Moody’s on Monday cut its rating on French long-term sovereign debt by a single notch, from AAA to Aa1. The move had been largely expected, following a similar decision in January by Standard Poor’s and amid continuing economic stagnation. Markets greeted the news with a yawn.
But the European Financial Stability Facility, the euro zone’s temporary bailout fund, and its permanent replacement, the European Stability Mechanism, still enjoy AAA ratings at Moody’s — despite the fact that France, as the second-largest economy in the 17-nation euro zone, is on the hook for more bailout guarantees than any other member except Germany.
Many analysts say it is just a matter of time before Moody’s downgrades the bailout funds in turn, which could force them to pay more for their borrowing.
“We believe that a downgrade of the E.F.S.F. is coming in the next few days,” said Michael Leister, interest rate strategist at Commerzbank in London. “It was a surprise that it didn’t happen mechanically, at the same time as France.”
The bailout funds are crucial to fixing Europe’s sovereign debt problems. They have committed tens of billions of euros to Greece, Portugal and Ireland. The funds will also be part of a forthcoming recapitalization of the ailing Spanish banking sector, if not of a wider rescue of the country. Cyprus, too, is close to signing a bailout agreement.
In theory, credit ratings should reflect the risk that a lender will not be repaid, and are thus inversely related to the interest rate the lender demands to hold a debt. But with the global financial system fragile and central banks holding rates down, that relationship has been strained. Both France and the United States, which lost its AAA rating at Standard Poor’s in 2011, continue to borrow near record low levels.
Moody’s in fact warned in July that the outlook for the E.F.S.F. was negative, and that it might downgrade the fund if there were “a deterioration in the creditworthiness of the participating euro area member states,” including France.
Jessica Eddens, a spokeswoman for Moody’s, confirmed Thursday by e-mail that the E.F.S.F. and the E.S.M. continued to enjoy an AAA rating, with a negative outlook.
“Moody’s will assess the implications of the downgrade of the French government’s rating for the E.F.S.F.’s and E.S.M.’s ratings as a matter of course,” she said, “focusing in particular on whether the support available from the remaining AAA guarantors and shareholders is consistent with the E.F.S.F. and E.S.M. retaining the highest ratings.”
For the moment, the Moody’s downgrade of France is complicating life for the E.F.S.F., which has had to put its financing plans on hold while officials work through the implications of the French downgrade.
The fund had been preparing to sell three-year bonds, for which it said there was solid investor demand. But its rules require that new bond issues must be fully guaranteed by euro zone member states with better ratings than the E.F.S.F. The fund has now halted that planned offering, at least temporarily.
The E.F.S.F. “is currently unable to proceed until this technical aspect is resolved,” Christophe Frankel, the E.F.S.F.’s chief financial officer, said in a statement. He noted that the fund’s issuance of short-term bills had not been affected, as France’s short-term ratings have not changed.
The solution to the E.F.S.F.’s problem? Just wait.
Mr. Leister noted that once the E.F.S.F.’s credit rating has been cut, it will be at or below the French level, and, under the fund’s own rules, will once more able to issue debt— a rare case where an issuer hopes to be downgraded.
Wolfgang Proissl, a spokesman for the E.F.S.F., declined to comment on the potential for a downgrade of the fund and how that would affect its actions. “I can only tell you that we are carefully considering the situation,” he said.
Mr. Leister predicted that the impact on borrowing costs would be limited, as investors are prepared for the inevitable. “Yields on E.F.S.F. debt will go up,” he said, “but there’s not going to be a huge spike.”
Article source: http://www.nytimes.com/2012/11/23/business/global/daily-euro-zone-watch.html?partner=rss&emc=rss