S&P Says Euro Region’s EFSF May Lose Rating If Any AAA Member Downgraded

By Gabi Thesing - Dec 6, 2011 9:56 PM GMT+0700

The European Financial Stability Facility may lose its top credit rating if any of the bailout fund’s six guarantors face a downgrade from AAA, Standard & Poor’s said.

“We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on creditwatch, on one or more of EFSF’s guarantor members,” S&P said in a statement today.

At the same time, the ratings company said it “could affirm the AAA ratings on EFSF and its issues if we affirm the rating on all six of EFSF’s guarantor members currently rated AAA.” Germany, France, the Netherlands, Finland, Austria and Luxembourg are the top-rated nations backing the rescue fund.

Stocks, French bonds and the euro fell after S&P said late yesterday that it may cut the debt grade of 15 euro nations, including Germany and France. The decision on whether to do so will depend on the outcome of a European Union leaders’ summit on Dec. 9, the company said.

German Finance Minister Wolfgang Schaeuble said today that the downgrade warning will help force Europe to ratchet up efforts to resolve the two-year old fiscal crisis this week.

‘Continuing Disagreement’

“We could also affirm the ratings 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,” the S&P said.

The company last night rebuked leaders for their “continuing disagreement” over how to best tackle the crisis that now threatens to tip the global economy into recession.

“The truth is that markets in the whole world right now don’t trust the euro area at all,” Schaeuble said today in Vienna. S&P’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence” of investors.

German Chancellor Angela Merkel and France’s Nicolas Sarkozy are leading the charge toward the latest crisis fix after agreeing a joint position on automatic penalties for deficit violators and anchoring debt limits into euro states’ constitutions. Investors are looking for such an agreement on closer fiscal cooperation in the euro area to trigger intensified action from the European Central Bank.

‘Somewhat Hesitant’

With EU leaders due to gather in a little over 48 hours, U.S. Treasury Secretary Timothy Geithner arrived in Berlin for talks with Schaeuble after traveling to Frankfurt earlier today to meet with ECB President Mario Draghi and Bundesbank President Jens Weidmann. The ECB holds a policy meeting on Dec. 8.

Moritz Kraemer, S&P’s managing director for European sovereign ratings, said on a conference call from Frankfurt today that the ECB is “somewhat hesitant to engage in full- throttle” quantitative easing and that leaders will have to come up with a “credible” crisis response.

“We’re of the opinion that the confidence crisis that has held the euro zone in its grip for almost two years now has broadened, it has intensified,” Kraemer said. “The summit is of the utmost importance to address this in a more robust and comprehensive way than what we’ve seen so far.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net