S&P downgrades eurozone bail-out fund
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Standard & Poor’s on Monday stripped the eurozone’s bail-out fund of its AAA credit rating, potentially constraining its ability to contain the region’s debt crisis and focusing attention on efforts to create a more robust successor.
S&P lowered the European Financial Stability Facility’s rating to AA+, following its decision on Friday to remove the triple-A ratings of France and Austria, two of the find’s guarantors.
The EFSF relies on the triple-A ratings of its guarantors to raise cash in debt markets, which it then lends to stricken eurozone governments at a small mark-up. France and Austria account for some €180bn of the credit guarantees underlining the fund, created after the first Greek bailout in May 2010 and supposed to serve as a firewall sealing the eurozone’s core economies from the crisis.
Shorn of its top-tier credit rating, the EFSF is likely to be forced to pay higher premiums or operate with less cash at its disposal.
In a statement, S&P held out the possibility that Eurozone governments could shore up the fund, something that officials have said they were exploring.
But that possibility appeared remote after Wolfgang Schäuble, the German finance minister, argued that the EFSF already had ample resources, and that no further support from Berlin, its biggest sponsor, would be forthcoming.
“It is sufficient,” Mr Schäuble told Deutschland Radio. “The guarantee sum that we have is sufficient by far for what the EFSF has to do in coming months.”
The German finance minister also joined other top European officials, including Olli Rehn, the economics commissioner, in bashing the US rating agency for failing to understand the reforms under way in the eurozone, including the creation of a “fiscal compact” to give sharper teeth to budget rules.
The EFSF has so far committed €43.7bn to Ireland and Portugal, and was expected to contribute another €150bn to help underwrite a second Greek bail-out and recapitalise banks.
Although it is sufficient for those tasks, analysts have long complained that it lacks the firepower to assure financial markets that much larger eurozone economies, such as Spain and Italy, could be protected if the crisis deepened.
Even before S&P’s move, European officials had accepted that it would be politically impossible to secure support in Germany and other triple A-rated countries to increase their exposure to the fund.
As such, they are now focusing their efforts on bringing to life its €500bn successor, the European Stability Mechanism, which is supposed to come into service on July 1 – a year ahead of schedule.
The ESM will boast €80bn in paid-in capital contributions from eurozone governments as opposed to the mere guarantees underlying the EFSF – a construction that should make it more robust.
But EU officials acknowledged that they must quickly clear several legislative obstacles if they are to have the fund up and running in less than six months.
Doing so will require ratification of a framework agreement by all 17 eurozone governments – a process that proved tortuous for the EFSF. All 27 EU members – even those not involved in the ESM – would also have to ratify an amendment to the Lisbon treaty.
“We have to move as quickly as possible,” one EU official said.
Some key issues about the fund are still unresolved, including its size. In December, eurozone leaders agreed to consider an increase above €500bn by March – although Germany has been resistant.
Officials in Berlin believe that concluding an agreement on the new “fiscal compact” may be essential to persuade German legislators to back the ESM – particularly after eurozone leaders last month dropped a plan to force private creditors to shoulder losses in future bail-outs.
“It is a political link, not a legal one,” said one senior official, “but it probably matters to Germany more than anyone else.”
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