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October 24, 2021

Standard & Poor’s downgrades EU bailout fund EFSF

The credit ratings agency Standard & Poor’s (S&P) has downgraded, on Monday, the European Union (EU) bailout fund to AA+ from AAA, BBC informs. The European Financial Stability Facility’s (EFSF) rating is based on the ratings of the countries that guarantee it. S&P’s downgrade of France and Austria on Friday meant there were not enough AAA rated guarantors for the fund to maintain its top rating.

The downgrade could affect the EFSF’s ability to raise money cheaply. S&P said the EFSF could regain its AAA rating if it obtained additional guarantees. Alternatively, the fund could be endowed with less money, which would be better guaranteed. The BBC’s business editor Robert Peston says that, following the S&P downgrades, the bailout funds are endowed with what looks like a puddle or pond, rather than a great sea of money stretching beyond the horizon.

Another ratings agency, Moody’s, said on Monday, it would allow France to maintain its AAA rating for now, although it warned that the deterioration in France’s debt position was “putting pressure” on the country’s stable outlook. S&P cut its ratings for France, Italy, Spain, Cyprus, Portugal, Austria, Slovakia, Slovenia and Malta late on Friday. The idea of the EFSF was for countries with top credit ratings to borrow money cheaply that they could then lend on to countries that were struggling. But Friday’s downgrade took away two of its six AAA rated guarantors. That will reduce the fund’s AAA rated guarantees from EUR 440bn to about EUR 260bn.

About EUR 40bn of that is already going on the bailouts of the Irish Republic and Portugal with another EUR 100bns likely to be needed for the second bailout of Greece.

ECB’s chief warns situation is ‘very grave’

European Central Bank (ECB) President Mario Draghi said, yesterday, it could cripple financial markets and the economy unless effective actions are taken by governments, Wall Street Journal informs.”We are in a very grave state of affairs and we must not shy away from this fact,” Draghi said in testimony to the European Parliament. Draghi’s remarks, made in his capacity as head of the European Systemic Risk Board, a bank regulator, came days after the ratings of nine euro-zone countries and after S&P decision to lower the triple A rating of Europe’s bailout fund. The EFSF retains its tripleA rating from the other main agencies, Moody’s and Fitch.

Three months ago, Draghi’s predecessor, Jean-Claude Trichet, told the same group of lawmakers the crisis had reached “systemic dimensions.” Draghi on Monday said “the situation has worsened further” since then.
Steps must be taken to restore economic growth and boost employment even as vulnerable governments reduce their budget deficits, Draghi said. Concerns over government-bond markets in some European countries, in addition to a worsening of economic growth prospects, “led to severe disturbances in the normal functioning of financial markets and, ultimately, the real economy,” Draghi said. Draghi warned recent decisions by European governments to improve coordination of fiscal economic policies and move toward more fiscal union “are not enough” unless they are followed through. He urged governments to put in place agreements made last year to beef up Europe’s rescue fund, and said efforts to shore up the banking system shouldn’t lead to a reduction in new lending. “I cannot underline these points enough,” said Draghi. “Only a well-coordinated, coherent and properly timed strategy will yield the desired results.”

While not commenting specifically on the S&P ratings cuts for euro-zone governments, Draghi stressed the need for “much less mechanical reliance” on rating agencies, and said greater competition would be useful.

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