21st Sep 2021

Eurozone bail-out fund loses triple-A rating

  • (Photo: Images Money)

The Eurozone's bail-out fund was downgraded by one notch to AA+ by the US ratings agency Standard & Poor's on Monday (16 January) - a move likely to put an extra financial burden on contributing nations, many of whom were themselves downgraded last week.

Designed to fund the rescue packages for Greece, Ireland and Portugal, the European Financial Stability Facility (EFSF) owed its triple A rating to guarantees from eurozone countries, two of which - France and Austria - saw their own top rating cut by one notch on Friday, along with other countries further down the ratings ladder.

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“The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities. Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place,” Standard&Poor's said in a statement.

The move is likely to lower the firepower of the fund, unless contributing countries step up their loan guarantees to the facility.

"The downgrade has a consequence - if it wants to keep its triple A status, it will have to lend less or, if not, the cost of lending will go up. If it wants to maintain the same capacity to lend, at the same price, you will have to have additional contributions from member states," European Central Bank chief Mario Draghi said on Monday evening during a hearing in the European Parliament in Strasbourg.

EFSF chairman Klaus Regling "took note" of the downgrade and argued that its lending capacity will not be changed.

"The EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programmes until the European Stability Mechanism [permanent bail-out fund] becomes operational in July 2012.”

Eurozone finance ministers chairman Jean Claude Juncker, whose country is hosting the EFSF, also sought to downplay the effects of the downgrade.

"S&P's decision will not reduce EFSF’s lending capacity of €440 billion. EFSF will continue to be backed by unconditional and irrevocable guarantees by euro area member states."

He added that the other two major ratings agencies, Fitch and Moody's have not downgraded the fund or indicated they would do so.

Earlier that day, a commission spokesman went to some lengths to downplay the importance of Friday's decision to downgrade Austria, Cyprus, France, Italy, Malta, Portugal, Slovakia, Slovenia and Spain. He argued that ratings agencies are not privy to all the economic and financial data about member states that the EU commission has.

ECB chief Draghi also noted that "all ratings agencies had a terrible loss of reputation over last crisis" and said that his institution in the last few years has avoided having a "mechanical reliance" on them.

Critics says that ratings agencies, having failed to spot the build-up to the financial crisis in 2008, are now being over-zealous to make up for it.

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