S&P Says EFSF May Lose AAA If Any AAA Euro Member Downgraded

German Finance Minister Wolfgang Schaeuble
Wolfgang Schaeuble, Germany's finance minister, said today that the downgrade warning should spur European leaders to ratchet up efforts to resolve the region's debt crisis. Photographer: Michele Tantussi/Bloomberg

The European Financial Stability Facility may lose its top credit rating if any of the bailout fund’s six guarantors face a downgrade from AAA, Standard & Poor’s said.

“We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the AAA sovereign ratings, which are currently on creditwatch, on one or more of EFSF’s guarantor members,” S&P said in a statement today.

At the same time, the ratings company said it “could affirm the AAA ratings on EFSF and its issues if we affirm the rating on all six of EFSF’s guarantor members currently rated AAA.” Germany, France, the Netherlands, Finland, Austria and Luxembourg are the top-rated nations backing the rescue fund.

European stocks the euro fell after S&P said late yesterday that it may cut the debt grade of 15 euro nations, including Germany and France. German Finance Minister Wolfgang Schaeuble said today the downgrade warning should spur European leaders to ratchet up efforts to resolve the region’s debt crisis at a summit in Brussels on Dec. 8-9.

“The crisis has become a crisis of euro-zone governance and crisis management,” Moritz Kraemer, managing director of European sovereign ratings at S&P, said on a conference call today. He said the summit is of the “utmost importance” and that leaders must address the turmoil “in a more robust and comprehensive way than what we’ve seen so far.”

Stocks Decline

The Stoxx Europe 600 Index fell 0.3 percent at the close today, having earlier dropped as much as 0.8 percent. National benchmark indexes dropped in 12 of the 17 western-European markets that were open today. The euro slipped 0.1 percent against the dollar, while French bonds declined, pushing the yield on the 10-year debt up 10 basis points to 3.24 percent.

S&P said today it could affirm the rating on the EFSF if one or more of its guarantor countries lost their top rating, but it had evidence that the nations “were implementing further credit enhancements that were in our view sufficient to mitigate the relevant guarantor members’ reduced creditworthiness.”

The company last night rebuked leaders for their “continuing disagreement” over how to best tackle the crisis that now threatens to tip the global economy into recession.

“The truth is that markets in the whole world right now don’t trust the euro area at all,” Schaeuble said today in Vienna. S&P’s statement will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence” of investors.

Merkel-Sarkozy Charge

German Chancellor Angela Merkel and France’s Nicolas Sarkozy are leading the charge toward the latest crisis fix after agreeing a joint position on automatic penalties for deficit violators and anchoring debt limits into euro states’ constitutions. Investors are looking for such an agreement on closer fiscal cooperation in the euro area to trigger intensified action from the European Central Bank.

“The ECB is somewhat hesitant to engage in full-throttle QE,” Kraemer said. “The first steps will have to be made by politicians and the summit is very important.”

With EU leaders due to gather in a little over 48 hours, U.S. Treasury Secretary Timothy Geithner arrived in Berlin for talks with Schaeuble after meeting earlier today with ECB President Mario Draghi and Bundesbank President Jens Weidmann in Frankfurt. The ECB holds a policy meeting on Dec. 8.

Geithner said at a press conference in Berlin that it’s “very important” for Germany and France to succeed in their efforts to strengthen the European Union, and that he’s “very encouraged” by recent developments.

“While we’re of the opinion that politicians are keenly aware of challenges, our experience with past summits suggests that it’s far from certain that an outcome would” bring “confidence to the market,” S&P’s Kraemer said. “If that was to be unsuccessful, we anticipate the possibility of another leg downward of the crisis and market confidence.”


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