Moody’s cuts eurozone rescue funds’ ratings

Reuters, DPA/Brussels

Credit ratings agency Moody’s cut its rating for the eurozone rescue funds ESM and EFSF to Aa1 from Aaa following its downgrade of France earlier in November, the agency has said.

It said late on Friday that the downgrade of the ESM and the EFSF, which were created to stabilise the eurozone by providing financial assistance to euro area member states in difficulty, was prompted by the high correlation in credit risk among the rescue funds and their largest financial supporters.

Moody’s stripped France of its prized triple-A badge this month, cutting the sovereign credit rating on Europe’s No2 economy by one notch to Aa1 from Aaa. It cited an uncertain fiscal outlook and deteriorating economy.

“Moody’s view that there is a high correlation in credit risk among the entities’ supporters is consistent with the evolution to date of the euro area debt crisis and the close institutional, economic and financial linkages among the major euro area sovereigns”.

The agency said it kept a negative outlook for the new credit rating.

The EFSF and ESM said that they took note of Moody’s decision but did not agree with it.

“We disagree with the rating agency’s approach which does not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure,” said Klaus Regling, managing director of the ESM and chief executive of EFSF.

“Moody’s rating decision is difficult to understand.”

He said the downgrade would not “in any way” inhibit the rescue fund from taking action or issuing credit to fiscally stressed member governments.

Moody’s had announced it would review the Aaa rating of the two funds after the downgrade of France.

Moody’s left the rescue funds’ top-notch short-term credit ratings unchanged. “This underlines ESM’s uniquely robust capital structure and the solidity of EFSF,” the funds said.

The rescue funds noted that they continue to enjoy the rival Fitch rating agency’s top-notch AAA long-term rating.

The EFSF temporary fund was established in 2010 when Greece became the eurozone’s first country to need a full-fledged financial rescue, and was later part of the bailouts for Ireland and Portugal.

The ESM permanent bailout fund, inaugurated on October 8 after months of delays, was created in hopes of alleviating the budget and banking crises that have plagued the common currency area for more than two years.

Jean-Claude Juncker, president of the Eurogroup of finance ministers in the currency zone and chairman of both funds, said the eurozone’s 17 member states remain politically and financially “fully committed” to the rescue funds and “stand firmly behind both institutions.”

Germany retains its triple-A rating with all three major ratings agencies, though Moody’s has imposed a negative outlook on Europe’s largest economy.