Downgrade puts cheap bailout money at risk

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

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

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 a debt crisis that has dragged on for more than two years. It also underlines how reliant states and financial firms still are on the opinion of rating agencies, despite policymakers across Europe vowing on Monday to curtail their influence.

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

“The downgrade to ’AA+’ by only one credit agency will not reduce (the) EFSF’s lending capacity of C440 billion,” Klaus Regling, the fund’s chief executive officer, said 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 had warned in December that it would cut the rating of the C440 billion EFSF 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 that 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 also appear politically difficult in the Netherlands and Finland. Luxembourg, the fourth country that S&P still awards its highest rating, is so small that its contributions have little impact.

Another option would be to accept that the EFSF can give out fewer loans.

Because of the EFSF’s strange setup the bonds it issues to raise bailout money are underpinned by some C720 billion in guarantees from the 14 eurozone countries that haven’t received bailouts. But for issuing AAA-rated bonds, only AAA-guarantees count, taking the fund’s lending capacity down to C440 billion.

With the downgrades of France and Austria, the EFSF loses some C180 billion in AAA-guarantees, leaving it with a loan capacity of just over C260 billion. Of that, around C40 billion have already been committed to the bailouts of Ireland and Portugal, and a new Greek rescue will quickly take more than C100 billion out of the till.

While that would leave the eurozone with a severely diminished firewall, the lower lending capacity may not matter that much. To rescue Italy and Spain, the EFSF would need more than C1 trillion, according to analysts, and whether the shortfall is C900 billion or C600 billion won’t make much of a difference.

Regling said that more support was on the way from the eurozone’s new, permanent rescue fund, the C500 billion European Stability Mechanism, which is expected take over from the EFSF later this year. In contrast to the EFSF, the ESM has paid-in capital, similar to a bank, and is thus less vulnerable to rating downgrades.

Policymakers on Monday nevertheless lashed out 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 on Friday, said the move’s importance should not be exaggerated.

“We have to react to this (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 opinion of rating agencies.

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

The European Union is currently in the process of putting new banking rules into law that 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 misjudged ratings “intentionally or with gross negligence.”

Just Posted

Feds to post deficits $8B bigger than expected over next two years: PBO report

OTTAWA — The Trudeau government is on track to run deficits nearly… Continue reading

Kinder Morgan bungled pipeline public relations: poll

The survey suggests 58 per cent of Canadians believe the company is to blame for poor perceptions

Calgary Flames name Peters as replacement for fired head coach Gulutzan

The 53-year-old from Three Hills, Alta., resigned as head coach of the Carolina Hurricanes

The Latest: UK leader congratulates royals on birth of son

LONDON — The Latest on the royal baby birth: 1:50 p.m. British… Continue reading

G7 ministers agree to call Russia out on ‘malign’ behaviour, Johnson says

TORONTO — Ministers from the G7 countries have committed to taking Russia… Continue reading

Replay Red Deer April 22, 2018

Watch weekly news highlights from Red Deer and Central Alberta

As Osoyoos Indian Band flourishes, so too does Okanagan’s wine tourism

Indigenous practices have driven growth of South Okanagan’s wine history and agricultural influence

Van runs into pedestrians in Toronto

TORONTO — Police say multiple pedestrians have been struck by a van… Continue reading

Loblaw Companies tax court trial over Barbadian banking subsidiary starts

TORONTO — A tax court trial involving Loblaw Companies Ltd. and allegations… Continue reading

As trial winds down, DA downplays Cosby travel records

NORRISTOWN, Pa. — Prosecutors highlighted gaps in Bill Cosby’s travel records on… Continue reading

Summer Movie Preview: Hollywood roars back into action

LOS ANGELES — Summer starts early this year in Hollywood with the… Continue reading

5 things to know as William and Kate have 3rd child

LONDON — Like everything to do with Britain’s royal family, a mix… Continue reading

Plane not de-iced before crash near remote Saskatchewan community: safety board

FOND DU LAC, Sask. — Investigators say a plane that crashed near… Continue reading

Toys “R” US ends Canadian stores auction with Fairfax as the only bidder

TORONTO — Toys “R” Us Inc. will seek approval to sell its… Continue reading

Most Read

Five-day delivery plus unlimited digital access for $185 for 260 issues (must live in delivery area to qualify) Unlimited Digital Access 99 cents for the first four weeks and then only $15 per month Five-day delivery plus unlimited digital access for $15 a month