THE EUROZONE’S plan to convince top-flight investors to buy its debt was dealt a major blow last night as Standard & Poor’s hit its “big bazooka” bailout fund with a downgrade.
S&P said that since a large number of the fund’s guarantors are no longer triple-A rated, the fund itself could not keep the gold standard rating.
The European Financial Stability Facility (EFSF), the Eurozone’s bailout fund, lacks the “credit enhancements” – or greater German support – that would be necessary to make up for the lower ratings of its other guarantors, the agency said.
Last night, Eurozone officials rushed to assure markets that the EFSF will not alter its plans to lend out hundreds of billions to struggling states because it is still triple-A rated by two out of three agencies.
“The downgrade to ‘AA+’ by only one credit agency will not reduce EFSF’s lending capacity of €440bn,” said EFSF chief Klaus Regling.
But that could change if Moody’s downgrades France, which it warned could lose its triple-A rating yesterday.
In the mean time, the fund has decided to try to win over investors without the top S&P rating.
A senior banker who has worked on EFSF debt sales told City A.M. it would have had to scale bank its lending capacity if it were to try to win back the highest rating.
He added: “I do not expect Germany to step in with any further guarantees – the parliament made it very clear that €211bn was its upper limit. The EFSF may just have to decide to live with a double-A rating. It may not be the strategically ideal scenario, but it is the only way forward.”
The downgrade piles the pressure on Eurozone officials and the German government to boost Berlin’s contribution to the EFSF’s replacement, the European Stability Mechanism (ESM), which becomes operational next July, so that it can avoid the same fate.
The EFSF confirmed that it will continue as planned with a €1.5bn sale of six-month debt this morning.