By Svenja O’Donnell - Jan 17, 2012 6:01 AM GMT+0700
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A Euro sign sculpture stands in front of the European Central Bank's (ECB) headquarters in Frankfurt. Photographer: Simon Dawson/Bloomberg
Jan. 17 (Bloomberg) -- Satyajit Das, author of "Extreme Money: Masters of the Universe and the Cult of Risk," talks about Europe's sovereign debt crisis. Das also discusses China's economy. He speaks from Sydney with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Das spoke before China announced its fourth-quarter economic growth data. Source: Bloomberg)
The European Financial Stability Facility, the euro area’s bailout fund, lost its top credit rating at Standard & Poor’s after earlier downgrades of France and Austria.
The rating was cut to AA+ from AAA, S&P said yesterday in a statement and removed the facility from CreditWatch with negative implications. S&P had said on Dec. 6 that the loss of an AAA rating by any of EFSF’s guarantors may lead to a downgrade.
“The EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities,” the rating company said. “Credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place.”
The EFSF, designed to fund rescue packages for Greece, Ireland and Portugal partially with bond sales, owed its AAA rating to guarantees from its sponsoring nations. Two of those sovereigns, France and Austria, were cut on Jan. 13 to AA+ from AAA by S&P, which also downgraded seven other euro countries.
Klaus Regling, chief executive officer of the facility, said the downgrade won’t hamper its capacity of 440 billion euros ($557 billion). “EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs until the ESM becomes operational in July 2012,” he said in an e-mail, referring to the permanent European Stability Mechanism.
‘Unconditional Guarantees’
Luxembourg Prime Minister Jean-Claude Juncker, who leads euro-area finance ministers, said in a separate statement that the facility “has sufficient means to fulfill its commitments under current and potential future adjustment programs and will continue to be backed by unconditional and irrevocable guarantees by euro area member states.”
European leaders may struggle to deliver their new fiscal rules and cut Greece’s debt burden as their efforts come increasingly under fire. Greek officials will reconvene with creditors on Jan. 18 after discussions stalled last week, while governments in Europe are preparing for a Jan. 30 summit.
The policy response to the crisis “has not kept up” with the risks, which remain “firmly tilted to the downside,” Moritz Kraemer, S&P’s managing director of European sovereign ratings, said on a conference call on Jan. 14.
Changing Outlook
S&P said yesterday that that governments “may currently be exploring credit-enhancement options” and that if the EFSF adopts enhancements “sufficient to offset its now-reduced creditworthiness,” it “would likely raise” the rating to AAA.
Still, it said that if such enhancements are “not likely to be forthcoming,” it would change the outlook to negative to “mirror the negative outlooks of France and Austria.”
The European Commission said yesterday that S&P’s downgrades ignored Europe’s progress in fiscal consolidation. EU forecasts show the euro area’s aggregate deficit will fall to 3.4 percent of gross domestic product in 2012 from 4.1 percent in 2011, spokesman Olivier Bailly said in Brussels.
German Chancellor Angela Merkel said the rating company’s criticism of “insufficient” policy steps reinforced her view that leaders must redouble efforts to resolve the crisis.
Germany, France, the Netherlands, Finland, Austria and Luxembourg were the top-rated nations backing the fund, and Germany is now the only euro nation with a stable AAA rating.
To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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