In a major move, global credit rating agency Standard and Poor has stripped the EFSF (European Financial Stability Facility) bail-out fund off its AAA status to a grade lower to AA+ status. Not that it is surprising considering that last week S&P has already lowered the ratings of nine eurozone nations, including that of France and Austria (two main EFSF’s guarantors). S&P has cited insufficient policy initiatives by European leaders as the cause of ratings downgrade.
The existing lending capacity of European bail-out fund is up to €440 billion, depending on contributions from its guarantor nations which are eurozone countries with triple-A ratings. After ratings downgrade of nine nations, only four nations remain with highest creditworthiness. These are Germany, Finland, Netherlands and Luxembourg.
Klaus Regling, the chief executive of EFSF fund has downplayed S&P’s latest move. Despite this, the reduced rating of EU rescue fund is seen as a big blow to those nations which are already reeling under European debt crisis. With six months still to go for ESM (European Stability Mechanism) fund to be effective, there is tremendous pressure on the existing top credit-worthy eurozone nations to step up cash flow to the EFSF rescue fund and also find a convincing solution to European debt crisis.
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