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EFSF Cut to AA+ by Fitch in Wake of France’s Loss of Top Rating

Europe’s temporary rescue facility lost its AAA rating in a move by Fitch Ratings to match it to the level of France after the country lost its own top grade last week.

The European Financial Stability Facility was downgraded by one level to AA+, Fitch said in a statement in London today. The company attributed the decision as a consequence to its July 12 cut to the rating of Europe’s second-largest economy.

“EFSF’s ratings rely on the irrevocable and unconditional guarantees and over-guarantees provided by euro-area member states,” Fitch said. After France’s downgrade, “the EFSF’s long-term debt issues are not fully covered by AAA guarantees and over-guarantees and, for debt issued before October 2011, by the cash reserve.”

The EFSF, backed by the guarantees of euro member states, will be replaced in time by the European Stability Mechanism that started last year and relies on paid-in capital by European governments to fund bailouts. Investors often ignore ratings decisions, evidenced by the rally in Treasuries after the U.S. lost its top grade at Standard & Poor’s in 2011.

Fitch said that 100 percent of long-term debt issued by the EFSF is now guaranteed by countries rated at least AA+.

If any other EFSF backer rated AAA or AA+ gets downgraded, “and if the coverage by AA+ guarantees falls below 100 percent, Fitch would also review the long-term rating assigned to EFSF debt issues,” Fitch said.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by Standard and Poor’s. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

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