Economy: S&P downgrades EU bailout fund and lowers ratings on 9 EU countries

Updated On: Jan 17, 2012

Standard & Poor has downgraded its long-term credit rating of EU’s bailout fund, the European Financial Stability Facility (EFSF), from AAA to AA+. The move follows last Friday’s decision by S&P to cut the ratings of nine eurozone countries, including France and Austria. Germany, Finland, the Netherlands and Luxembourg were the only countries that were spared the cut. But S&P says it will restore the triple-A rating if additional credit enhancements are implemented.

The downgrade will not affect EFSF’s effective lending capacity of 400 billion euros, although views vary as to whether this amount will be sufficient enough to fulfill all its commitments. The EFSF has to finance rescue packages for Ireland, Portugal and Greece, of which the latter remains a key concern for the European community as it is now awaiting a second bailout. Moreover, as a result of the cut, the fund may have to start issuing lower-rated bonds and accept higher borrowing costs.

Nonetheless, EFSF Chief Executive Klaus Regling believes that the EFSF will sustain EU’s economy until the new European Stability Mechanism (ESM) comes into action July this year. The European Stability Mechanism will serve as a permanent rescue fund and is expected to have an effective capacity of 500 billion euros. On the other hand, despite S&P’s move to downgrade the fund’s credit rating, Moody and Fitch have retained their highest ratings for the EFSF and have no plans to cut ratings as of yet.

Finance ministers of the 17 countries that use the euro will be meeting on January 23 to discuss the implications of S&P’s downgrade, while EU leaders will meet for a summit in Brussels on January 30 to discuss economic issues and strategies to tackle Greece’s debt default.

Report: S&P Cuts Ratings on Europe’s Bailout Fund [Wall Street Journal, 17 January 2012]

Report: S&P Downgrade May Spark Tougher EU Ratings Curbs [India Times, 17 January 2012]

Report: Greek Woes Dampen Euro Good News [The Independent (UK), 17 January 2012]

Report: S&P Downgrades Eurozone Bailout Fund to AA+ [Reuters, 16 January 2012]

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