The European Financial Stability Facility (EFSF), the eurozone's bailout fund, has been threatened with a downgrade by the credit ratings agency Standard & Poor's (S&P).
The agency warned that there is at least a 50% chance of the EFSF being downgraded from its AAA long-term and A-1+ short-term ratings.
Formed in May 2010 as part of the early response to the sovereign debt crisis, the EFSF is a fund which is designed to buy the debt of sovereign nations within the eurozone at risk of default, as a temporary mechanism to allow countries to reform their economies and return to solvency.
The EFSF largely funds those bailouts by issuing bonds in the same way as governments, and is backed by the AAA rated sovereigns within the eurozone.
S&P's warning of a downgrade indicates a continuing decline in confidence that the eurozone economy will recover in the near future. Pressure on the EFSF's ratings was nearly inevitable, after the agency also threatened downgrades for every major eurozone economy, including Germany and France, on Monday.
Following crisis talks in Paris on Monday afternoon, French President Nicolas Sarkozy and German Chancellor Angela Merkel said that eurozone states should face sanctions for running up large deficits.
They declared they want a new European treaty, either with the entire EU or just the eurozone to solve the financial crisis.
The pair called for the 27 countries of the EU to move towards greater fiscal integration to ensure the current financial crisis is not repeated. If that was not possible, just the 17 states that have adopted the euro should move forward, they said.
"Whatever has happened must never happen again, and it's for this reason we want a new treaty," said Sarkozy. "This is what Germany and France want."
S&P's full press release can be read below:
Standard & Poor’s Ratings Services today placed the ‘AAA’ long-term credit rating on the European Financial Stability Facility (EFSF) on CreditWatch with negative implications. At the same time, we affirmed the ‘A-1+’ short-term credit rating on EFSF.
Our ‘AAA’ long- and ‘A-1+’ short-term ratings on EFSF are based on (i) the unconditional, irrevocable, and timely guarantees from EFSF members (guarantor members) rated ‘AAA’ by Standard & Poor’s that support EFSF’s obligations (bonds, notes, commercial paper, debt securities, or other financing arrangements) and, (ii) the ‘AAA’ rated securities that constitute EFSF’s liquidity reserves. Standard & Poor’s has placed the ‘AAA’ long-term issue ratings on EFSF’s guarantor members Austria, Finland, France, Germany, Luxembourg, and The Netherlands on CreditWatch negative (see “Standard & Poor’s Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications,” published on Dec. 5, 2011), indicating our view of their increased credit risks.
A CreditWatch 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’.
In our media releases of Dec. 5, 2011, on the CreditWatch placements of individual ‘AAA’ rated guarantor members, we indicated that our ratings on Austria, Finland, Germany, Luxembourg, and The Netherlands are currently unlikely to fall by more than one notch, and the ratings on France by no more than two notches, if at all. Accordingly, we currently anticipate that if we lower the rating on EFSF, it could be by up to two notches.
We expect to resolve EFSF’s CreditWatch placement within 90 days and, if possible sooner, after we complete the review of EFSF guarantor members currently rated ‘AAA’.
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. Conversely, we 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’. 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.