EFSF’s Firepower May Drop 35% If France Downgraded, Mizuho Says

The lending capacity of Europe’s rescue fund may drop by 35 percent if France’s AAA credit rating is downgraded, because the action will hurt the nation’s ability to guarantee debt issued by the fund, according to Mizuho Corporate Bank Ltd.

The European Financial Stability Facility’s effective lending capacity is currently limited to 440 billion euros ($603 billion), backed by guarantees from top-rated France and Germany. European leaders on Oct. 27 agreed to boost the fund’s size to 1 trillion euros.

Should France lose its top rating, the EFSF’s lending capacity will decrease by 35 percent to 280 billion euros, Daisuke Karakama, a market economist in Tokyo at the unit of Japan’s third-biggest listed bank, wrote in a report today. Excluding the estimated amount secured to bail out Ireland, Portugal and Greece, the remaining firepower will be 64 billion euros, he wrote.

“Europe will be in a tough position if France’s rating is cut and it fails to secure 1 trillion euros for the fund,” Karakama said in an interview today.

Moody’s Investors Service said on Oct. 17 that France’s credit rating may suffer from a deterioration in debt metrics and the risk of added liabilities from the debt crisis.

Before joining Mizuho Corporate Bank in 2008, Karakama worked on loan at the European Commission as an official from the Japan External Trade Organization.

To contact the reporter on this story: Joji Mochida in Tokyo at jmochida@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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