Standard & Poor’s cut its credit rating of the eurozone’s rescue fund, the European Financial Stability Facility (EFSF), on Monday (16 January), claiming its decision was inevitable following cuts three days earlier to the creditworthiness of France and Austria, two of the EFSF’s guarantors.
The US ratings agency downgraded the fund by one notch to AA+ from AAA, but the move triggered little reaction from financial markets where it was widely anticipated. Japan, a major buyer of EFSF bonds, said they remained an “attractive” investment.
Chief says move will not impact fund
In a statement, the EFSF said the downgrade would not affect its lending capacity, and emphasised that its short-term rating remained at the S&P’s top level.
“The downgrade to ‘AA+’ by only one credit agency will not reduce EFSF’s lending capacity of €440 billion,” said the fund’s chief executive, Klaus Regling.
“EFSF has sufficient means to fulfil its commitments under current and potential future adjustment programmes until the ESM becomes operational in July 2012,” he added.
The ESM – the European Stability Mechanism – is a permanent rescue fund that is expected to have an effective capacity of €500 billion, based on paid-in capital of €80 billion and callable capital of €620 billion.
French Finance Minister François Baroin said there was no need to shore up the EFSF despite the S&P downgrade.
“The EFSF has kept intact its ability to lend, with enough means and guarantees to fulfil the full range of its present and future commitments,” he said in a statement. “There is therefore no need to act on the EFSF at the moment.”
Japan sticks by Europe and fund
German Chancellor Angela Merkel’s spokesman, Steffen Seibert told reporters: “The government has no reason to believe that the volume of guarantees that the EFSF has now should not be sufficient to fulfil its current obligations.
“We should not forget that it has been decided to significantly move forward the ESM and to have it in place in mid-2012, one year earlier than planned.”
There was also support from Japan, with Finance Minister Jun Azumi saying Tokyo’s trust in EFSF bonds, in which it has so far invested €21 billion, had not been shaken.
“Japan has bought them by certain amounts and our stance will not immediately change just because of the downgrade,” Azumi told reporters after a cabinet meeting.
The euro hovered just above a 17-month trough against the dollar early in Asia early today (17 January), but reaction to the S&P downgrade was muted. Trading overnight was subdued as US markets were shut for the Martin Luther King holiday.