(CN) – Standard & Poor’s downgraded long-term bonds issued by the European Financial Stability Facility, cracking down after cutting the ratings of France and Austria, which guaranteed the fund.
The bonds and the two EU states now carry the AA+ rating instead of the AAA score from last week. S&P had warned that its rating of the European Financial Stability Facility (EFSF) would depend on the creditworthiness of its backers.
“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,” the agency said in a statement Monday.
“If we see that once again the EFSF’s long-term obligations are fully supported by guarantees from EFSF member-guarantors rated ‘AAA’ or by securities rated ‘AAA,’ we would likely raise the EFSF’s long-term ratings to ‘AAA.'”
Those guarantees might include ratification of the European Stability Mechanism, a permanent replacement for the EFSF that will take 90 percent of its capital from the 17-nation euro zone membership.
When S&P cut the credit ratings of nine European nations, including France and Austria, on Friday, it mentioned a host of concerns, such as the tightening of private credit, an increase in risk premiums for European bond issuers and weakening prospects for economic growth.
“The policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” the agency said in a statement.
EFSF did not blink at the downgrade. “The downgrade to ‘AA+’ by only one credit agency will not reduce EFSF’s lending capacity of ¬ 440 billion,” CEO Klaus Regling, said in a statement. “EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programmes until the ESM becomes operational in July 2012.”
Regling’s statement appeared to hold true Tuesday as the facility announced a successful auction of its long-term bonds. Spain and Italy, which also suffered a ratings reduction on Friday, announced similar successful auctions of their long-term debt.
The Financial Stability Facility was created in 2010 to temporarily stabilize the European economy, pending the creation a permanent solution, by providing loans to countries in financial difficulty and by intervening in the bond markets to support bonds issued by European nations.