Commission  has  already  estimated  in  the 
past  the  potential  costs  that  such  an  exercise  would  entail,  and  concluded  that  this  is 
disproportionate  to  the  benefits  generated29.  In  particular,  in  so  far  a  new  body  would 

29   SEC(2011) 1354, Impact assessment, accompanying proposal for a Regulation amending Regulation 

(EC) No 1060/2009 on credit rating agencies, p. 34-37 

16 

 
                                                            
merely duplicate the information provided on EU sovereigns by existing EU institutions, 
the benefits would most likely not outweigh the costs.  

2. Impact of a European creditworthiness assessment  

A) Impact on reliance on sovereign credit ratings 

If  a  potential  European  creditworthiness  assessment  would  constitute  an  alternative  to 
external  ratings,  this  could  reduce  reliance  on  such  ratings.  A  potential  European 
creditworthiness  assessment  should  be  complementary  to  existing  information  sources 
and avoid that it would be solely and mechanistically relied upon by investors.   

The report30 of the Financial Stability Board on the implementation of the FSB principles 
on  reducing  reliance  to  ratings,  calls  on  authorities  to  “guard  against  the  temptation  to 
adopt a small number of alternative measures for assessing creditworthiness in place of 
CRA ratings, which can result in substituted pro-cyclicality and herd behaviour.”  

To  the  extent  that  it  would  duplicate  the  existing  information  provided  by  the  current 
macro-economic surveillance of European sovereigns, it can be expected that the impact 
on reducing over-reliance on external credit ratings would be limited. 

B) Impact on investors 

A European creditworthiness assessment would have a distinct impact depending on the 
type of investor.  

Based  on  interviews  carried  out  with  a  sample  of  institutional  investors,  the  benefits 
would  be  limited,  as  they  already  carry  out  an  in-depth  creditworthiness  assessment 
based on the existing data sources. The existing fiscal and macro-economic surveillance 
regime  already  provides  all  relevant  information  to  assess  the  creditworthiness  of  EU 
sovereigns. A European creditworthiness assessment would merely provide an additional 
input into their credit risk assessment system. Furthermore, the interviewed institutional 
investors  investing  in  the  global  sovereign  bond  market  favour  comparable  data  on  a 
global  level,  not  limited  to  a  geographical  area  such  as  the  EU.  Such  information  is 
already  provided  by  international  institutions  such  as  the  International  Monetary  Fund 
(IMF)31,  the  World  Bank32  and  the  Organisation  for  Economic  Cooperation  and 
Development (OECD)33.  

30   Financial  Stability  Board,    Thematic  Review  on  FSB  Principles  for  Reducing  Reliance  on  CRA 

Ratings, available at: http://www.financialstabilityboard.org/wp-content/uploads/r_140512.pdf. 

31   For  example  IMF  country  reports  available  at:  http://www.imf.org/external/country/index.htm; Other 
IMF  global  statistics  on  key  economic  aggregates  which  can  be  employed  for  creditworthiness 
assessment of sovereigns are available at: http://www.imf.org/external/data.htm. 

32   For  example  world  bank  sovereign  debt  statistics  available  at:  http://data.worldbank.org/data-

catalog/international-debt-statistics;  

33   For example the OECD economic outlook, available at http://www.oecd.org/eco/economicoutlook.htm 
and  the  OECD  research  and  statistics  on  public  finance  and  Sovereign  debt,  available  at 
http://www.oecd.org/eco/public-finance/ 

17 

 
                                                            
Based  on  interviews  with  smaller  investors,  they  could,  in  some  circumstances,  benefit 
from  an  EU  creditworthiness  assessment  if  it  could  reduce  the  efforts  to  gather  and 
analyse  all  available  relevant  information.  While  they  benefit  from  the  transparency 
provided  by the new fiscal and macro-economic surveillance regime with  the EU, they 
have limited capabilities to process this information.  

However, in the current setting, a European creditworthiness assessment would add little 
additional value to the existing information provided by the fiscal and macro-economic 
surveillance regime, in particular compared to the costs associated with the set-up of any 
such European assessment. 

