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Eurozone rescue fund drops to AA+ in S&P’s rating

- Associated Press - Monday, January 16, 2012

BRUSSELS — The rating agency Standard & Poor's said Monday it has downgraded the creditworthiness of the eurozone's rescue fund by one notch to AA+, putting at risk the fund's ability to raise cheap bailout money.

The downgrade follows ratings cuts for AAA-rated France and Austria, whose financial guarantees were key to the creditworthiness of the European Financial Stability Facility.

If replicated by other rating agencies, S&P's move complicates the eurozone's efforts to emerge from its two-year debt crisis. It also underlines how reliant states and financial firms still are on the opinion of rating agencies despite policymakers across Europe vowing Monday to curtail their influence.

Although the ratings cut had been expected after S&P downgraded nine euro countries Friday, the EFSF's top official moved quickly to reassure investors.

"The downgrade to 'AA+' by only one credit agency will not reduce EFSF's lending capacity of 440 billion" euros, said Klaus P. Regling, the fund's chief executive officer, in a statement. He added that the EFSF has enough money to fund the bailouts of Ireland and Portugal as well as a second rescue for Greece that is likely to be decided in the coming weeks.

S&P warned in December that it would cut the EFSF rating in line with the downgrades of any AAA country.

Moody's and Fitch, the two other big rating agencies, still have the EFSF at AAA, meaning it would count as a top-notch investment for most funds, but analysts warn that further downgrades could follow soon.

Once another big agency cuts the EFSF's rating, the eurozone faces a stark choice. Either the fund starts issuing lower-rated bonds - and accepts higher borrowing costs - or its remaining AAA contributors increase their guarantees.

So far, Germany, the biggest of the four AAA economies in the eurozone, has ruled out boosting its commitments to the fund, and increases appear politically difficult in the Netherlands and Finland as well. Luxembourg, the fourth country to which S&P still awards its highest rating, is so small that its contributions have little impact.

Policymakers lashed out Monday against S&P's downgrades and promised to curtail their influence. French President Nicolas Sarkozy, in his first public comment since France lost its AAA rating Friday, said the move's importance should not be exaggerated.

"We have to react to [the French downgrade] with calm, by taking a step back," he said at a news conference in Madrid. "At the core, my conviction is that it changes nothing."

Meanwhile, Mario Draghi, president of the European Central Bank, told European lawmakers in Strasbourg, France, that banks and other financial firms should stop basing their risk assessment solely on the opinions of rating agencies.

"One needs to ask how important are these ratings for the marketplace, for the regulators and for investors," Mr. Draghi said, adding that investors should treat the agencies' judgments as just one piece of information alongside their own analyses.

The European Union is in the process of putting new banking rules into law that would cut the reliance on risk assessments from rating agencies. It also has proposed new legislation that would force the agencies to be more transparent about how they reach their decisions and even allow investors to sue firms that misjudge ratings "intentionally or with gross negligence."

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