(The following statement was released by the rating agency)
Dec 26 -
Summary analysis -- European Financial Stability Facility --------- 26-Dec-2012
CREDIT RATING: AA+/Negative/A-1+ Country: Supranational
Primary SIC: Sovereign
Credit Rating History:
Local currency Foreign currency
16-Jan-2012 AA+/A-1+ --/--
28-Oct-2011 AAA/A-1+ --/--
20-Sep-2010 AAA/-- --/--
The European Financial Stability Facility (EFSF) is a supranational entity incorporated in Luxembourg. Its members comprise all 17 European Economic and Monetary Union (euro area) member states. The EFSF’s mandate is to provide loans to member governments facing difficulties in accessing capital markets. The EFSF is to disburse such loans subject to the borrowing member’s compliance with reform conditions.
Standard & Poor’s Ratings Services does not expect the EFSF to be treated as a preferred creditor, but to rank pari passu with senior unsecured private creditors. Financing for the loans is to come from the proceeds of the EFSF’s issuance of securities, backed by member guarantees and highly rated securities. The EFSF’s lifespan is limited and no new financial lending engagements can be made after June 2013. The permanent European Stability Mechanism (ESM, not rated) became operational in October 2012 and we expect that future financial programs benefitting member states will be financed by the ESM rather than the EFSF.
Explicit guarantees from member states continue to be the main factors underpinning the ratings on the EFSF. Furthermore, we consider the EFSF to be a government-related entity (GRE) with integral links with and critical role for its euro area sovereign members, based on its:
-- “Critical” role: We consider the EFSF to be the cornerstone of the EU’s strategy to restore stability to the eurozone sovereign debt market and to preserve confidence in the European financial system.
-- “Integral” link: The EFSF’s board of directors comprises senior government officials, nominated by EFSF members. What we view as unconditional, irrevocable, and timely guarantees from members rated ‘AA+’ and above by Standard & Poor‘s, (or guarantees made by ‘AA+’ and above rated members plus liquidity reserves invested in ‘AA+’ and above rated securities) cover all of the EFSF’s liabilities.
We therefore conclude that there is an “almost certain” likelihood of extraordinary financial support by member states should the EFSF ever require it.
Since the EFSF has virtually no paid-in capital (EUR28.5 million), our rating on it depends directly on the creditworthiness of its guarantors. Each funding instrument is individually and separately guaranteed. In case the EFSF’s borrowers do not pay back their loans on time and in full, guarantors are obliged to provide cash up to their total specific guarantee commitment for the EFSF funding instrument in question, so as to secure the EFSF’s timely debt service.
To date, EFSF sovereign members that Standard & Poor’s rates ‘AA+’ and above guarantee a total of EUR452 billion, sufficient to fully cover the EFSF’s overall lending capacity (EUR440 billion). Following our weakest-link approach, we have equalized our issuer credit rating on the EFSF with the long-term foreign currency rating on the highest-rated guarantors (plus liquid securities held by the EFSF) that allow full coverage of the EFSF’s effective maximum borrowing capacity approved by member states. Currently this coincides with the ‘AA+’ long-term sovereign credit ratings on the republics of France and Austria.
The rating on the EFSF has remained unaffected by Standard & Poor’s update of its article, “Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology”, published Nov. 26, 2012, on RatingsDirect on the Global Credit Portal.
The negative outlook on the EFSF mirrors the outlook on the ‘AA+’ rated sovereign guarantors, the Republic of France and Austria. This is based on our weakest-link approach, equalizing our issuer credit rating on the EFSF with the long-term foreign currency rating on the highest rated guarantors (plus liquid securities held by the EFSF) that allow full coverage of the EFSF’s effective maximum borrowing capacity approved by member states.
We could lower the rating if we were to downgrade any of the currently ‘AA+’ or ‘AAA’ rated guarantors to ‘AA’ or below.
We could revise the outlook to stable if we were to revise the outlook on the Republic of France and Austria to stable.
Related Criteria And Research
-- Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012
-- Full analysis on the European Financial Stability Facility, Sept. 7, 2012.
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Methodology: Weak-Link Approach For Composite Government Issuance With Several Payment Responsibilities, May 29, 2009
-- Rating Sovereign-Guaranteed Debt, April 6, 2009