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Tuesday 6 December 2016

Euro plunges as rating of bailout fund is cut

S&P downgrades EFSF to AA+ as single currency falls to 17-month low against dollar

Published 17/01/2012 | 05:00

French president Nicolas Sarkozy is greeted by Spanish prime minister Mariano Rajoy as the leaders held talks in Madrid yesterday on the continuing euro crisis
French president Nicolas Sarkozy is greeted by Spanish prime minister Mariano Rajoy as the leaders held talks in Madrid yesterday on the continuing euro crisis

EUROPEAN efforts to contain the debt crisis suffered a double blow last night as the main EU bailout fund was hit with a ratings cut and the euro plunged in the money markets.

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Rating agency Standard & Poor's (S&P) last night cut the European Financial Stability Facility's (EFSF) rating by one notch from AAA to AA+.

It comes as the fund plans to sell up to €1.5bn of six-month debt this week.

The loss of the top rating for the main European bailout fund is the latest sign that the debt crisis is deteriorating.

With no sign of an end to the debt crisis the euro fell to fresh lows yesterday. Against the dollar, the euro dropped to the lowest level in 17 months, but the big move was against Japan's yen, with the single currency now at its lowest value since 2000.

Bazooka

The EFSF rating cut will make it even harder to create the so-called 'big bazooka' of a €1trn or even €2trn rescue package that European leaders have been trying to put together for the past 12 months.

The move by S&P was not a surprise. It comes after the same rating agency slashed the ratings of nine eurozone countries including France on Friday.

France provides the second biggest guarantee to the fund so it ratings cut meant the value of the fund's guarantees was undermined.

European leaders and officials have hit back at the rating agency since Friday's announcements. ECB president Mario Draghi said there should be less reliance on their ratings.

"We should learn to do without ratings, or at least we should learn to assess 'creditworthiness' with less reliance on the rating companies," Draghi said at the European Parliament in Strasbourg.

EU Commission officials say S&P is wrong to say the approach to solving the debt crisis has been solely about austerity. That was too little to prevent the latest ratings cut.

The EFSF was set up in 2010 to raise money in the markets, thanks to guarantees from countries that use the euro. In reality, it was guarantees from six AAA-rated countries that convinced investors to lend to it.

The strength of those guarantees had been in doubt even before France lost its top credit rating. The EFSF saw a steady increase in its cost of borrowing compared to Germany last year.

In November, the fund was forced to delay a planned bond auction because of rising borrowing costs even though debt costs were falling for other AAA-rated borrowers.

Despite being predicted, the rating cut is bad news for Ireland. The EFSF is the main European bailout fund lending to Ireland under the EU/IMF rescue package.

Under the revised bailout deal, it lends cash to the Government at around the same price it pays to raise the money in the markets. A rating downgrade is likely to mean a rise in EFSF's borrowing costs, which will be passed on to our Government.

Irish Independent

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