Photo: Courtesy Sotheby’s
Standard & Poor’s just placed the European Financial Stability Facility—the eurozone bailout fund—on creditwatch negative.This follows a downgrade from AAA to AA+ last month.
According to the release from S&P, analysts had marked the EFSF’s outlook as stable at AA+ back in January because they considered that EU leaders would add credit enhancements to the fund after two of its triple-A creditors—France and Austria—were downgraded.
They no longer hold this assumption.
Markets have been kind to European sovereigns in the bond markets lately, removing much of the liquidity pressures countries and banks faced six months ago. However, this is an ominous sign that this sentiment could turn around after the last of two three-year LTROs takes place later this month.
Read the full release below:
- We have concluded that credit enhancements sufficient to offset what we view as the reduced creditworthiness of European Financial Stability Facility (EFSF) guarantors are not likely to be forthcoming.
- We are therefore revising the outlook on the long-term rating on the EFSF to negative from developing and affirming the ‘AA+/A-1+’ ratings.
- The negative outlook on the long-term rating mirrors the negative outlooks of France and Austria.
LONDON (Standard & Poor’s) Feb. 27, 2012–Standard & Poor’s Ratings Services said today that it revised its outlook on the European Financial Stability Facility (EFSF) to negative from developing. At the same time, we affirmed the ‘AA+’ long-term and ‘A-1+’ short-term issuer credit ratings on the EFSF.
Following the lowering of the ratings on France and Austria on Jan. 13, 2012, the rated long-term debt instruments already issued by the EFSF are no longer exclusively supported by guarantees from the EFSF guarantor members rated ‘AAA’ by Standard & Poor’s or ‘AAA’ rated liquid securities. Instead, the EFSF’s instruments are now covered by guarantees from guarantor members or securities rated ‘AAA’ or ‘AA+’. Therefore, on Jan. 16, 2012, we lowered the long-term issuer credit rating on the EFSF, and the issue ratings on its long-term debt securities, to ‘AA+’ from ‘AAA’.
At that time, we considered that credit enhancements–in addition to the existing 165% over-guarantee provided by each non-borrowing EFSF member state (see the full analysis listed below)–that would offset our view of the now-reduced creditworthiness of the EFSF’s guarantors and securities backing the EFSF’s issues could be forthcoming. We have since revised this view. We no longer expect EFSF member states to provide additional credit enhancements to ensure that its rated long-term debt instruments will be exclusively supported by guarantees from the EFSF guarantor members rated ‘AAA’ by Standard & Poor’s or ‘AAA’ rated liquid securities.
The negative outlook on the long-term rating on the EFSF mirrors the negative outlooks of France and Austria. Absent additional credit enhancements, we could lower the ratings on the EFSF if we lowered the long-term sovereign credit ratings on any of the EFSF’s ‘AAA’ or ‘AA+’ rated members (Germany, France, The Netherlands, Austria, Finland, or Luxembourg) to below ‘AA+’.
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