S&P downgrades eurozone bailout fund

The European Financial Stability Facility lost its top credit rating at Standard & Poor’s after the rating company downgraded France and Austria.

The rating was lowered to AA+ from AAA, S&P said in a statement today. It removed the ratings on the facility from CreditWatch with negative implications. S&P had said on Dec. 6 that the loss of an AAA rating by any one of the EFSF’s guarantor nations may lead to the facility being downgraded.

“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,” the company said. “Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place.”

The EFSF, which is designed to fund rescue packages for Greece, Ireland and Portugal partially with bond sales, owed its AAA rating to guarantees from its sponsoring nations. Two of those sovereigns, France and Austria, were cut on Jan. 13 to AA+ from AAA by S&P, which also downgraded seven other euro-region countries.

Klaus Regling, chief executive office of the facility, said the downgrade won’t hamper its lending capacity of 440-billion euros (US$557-billion).

“EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs until the ESM becomes operational in July 2012,” he said in an e-mailed statement, referring to the permanent European Stability Mechanism.

Policy Criticism

European leaders may struggle to deliver their new fiscal rules and cut Greece’s debt burden as their efforts come increasingly under fire. Greek officials will reconvene with creditors on Jan. 18 after discussions stalled last week, while governments in Europe are preparing for a Jan. 30 summit.

The policy response to the crisis “has not kept up” with the risks, which remain “firmly tilted to the downside,” Moritz Kraemer, S&P’s managing director of European sovereign ratings, said on a conference call on Jan. 14.

S&P said in its statement on the EFSF downgrade that governments “may currently be exploring credit-enhancement options.” It said if the EFSF adopts enhancements “sufficient to offset its now-reduced creditworthiness,” it “would likely raise” the rating to AAA.

Still, it added that if such enhancements are “not likely to be forthcoming,” it would change the outlook on the facility to negative to “mirror the negative outlooks of France and Austria.”

European Efforts

The European Commission said earlier today that S&P’s downgrades ignored Europe’s progress in fiscal consolidation. EU forecasts show the euro area’s aggregate deficit will fall to 3.4% of gross domestic product in 2012 from 4.1% in 2011, spokesman Olivier Bailly said in Brussels.

German Chancellor Angela Merkel said the rating company’s criticism of “insufficient” policy steps reinforced her view that leaders must redouble efforts to resolve the crisis. Germany, France, the Netherlands, Finland, Austria and Luxembourg were the top-rated nations backing the fund, and Germany is now the only euro-area nation with a stable AAA rating.

Financial Post