S&P cuts ratings on eurozone bailout fund

Standard & Poor’s has downgraded the EU bailout fund to AA+ from AAA, citing its own downgrades of nine European nations that back the fund as a key reason.

Fears of the downgrade from the ratings agency sent the euro to an 11-year low versus the yen yesterday, and saw it fall sharply against the US dollar.

The rating of the European Financial Stability Facility is based in part on the credit worthiness of the countries guaranteeing it.

S&P cut the ratings of nine countries supporting it, including France and Austria, which held coveted AAA ratings.

Together, the nine countries contribute €445.1bn to the EFSF.

They are France, Italy, Spain, Cyprus, Portugal, Austria, Slovakia, Slovenia and Malta.

The move makes it significantly more difficult for the EFSF to be used as a mechanism for rescuing the bloc, because the fund seeks to raise money based on its own creditworthiness. It has said it will still conduct a sale this morning for €1.5bn worth of six-month debt.

However, potential sovereign lenders in Asia have already turned down the offer to contribute, saying the eurozone must first get its house in order.

But EFSF chief Klaus Regling said yesterday: “The downgrade by only one credit agency will not reduce the EFSF’s lending capacity of €440bn.”

S&P said the EFSF could regain its AAA rating if it had more guarantees, or borrowed less.

Meanwhile, former European Central Bank chief economist Juergen Stark said in his resignation letter that bond buying by the ECB – another way pressure can be taken off indebted states – was stretching the ECB’s mandate.


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