Trump's NATO spending demands could hit Europe's credit ratings, says S&P Global

By Marc Jones

LONDON (Reuters) -The credit ratings of Europe's NATO members are likely to suffer if they ramp up defence spending in line with U.S. President Donald Trump's demands although they might drive the region to jointly issue debt, ratings firm S&P Global has said.

Despite almost doubling their defence expenditure since Russia annexed Ukraine's Crimea in 2014, European nations on average still spend below NATO's 2% of GDP guidelines, while the U.S. finances nearly two-thirds of NATO's military budget.

As a percentage of GDP, Europe's spending also works out as less than 60% of that of the U.S. - 1.9% of GDP this year versus 3.3% - something Trump's Vice President JD Vance again stressed as he arrived at a security conference in Munich on Friday where he will meet Ukrainian President Volodymyr Zelenskiy.

S&P looked at three scenarios: the first where European nations increase defence spending to the current NATO GDP-weighted average of 2.67% of GDP; a second where they match the current U.S. level of 3.3%; and a third where it jumps to the 5% of GDP Trump has called for.

Scenario one would mean the EU as a whole increasing defence spending by $242 billion a year. In scenario three, it would rise by as much as $875 billion.

S&P warned that the latter scenario in particular was likely to impact credit ratings, as it was "far beyond what individual states can finance without offsetting such outlays with other spending reductions or likely pressuring their creditworthiness."

For Germany and France, Trump's 5% demand would result in their respective budget deficits ballooning to 4.6% and 8.9% this year, versus the 1.7% and 6% that S&P currently forecasts.

For Romania, already in danger of being downgraded to "junk" status, the deficit would jump to 9.5% in the 5% of GDP scenario, while in non-EU member Britain it would worsen to 7% of GDP from a currently-forecast 4.3%.

It would mean almost all European countries having to reprioritise spending at a time S&P analyst Riccardo Bellesia said when most are already grappling with slowing economic growth and rising social care costs due to aging populations.

"Governments are aware this could put their fiscal profile at risk," Bellesia said, adding "the political consequences of cutting social spending to offset higher spending on defence would likely be significant."

Collective action could be an answer. Although key countries including Germany have long opposed joint EU debt issuance, that could change, "given the various messages coming out of Washington D.C."

Getting the triple-A rated European Stability Mechanism set up during the euro zone crisis to borrow the money is one option although an alternative could be something new that includes Britain, which formally quit the EU in 2020, and Norway which is also outside the bloc.

"The details of any collective funding arrangement... will determine its creditworthiness (credit rating)," S&P said.

(Reporting by Marc Jones; Editing by Aidan Lewis and Toby Chopra)