Eurozone bailout funds downgraded over French fears

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

Moody's said on Friday (30 November) the downgrade of the ESM and the EFSF, which were created to stabilise the eurozone by providing financial assistance to euro 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 No. 2 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," Moody's said.

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

The EFSF and ESM said in a statement late on Friday 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 had announced it would review the Aaa rating of the two funds after the downgrade of France.

The euro pared most gains versus the US dollar in late Friday trade after Moody's downgrade.

Background

Credit rating agencies (CRA) were among the first to be regulated at European level in the aftermath of the 2008 financial crisis, reflecting the European Commission's view that they had failed to predict the the crisis and even helped make it worse.

These regulations, called ‘CRA I’, were adopted in 2009 and were later strengthened in May 2011 to become ‘CRA II’. CRAs are required to avoid conflicts of interest, to ensure the quality of their ratings and rating methodologies and to maintain a high level of transparency. CRAs also have to apply for registration in Europe.

In the midst of the sovereign debt crisis in November 2010, the Commission launched a public consultation which focused on over-reliance on external credit ratings, improving the speed and transparency of sovereign debt rating, making the markets for rating agencies more competitive and making agencies legally accountable in order to prevent conflicts of interest.

Further Reading

European Commission

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