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Tuesday, 17 January 2012

Standard and Poor’s downgrades the European Financial Stability Facility, just after it downgraded France and Austria. European leaders are unpleasantly surprised, but try to downplay the situation.

On Monday-morning, 16 January 2012, Twitter was already buzzing with speculation on a possible downgrade for the European Financial Stability Facility (EFSF) by S&P. This would not exactly be a surprise move, as I wrote already in my blog of last Friday-night ´ Standard & Poor's negatively adjusts ratings of nine Euro-zone countries´:

The rating of this emergency fund [EFSF-EL] now depends on the guarantees of only four countries with an AAA-rating: Germany, The Netherlands, Luxembourg and Finland.

And that is a very heavy burden to carry for only four countries of which three have very narrow shoulders, financially speaking.

Standard and Poor´s wasn´t going to leave much room for speculation and decided that the shoulders of Finland, The Netherlands and Luxembourg were indeed too narrow to maintain the AAA-rating of the EFSF. Yesterday-evening, it downgraded the EFSF from AAA to AA+. The press release was again crystal-clear:

  • On Jan. 13, 2012, we lowered to 'AA+' the long-term sovereign credit ratings on two of the European Financial Stability Facility's (EFSF's) previously 'AAA' rated guarantor member states, France and Austria.
  • The EFSF's obligations are no longer fully supported either by guarantees from EFSF members rated 'AAA' by Standard & Poor's, or by 'AAA' rated securities. We consider that credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place. 
  • We are therefore lowering our long-term issuer credit rating on the EFSF to 'AA+' from 'AAA'. We are also affirming the 'A-1+' short-term rating on EFSF. 
  • The outlook is developing, which reflects that we could raise the EFSF's long-term rating to 'AAA' if we see that additional credit enhancements are put in place, but also the likelihood that we could lower the rating further if we conclude that the creditworthiness of the EFSF's members will likely be further reduced over the next two years. 
Standard & Poor's Ratings Services today lowered the 'AAA' long-term issuer credit rating on the European Financial Stability Facility (EFSF) to 'AA+' from 'AAA' and affirmed the short-term issuer credit rating at 'A-1+'. We removed the ratings from CreditWatch, where they had been placed with negative implications on Dec. 6, 2011. The outlook is developing. 

When we announced the placement of the ratings on the EFSF on CreditWatch on Dec. 6, 2011, we said that, depending on the outcome of our review of the ratings of the EFSF's guarantor member sovereigns, we would likely align the issue and issuer credit ratings on the EFSF with those of the lowest issuer rating we assigned to the EFSF members we rated 'AAA' (as of Dec. 6, 2011), unless we saw that sufficient credit enhancements were in place to maintain the EFSF rating at 'AAA' (see "European Financial Stability Facility Long-Term 'AAA' Rating Placed On CreditWatch Negative," published Dec. 6, 2011). 

Following the lowering of the ratings on France and Austria, the rated long-term debt instruments already issued by the EFSF are no longer fully supported by guarantees from the EFSF guarantor members rated 'AAA' by Standard & Poor's, or 'AAA' rated liquid securities. Instead, they are now covered by guarantees from guarantor members or securities rated 'AAA' or 'AA+'. 

We consider that credit enhancements that would offset what we view as the now-reduced creditworthiness of the EFSF's guarantors and securities backing the EFSF's issues are currently not in place. We have therefore lowered to 'AA+' the issuer credit rating of the EFSF, as well as the issue ratings on its long-term debt securities. 

We understand that EFSF member states may currently be exploring credit-enhancement options. If the EFSF adopts credit enhancements that in our view are sufficient to offset its now-reduced creditworthiness, in particular if we see that once again the EFSF's long-term obligations are fully supported by guarantees from EFSF member-guarantors rated 'AAA' or by securities rated 'AAA', we would likely raise the EFSF's long-term ratings to 'AAA'. 

You could say in situations like this, that a chain is as strong as the weakest link. France and Austria had been exposed as the weakest links with their earlier received AA+-rating. 

In my opinion, there could not be much debate about S&P lowering the ratings of both countries. Austrian banks were up to their necks in Hungarian sovereigns and debt and France was up to its neck into financial worries on the three French system banks BNP Paribas, Crédit Agricole and Dexia France.  

Therefore it made sense that the EFSF followed their rating towards AA+.

In response, the chairmen of the ECB and the EFSF had two options today:
  • Option 1: Doing some serious grumbling towards S&P, hoping that it would spontaneously say: ‘You are right! We totally forgot that you are Europe. Never mind, we will return the rating to its old level immediately’.
  • Option 2: Trying to downplay the situation, stating that the rating didn’t mean a thing and that everything would be cool.
Option 1 was done by ECB chairman Mario Draghi (source: Euronews):

“As regulators we should learn to do without ratings. Or at least we should learn to assess creditworthiness in a way in which ratings or credit rating agencies are one of the many components of our information,” said Mario Draghi.

Klaus Regling, the current chairman of the EFSF, tried to do the latter: ‘The credit supply will remain at the current level’.

Both didn’t manage to make a very convincing impression, I’m afraid.

And what did Jan Kees de Jager, the Dutch Finance Minister do? Well, he put his wallet deeper in his pockets, according to Het Financieele Dagblad (, and spoke:

“The Netherlands is not going to guarantee a higher rating of the EFSF. There are too few creditworthy countries left to guarantee such an increase. Instead we should move to a permanent emergency fund quickly”.

And S&P looked at Europe and the EFSF and saw it had been right. And that’s the way it is! 

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