Eurozone Financial Stability Debt Rating Lowered

Fitch today lowered its default rating on EFSF debt to ‘AA+’ due to last week’s downgrade of France’s sovereign debt. Last Friday, Fitch cut France’s debt rating from ‘AAA’ to ‘AA+’.

Here’s the agency’s reasoning:

The original version of the [Framework Agreement] ensured that all payments due on EFSF debt are covered by guarantees provided by [eurozone members], pro-rata based on their contribution key in the European Central Bank, which could be extended to 120% of their initial amount. Subsequent amendments to the [Framework Agreement] and Deed of Guarantee, applicable to all debt issued since October 2011, reduced the credit enhancement through cash buffers and extended the percentage of over-guarantee percentage to 165%.

Following the downgrade of France’s [Issuer Default Ratings], 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. However, short-term debt issues remain entirely covered by guarantees and over-guarantees issued by [eurozone members] rated ‘F1+’.

The ratings outlook is ‘stable’.

Fitch also notes that long-term EFSF would review EFSF’s ratings if any of the ‘AA+’ or ‘AAA’ eurozone members are downgraded below ‘AA+’. Currently Germany, the Netherlands, Austria, Finland, and Luxembourg enjoy ‘AAA’ ratings on long-term sovereign debt. France is the only eurozone member with a ‘AA+’ rating.

The impact of this decision is likely to be an increase in the interest rates that the eurozone’s troubled periphery will have to pay for their borrowing.

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