Global Financial Strategy - S&P; threatens EU bailout fund downgrade

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S&P; threatens EU bailout fund downgrade

Tuesday 6 December 2011 – by [email protected]

The European bailout fund’s triple-A credit rating has been placed on negative watch by Standard & Poor’s, meaning it faces at least a 50 per cent chance of being downgraded in the next three months.

The move has been prompted by S&P;’s downgrade threat to 15 of the 17 eurozone member states late on Monday, as six of the AAA rated sovereigns guarantee the financial obligations of the European Financial Stability Facility.

On Tuesday afternoon, the rating agency said that depending on the outcome of its review of the ratings on EFSF member governments, it could lower the long-term rating on the EFSF “by one or two notches”.

It said: “A credit watch negative placement indicates that, in our opinion, there is at least a one-in-two probability of the rating being lowered in the short term.

“Based on EFSF’s current structure, were we to lower one or more of the current AAA ratings on EFSF’s guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated AAA.”

Austria, Finland, France, Germany, Luxembourg and the Netherlands are the EFSF guarantor members holding a triple A status that were put on negative credit watch on Monday.

Related articles:

EU falls short on boosting EFSF fund

Draghi demands answers on EFSF delay

S&P; affirms AAA for expanded EFSF

No such thing as EFSF leverage without ECB

Slovakia agrees on EFSF changes

But S&P; caveats: “We could also affirm the ratings [of EFSF] if we were to lower the current AAA ratings on one or more guarantor members, but had evidence that the EFSF guarantor members were implementing further credit enhancements that were in our view sufficient to mitigate the relevant guarantor members’ reduced creditworthiness.”

It adds: “We expect to resolve EFSF’s credit watch placement within 90 days and, if possible sooner, after we complete the review of EFSF guarantor members currently rated AAA.”

Commenting on this in light of the European Commission’s recent proposals to clamp down on rating agencies, internal market commissioner Michel Barnier said: “I don’t think agencies are taking revenge on our proposals. I can’t imagine that. Frankly, no.

“But all financial players, including rating agencies, must understand that they will be subject to public regulation carried out in the most intelligent and effective way possible.

“I’m not jumping to conclusions. I am not starting an ideological fight. All financial actors serve a purpose. Some have more weight than others. I have often said that private agencies whose actions affect the public, warrant public supervision, perhaps more than others.”

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