Euro zone bailout fund threatened

BRUSSELS — The euro zone bailout fund is in danger of losing its triple-a rating after countries backing it were downgraded, complicating efforts to shield big nations like Italy from the debt crisis.

Governments were already struggling to boost the firepower of the European Financial Stability Facility (EFSF) before Standard and Poor's decided to cut the ratings of nine euro zone nations including top-rated Austria and France.

S&P, which indicated in December that any downgrade of a triple-a nation could lead to similar action against the EFSF'S stellar rating, slashed the credit scores of France and Austria by one notch to AA+.

"Now there is a risk that the EFSF will lose its triple A," said a European government source.

"It's a

real

problem,"

the source said, noting that France contributes to one-fifth of the fund. Luxembourg Prime Minister Jean-claude Juncker

who heads the group of euro zone finance ministers, said governments will strive to protect the EFSF'S AAA rating.

"The shareholders of the EFSF affirm their determination to explore the options for maintaining the EFSF'S AAA rating," he said in a statement

(pictured),

after the S&P announcement.

The EFSF is backed by guarantees from euro zone states, allowing the fund to borrow money from investors at cheap rates and then lend that money to nations that have been shut out of the private markets. A credit score downgrade would likely raise the interest rate demanded by investors to buy bonds issued by the EFSF, in turn making it more expensive for euro zone states to help each other out.

The EFSF had a lending capacity of 440 billion euros when it was created, but the figure is now down to 250 billion euros following bailouts of Ireland and Portugal.

The fund is now considered too small to come to the aid of bigger countries like Italy or Spain, the euro zone's third and fourth biggest economies, whose borrowing costs have spiked in recent months.

Greece, which received a 110-billion-euro EU-IMF bailout before the EFSF was founded in May 2010, is hoping to secure a second 130-billion-euro rescue package from the euro zone.

With more bailouts a growing possibility, EU leaders had hoped last year to leverage the EFSF to one trillion euros by using clever financial footwork. — AFP