Tuesday, December 6, 2011

S&P Preparing to Downgrade the EFSF by up to 2 Notches

S&P Memo to the Fed:  The European bailout needs a bailout.

Full Release below:

European Financial Stability Facility Long-Term 'AAA' Rating Placed On CreditWatch Negative


On Dec. 5, 2011, Standard & Poor's placed its ratings on the 'AAA' rated sovereigns which guarantee the financial obligations of the European Financial Stability Facility (EFSF).
As a result, we are also placing the 'AAA' long-term credit rating on EFSF on CreditWatch negative and affirming the 'A-1+' short-term rating.
Depending on the outcome of our review of the ratings on EFSF member governments, we could lower the long-term rating on the EFSF by one or two notches, if any.
The issuer and issue ratings we will assign to EFSF following our CreditWatch review will likely be the same as the lowest issuer rating we assign to the rated EFSF members we currently rate 'AAA', unless there are offsetting credit enhancements in place.

Rating Action

On Dec. 6, 2011, Standard & Poor's Ratings Services placed the 'AAA' long-term credit rating on the European Financial Stability Facility (EFSF) on
CreditWatch with negative implications. At the same time, we affirmed the 'A-1+' short-term credit rating on EFSF.


Our 'AAA' long- and 'A-1+' short-term ratings on EFSF are based on (i) the unconditional, irrevocable, and timely guarantees from EFSF members (guarantor members) rated 'AAA' by Standard & Poor's that support EFSF's obligations (bonds, notes, commercial paper, debt securities, or other financing arrangements) and, (ii) the 'AAA' rated securities that constitute EFSF's liquidity reserves. Standard & Poor's has placed the 'AAA' long-term issue ratings on EFSF's guarantor members Austria, Finland, France, Germany, Luxembourg, and The Netherlands on CreditWatch negative (see "Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications," published on Dec. 5, 2011), indicating our view of their increased credit risks.

A CreditWatch negative placement indicates that, in our opinion, there is at least a one-in-two probability of the rating being lowered in the short term. Based on EFSF's current structure, were we to lower one or more of the current 'AAA' ratings on EFSF's guarantor members, all else being equal, we would lower the issuer and issue ratings on EFSF to the lowest sovereign rating on members currently rated 'AAA'.

In our media releases of Dec. 5, 2011, on the CreditWatch placements of individual 'AAA' rated guarantor members, we indicated that our ratings on Austria, Finland, Germany, Luxembourg, and The Netherlands are currently unlikely to fall by more than one notch, and the ratings on France by no more than two notches, if at all. Accordingly, we currently anticipate that if we lower the rating on EFSF, it could be by up to two notches.


We expect to resolve EFSF's CreditWatch placement within 90 days and, if possible sooner, after we complete the review of EFSF guarantor members currently rated 'AAA'.