Rating agency Standard & Poor’s has downgraded the creditworthiness of the eurozone’s bailout fund by one notch to AA plus.
The downgrade, which follows ratings cuts for AAA-rated France and Austria, could hurt the European Financial Stability Facility’s ability to raise cheap bailout money.
While most euro countries guarantee the bonds issued by the EFSF, its rating depends on the AAA countries. The remaining four do not make up enough guarantees to secure the fund’s €440 billion lending capacity.
S&P said it could upgrade the fund back to AAA if the euro zone offers new credit enhancements.
The agency had warned in December that it would cut the rating of the EFSF in line with the downgrades of any triple-A country.
Moody’s and Fitch, the other big two rating agencies, still have the EFSF at AAA, meaning that it would count as a top-notch investment for most funds. But analysts warn that further downgrades are likely soon.
Once another big agency cuts the EFSF’s rating, the euro zone faces a stark choice - either the fund starts issuing lower-rated bonds - and accepts higher borrowing costs - or its remaining AAA contributors increase their guarantees.
So far, Germany, the biggest of the four AAA economies in the euro zone, has ruled out boosting its commitments to the fund, and increases also appear politically difficult in Holland and Finland.
Another option would be to accept that the fund can give out fewer loans.
Because of its set-up, the bonds it issues to raise bailout money are underpinned by some €720 billion in guarantees from the 14 euro zone countries that haven’t received bailouts. But for issuing AAA-rated bonds, only AAA-guarantees count, taking the fund’s lending capacity down to €440 billion.
With the downgrades of France and Austria, the EFSF loses €180 billion in AAA guarantees, leaving it with a loan capacity of €260 billion. Of that, around €40 billion has already been committed to the bailouts of Ireland and Portugal, and a new Greek rescue will quickly take more than €100 billion out of the till.
While that leaves the euro zone with a severely diminished firewall, the lower lending capacity may not matter that much. To rescue Italy and Spain, the EFSF would need more than a trillion euro, according to analysts, and whether the shortfall is €900 billion or €600 billion euro would not make much of a difference.
PA