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3rd Mar 2024

Eurozone bailout funds downgraded over France

  • Will France ever pay back its debt? Moody's says there's a "marginal diminution in the certainty" it will do so. (Photo: Wikipedia)

Moody's ratings agency on Friday (30 November) downgraded the eurozone's two bailout funds following a recent similar move on France, the second-largest contributor to the rescue funds.

The European Stability Mechanism, a permanent €500 billion-strong fund established on 9 October, was downgraded to Aa1 - the second-best available rating. Its predecessor - the European Financial Stability Facility due to be phased out next year - was downgraded to a "provisional" Aa1. Further downgrades may follow, Moody's said.

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Both funds have France as their second-largest contributor and Moody's on 18 November decided to strip the French state of its top rating due to its sluggish economy and worsening competitiveness compared to Germany.

"The credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters," Moody's said. France's downgrade reflects a "marginal diminution in the certainty" Paris will repay its debt and honour its commitment to pay its share to the ESM, Moody's explained.

The ratings agency kept Germany's top rating unchanged. Germany is the largest contributor to the two bailout funds, which are being used for raising money on the markets to fund the bailout programmes for Greece, Ireland, Portugal and Spain.

"Moody's rating decision is difficult to understand," Klaus Regling who chairs both funds said in a statement.

"We disagree with the rating agency's approach which does not sufficiently acknowledge ESM's exceptionally strong institutional framework, political commitment and capital structure," he added.

However, given that Aa1 is the second-best available rating, the downgrade will not "inhibit ESM or EFSF in any way" to issue bonds and borrow money, Regling said.

European Central Bank chief Mario Draghi said during a conference in Paris on Friday that the downgrade will have little effect but that it was a "signal to be taken seriously."

EU law for ratings agencies

Meanwhile, a deal by EU countries and the European Parliament sealed earlier this week seeks to limit the influence of big credit rating agencies.

Moody's, Standard&Poor's and Fitch are the world's three largest agencies and their assessments about the likelihood of whether countries and companies will pay back their debt are central their borrowing rates. If the rating is in the so-called junk category, certain banks and pension funds cannot buy them or accept them as guarantees for other banks' loans.

"Credit rating agencies will have to be more transparent when rating sovereign states, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings of sovereign debt," financial services commissioner Michel Barnier said in a statement.

"They will have to follow stricter rules which will make them more accountable for mistakes in case of negligence or intent."

But some MEPs remain sceptical about how much this EU bill will do in changing agencies' behaviour.

"This reform is no big breakthrough in changing the rating agency market," said German Green MEP Sven Giegold, who was involved in the negotiations.

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