Europe’s Rescue Fund May Lose Top Debt Rating as France’s Grade at Risk

The euro area’s rescue fund may lose its top credit status were France’s AAA grade to be cut, Fitch Ratings said, highlighting how the region has been too slow in stemming the two-year-old debt crisis.

Five days after lowering France’s credit outlook, Fitch said the European Financial Stability Facility’s AAA rating is linked to France’s grade. France is one of six AAA nations backing the EFSF, whose top rating limits the cost of selling debt to finance emergency loans for distressed euro governments.

“The revision of the rating outlook on France to negative last Friday implies that the risk of a downgrade of EFSF debt has increased,” Fitch said in a statement today in London. “The primary source of ratings risk for EFSF debt issues is the possibility that one or more of its largest AAA guarantors is downgraded.”

The threat to France underscores the weaknesses in the institutions set up by the euro area to prevent Spain and Italy from being engulfed by the debt troubles that forced Greece, Ireland and Portugal to seek bailouts. Moody’s Investors Service said Dec. 12 it’s reviewing all euro governments for a possible downgrade, following a Dec. 5 warning by Standard & Poor’s involving 15 of the region’s 17 governments.

The euro area has upgraded the EFSF by raising its lending capacity to 440 billion euros ($575 billion) from an initial level of about 250 billion euros and by allowing the facility to buy sovereign bonds on the primary and secondary markets, offer credit lines to governments and recapitalize banks in addition to selling debt to finance rescue loans.

Fund Bolstered

In October, when that process was completed and concerns grew that even 440 billion euros wouldn’t suffice, euro leaders rejected an increase in the overall guarantees for the EFSF and opted instead to try to bolster its firepower further to 1 trillion euros through leveraging. In November, the region’s finance ministers said the leveraging efforts would fall short.

The Luxembourg-based EFSF this month began selling short- term debt to meet its expanded role in tackling the debt crisis. Under a funding program that will focus on three-, six- and 12- month bills, the facility on Dec. 13 issued 1.97 billion euros of 91-day securities at an average yield of 0.2222 percent.

The EFSF’s finances are tied to national guarantees totaling almost twice the headline figure. Currently, the region’s governments offer guarantees totaling 726 billion euros and apply an over-guarantee of 165 percent, resulting in a lending capacity of 440 billion euros.

The sum of guarantees excludes those of Greece, Ireland and Portugal, which don’t contribute as aid recipients. France’s guarantees amount to 158.5 billion euros, second to Germany’s 211 billion euros. The guarantees from the euro area’s six AAA countries total about 451 billion euros.

“Although the EFSF could potentially remedy a downgrade of a small AAA guarantor by increasing the size of its cash reserve or through additional credit enhancements, this would be far more challenging if a larger guarantor like France or Germany were downgraded,” Fitch said.

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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