The eurozone’s new sovereign rescue fund on Monday begins its quest for a vital triple A credit rating as officials from the European Financial Stability Facility kick off a series of meetings with rating agencies.
People briefed on the matter told the Financial Times that Klaus Regling, EFSF chief executive, would meet Standard & Poor’s, Fitch, and Moody’s separately this week to win them over for a top rating for the €440bn ($552bn) fund.
Although the fund would issue bonds only if a nation asked for funds, Mr Regling was said to be keen to get a rating quickly – and if possible achieve it during July – to establish the institution on the financial markets.
The EFSF, based in Luxembourg, is intended to serve as a lender of last resort for eurozone nations who, as with Greece this spring, found themselves unable to tap the financial markets because of investor nerves.
Although only three of the EFSF’s shareholders – Germany, France and the Netherlands – hold triple A ratings, eurozone nations hope that special mechanisms will allow them to secure the same rating for the fund.
An important element is a pledge by all shareholder countries to pay investors willing to lend to the EFSF 120 per cent of the initial loan in case of default; another is to funnel fees paid by borrowers into some form of EFSF reserve.
Mr Regling and his staff are working closely with eurozone finance ministries, as well as the German debt agency, which would issue EFSF bonds if they were needed.
Officials have also been gauging investor appetite.
Officials involved have throughout voiced confidence that a triple A rating was achievable.
Some officials believe that the EFSF bond yields would be close to – though not below – those of comparable benchmark German Bunds.
Investors remain unsure about whether such constructions can make up for the lower credit ratings of the EFSF’s other shareholders – George Soros, the billionaire investor, for example, has dismissed the idea of a triple A badge.
Analysts warn that the meetings between the EFSF and the rating agencies could prove to be tricky as the process over issuing a rating can be long and drawn out – particularly for a body that has been created for a particular purpose.
Worries that EFSF shareholders Spain and Portugal could be the fund’s first clients also add questions marks over the ability of eurozone nations to repay EFSF bond holders in case a borrower nation should ever default.
“It may take time before the rating agencies decide on what they will do. It is not that simple as this is a new body,” said David Owen, chief European financial economist at the US investment bank Jefferies in London.