Moody’s downgrades AAA rating of ESM rescue fund

Outlook ‘negative’

WASHINGTON, Dec 1, (Agencies): Moody’s cut the triple-A rating of the European Stability Mechanism rescue fund on Friday by one notch and gave it a negative outlook, citing its earlier downgrade of key ESM backer France.

Moody’s said the French downgrade on November 19, a one-step cut also from Aaa, reflects its view that there has been “a marginal diminution” in the likelihood that Paris will keep to its financial obligations, including its commitment to support the ESM.

For that reason, Moody’s also lowered the ESM’s rating to Aa1. It cut the ESM’s predecessor, the European Financial Stability Facility, to a “provisional” Aa1 from provisional Aaa, for the same reason.

“The credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters,” Moody’s said.

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“France is the second largest contributor to the two entities’ financial resources, as a provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.”

Germany is the largest backer of the two mechanisms, and its credit rating remains at the top-level Aaa.

The ESM and EFSF are crucial mechanisms for the rescue plan for the eurozone, routing aid from Europe’s wealthy countries to the crisis-stricken governments and banks of Greece, Spain, Portugal and Ireland.

Moody’s said both remain highly rated because they have strong capital bases and firm controls and that the ESM enjoys, as a lender, preferred creditor status.

ESM chief Klaus Regling objected to the Moody’s downgrade as unwarranted.

“Moody’s rating decision is difficult to understand,” he said in a statement.

“We disagree with the rating agency’s approach which does not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure.”

Eurogroup President Jean-Claude Juncker, who also serves as ESM and EFSF chairman, said: “The 17 euro area Member States are fully committed to ESM and EFSF in political and financial terms and stand firmly behind both institutions.”

The agency said its decision was driven by its earlier downgrade of France. The eurozone’s second-largest economy guarantees a sizable part of the ESM’s loan capacity.

ESM chief Klaus Regling called the decision “difficult to understand,” saying it does “not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure.”

The ESM — one of the 17-nation eurozone’s key tools in fighting off its debt crisis — continues to be assigned a top-notch long-term rating by Fitch. Moody’s and Fitch also see the fund’s short-term credit rating as AAA. Demonstrators hold placards in front of the Catalunya Caixa bank headquarters on Dec 1, in Barcelona during a protest against preference shares in which protesters asked the bank to return their savings. Spanish banks are a key concern to financial markets because of the falling value of huge loans they allowed to build up during a property bubble that col

lapsed in 2008. (AFP)