THE EU authorities suffered a fresh blow to their effort to prop up the euro zone last night as Standard & Poor’s stripped its top credit rating from the euro zone rescue fund.
S& P attributed the downgrading of the European Financial Stability Facility to its decision on Friday to remove its triple-A rating on the debt of France and Austria, two of the six euro zone countries that provide it with top-rated lending guarantees.
The latest move brings with it additional potential to increase the costs at which the EFSF raises money on private debt markets, leading to a knock-on increase in the interest rates Ireland and other bailout recipients pay for their loans.
The development came as German finance minister Wolfgang Schäuble insisted there was no reason to increase German guarantees to the fund to compensate for the loss of the French and Austrian triple-A ratings.
The EFSF faces an immediate test after the downgrading this morning when it goes to the market to raise some €1.5 billion in short-term debt.
The European authorities have been trying to downplay the impact of the downgrading of France and Austria and the downgrading of seven other euro countries that did not have a top rating. A spokesman in Brussels for the European Commission said that the timing of the downgrading was “very odd” and came in spite of positive developments in many of the countries concerned.
While the move has triggered concern among officials that it could curtail the EFSF’s firepower by as much as €180 billion, EFSF chief Klaus Regling stressed in a statement last night that the fund still retains top ratings from SP’s rivals Moody’s and Fitch.
“The downgrade to ‘AA+’ by only one credit agency will not reduce EFSF’s lending capacity of €440 billion,” Mr Regling said.
“EFSF has sufficient means to fulfil its commitments under current and potential future adjustment programmes until the ESM becomes operational in July 2012.”
Although the EU authorities are exploring ways of compensating for the loss of almost €160 billion in triple-A guarantees from France and some €20 billion from Austria, euro zone sources say it will not be possible to make up the deficit entirely.
“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,” SP said.
Mr Schäuble made it clear that he saw no reason to increase its support for the fund, saying Germany’s €221 billion contribution was “fully sufficient”.
Mr Schäuble called for renewed efforts to agree European regulation of ratings agencies “to limit them to what they actually are”.
He felt SP had “not understood” the potential positive consequences of Europe’s recent reform efforts and expressed optimism that the latest downgrade would speed up agreement among EU leaders on new European transparency rules for ratings agencies.
“One has to make sure that the rating agencies are really objective referees and not interested parties,” he told German radio. “These agencies are in competition with each other and we give a negative rating a great deal of publicity.”
French president Nicolas Sarkozy called on French people to “keep their cool” and not panic as he faced intense domestic pressure over the loss of France’s triple-A credit rating.
Mr Sarkozy tried to play down the significance of S&P’s move, saying his government would continue with its plans and not be dictated to by rating agencies.
“My deep belief is that, fundamentally it does not change anything,” he said.
During a tense press conference in Madrid, where he met Spanish prime minister Mariano Rajoy, Mr Sarkozy at first refused to answer a question on the subject because the SP cut had been superseded by “more recent news” – a reference to a statement yesterday from Moody’s, another rating agency, that reaffirmed France’s top rating but said it would be assessed over the coming months.
The downgrade has dealt a serious blow to Mr Sarkozy, who had presented himself as the leader best placed to save the top-notch rating.
Mr Sarkozy said his visit to Rome with German chancellor Angela Merkel, due to have taken place on Friday, would be postponed.
The move was reportedly made at the request of the French, reflecting concern among Mr Sarkozy’s aides over the domestic fallout from SP’s decision.
“What would be the point of a meeting that was already being termed a summit when we are always being reproached for organising too many summits,” Mr Sarkozy said.
