Credit ratings agency Standard and Poor’s downgraded the European Financial Stability Facility (EFSF) from “AAA” to “AA+,” although it does not rule out it would increase it again if it bolsters its funds, according to a communiqué released on Monday.
In a statement, S&P said the decision was all but inevitable following the cuts to the creditworthiness of France and Austria, which were two of the EFSF guarantors.
We consider that credit enhancements that would offset what we view as the now-reduced creditworthiness of the EFSF guarantors and securities backing the EFSF issues are currently not in place, the agency said in a statement.
We have therefore lowered to AA+ the issuer credit rating of the EFSF, as well as the issue ratings on its long-term debt securities.
The EFSF was set up by the 17 governments that share the European single currency in May 2010 and has so far been used to provide emergency loans to Ireland and Portugal. It is also expected to contribute to a second bailout of Greece.
The fund has an effective lending capacity of 440 billion Euros, which depends on guarantees, mainly from the Euro zone's AAA countries, only four of which now remain: Germany, Luxembourg, Finland and the Netherlands.
In a statement, the EFSF said the downgrade would not affect its lending capacity, and emphasized that its short-term rating remained at S&P top level.
The downgrade to 'AA+' by only one credit agency will not reduce EFSF lending capacity of 440 billion Euros, the fund's chief executive, Klaus Regling, said.
EFSF has sufficient means to fulfil its commitments under current and potential future adjustment programs until the ESM becomes operational in July 2012,” he added.
The ESM - the European Stability Mechanism - is a permanent rescue fund that is expected to have an effective capacity of 500 billion Euros, based on paid-in capital of 80 billion Euros and callable capital of 620 billion Euros.
However, details about the structure of the ESM have still not been agreed among all Euro zone member states. The original plan was to introduce it in July 2013, but that was brought forward by a year. Now Euro zone policymakers are working hard to ensure the ESM can come into effect in just six months time.