Ro­bust support and cap­i­tal base un­der­pin ESM’s cred­it­wor­thi­ness

Financial Mirror (Cyprus) - - FRONT PAGE -

The Euro­pean Sta­bil­ity Mech­a­nism (ESM) Aa1/Prime-1 rat­ings are un­der­pinned by the very strong po­lit­i­cal and fi­nan­cial support the en­tity re­ceives from its euro area share­hold­ers as well as the en­tity’s large cap­i­tal cush­ion, Moody’s In­vestors Ser­vice said in a re­port.

In par­tic­u­lar, the rat­ing agency high­lights that the ESM has a large (paid-in) cap­i­tal base and a strong mech­a­nism in place to call sub­stan­tial ad­di­tional cap­i­tal con­tri­bu­tions from its share­hold­ers in case of need.

The cred­it­wor­thi­ness of the ESM’s share­hold­ers is high (weighted me­dian rat­ing of Aa1), which pro­vides very high as­sur­ance that a cap­i­tal call will be hon­oured and fur­ther support pro­vided in the very un­likely event it is needed. A fur­ther credit strength is the ESM’s low lever­age, which would re­main mod­er­ate even in a sit­u­a­tion of full us­age of its lend­ing ca­pac­ity. The en­tity’s liq­uid­ity and cap­i­tal man­age­ment poli­cies are pru­dent and en­sure that the ESM will not face a liq­uid­ity short­fall in case a bor­rower de­faults.

That said, Moody’s cau­tions that the ESM’s cred­it­wor­thi­ness is more closely cor­re­lated with its key share­hold­ers than is the case for most other supra­na­tional en­ti­ties, given the close eco­nomic and fi­nan­cial link­ages in the euro area. Due to its pol­icy man­date to support euro area sov­er­eigns in fi­nan­cial dis­tress, the ESM tends to have a highly con­cen­trated loan book and high em­bed­ded credit risk. Moody’s also be­lieves that the de­fault cor­re­la­tion be­tween mem­ber states of the mon­e­tary union re­mains high, even though the acute phase of the euro area cri­sis has passed.

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