C) Impact on competition in the rating industry  

A genuine European creditworthiness assessment could create a new public competitor to 
the  existing  public  and  private  information  sources.  It  would  indirectly  challenge  the 
existing CRAs and compete against existing private aggregators of information available 
to  investors.  Furthermore,  it  would  provide  an  alternative  for  some  of  the  economic 
research  on  European  sovereigns  conducted  by  international  public  institutions  such  as 
the IMF, the World Bank and the OECD.  

3. Conclusion on the appropriateness of an EU creditworthiness assessment  

A European creditworthiness assessment would have only limited impact on the efforts 
to  reduce reliance on sovereign debt ratings as it would, most  likely, duplicate existing 
information.  Furthermore,  if  not  managed  correctly,  it  could  entail  the  risk  of  creating 
over-reliance on a new alternative if relied upon by investors in an exclusive way.  

In  addition,  based  on 
investors,  a  European 
interviews  with  a  selection  of 
creditworthiness  assessment  would  not  materially  improve  the  level  of  information  for 
institutional  investors.  These  investors  have  sufficient  information  available  through 
private  and  public  sources.  This  has  been  further  improved  through  the  new  system  of 
fiscal and macro-economic surveillance of Member States within the European semester. 
For  smaller  investors,  who  also  benefit  from  the  surveillance  mechanism,  a  European 
creditworthiness  assessment  facility  could  provide  some  benefits  by  reducing  the 
research  efforts.  However,  their  inherent  capabilities  with  such  information  tool  are 
limited.  Finally,  a  European  creditworthiness  assessment  would  compete  with  existing 
private information providers including credit rating agencies.  

Combining  all  relevant  factors,  a  European  creditworthiness  assessment  for  sovereign 
debt seems neither proportionate nor appropriate at this stage, when analysed next to the 
needs  of  investors  and  the  objective  of  eliminating  over-reliance  on  external  credit 
ratings.  As such, the Commission will not pursue the implementation and development 
of  such  a  European  creditworthiness  assessment  for  sovereign  debt.  However,  the 
Commission will continue to explore the possible alternative sources of easily available 
information  to  address  the  needs  of  smaller  investors,  as  explained  in  the  following 
section.  

18 

 
VI. Alternative actions 

In spite of the wide dissemination by the European Commission of economic and fiscal 
data  on  European  Member  States,  smaller  investors  might  face  difficulties  in  assessing 
the  creditworthiness  of  sovereign  debt  due  to  their  limited  capabilities  to  process  this 
information. To address this, other measures could be envisaged, focusing on the flow of 
underlying information needed to assess creditworthiness.  

The Commission will reflect further on the following measures: 

1. Incorporating international transparency standards 

Firstly,  the  implementation  by  the  Member  States  of  international  best  practices  on 
reporting of sovereign debt and debt issuances could be considered. An enhanced level of 
harmonisation  based  on  international  standards  could  reduce  remaining  differences  in 
publication  practices  by  Member  States.  This  could  improve  the  overall  information 
flows on sovereign debt and debt issuance available to investors. Any such action would 
have to complement, rather than duplicate, the existing legal framework of statistical data 
reporting  by  Member  States  to  instances  such  as  EUROSTAT.  Once  finalised,  the 
findings  of the OECD Task  Force on Transparency  of Debt Statistics, Debt  Operations 
and Public Debt Policies34 could provide a basis for this analysis. 

2. Furthering best practices by the Member States 

Secondly, the Commission will explore whether best practices observed in some Member 
States  can  be  exported  to  all  other  Member  States,  to  enable  better  access  to  national 
public debt data. For example, some Member States publish dedicated national databases 
with detailed information on their outstanding public debt. These databases are easily and 
freely accessible to all investors and interested parties. 

3. Streamlining publication of data by the Commission 

Finally, information on economic performance and demographics is available at EU level 
and  is  published  by  the  Commission  through  various  webpages  and  databases.  The 
Commission  could  explore  streamlining  how  and  where  existing  data,  reported  by 
Member States, is made available to the public.  

34   Hans J. Blommestein, Fatos Koc and Thomas Olofsson (eds.), (Forthcoming 2015), Recommendations 
on the Transparency of Debt Statistics, Debt Operations and Public Debt Policies, OECD Publishing, 

19