Eurozone leaders looked set to abandon attempts to maintain the European bail-out fund’s coveted AAA credit rating, as German Chancellor, Angela Merkel, insisted rescue efforts could survive a downgrade of the fund.
The decision, by ratings agency Standard & Poor’s (S&P), could wipe up to €170bn (£140bn) from the EFSF’s effective firepower, jeopardising its ability to bail out troubled eurozone economies.
John Chambers, the chairman of S&P’s sovereign rating committee, said the EFSF could retain its AAA rating if Germany and the remaining top-rated guarantors increased their commitments.
“If you’ve lost two of the six AAA guarantors, either they need to increase the backing from the four remaining AAA guarantors or they need to raise some cash buffers,” he said.
But Mrs Merkel poured cold water on that outcome yesterday, insisting she saw “no need to change anything regarding the EFSF” and that she “was always of the opinion that the EFSF doesn’t necessarily need a triple-A rating”.
Analysis by RBS concluded it was “highly unlikely” that eurozone leaders would be willing to inject more funds “solely to defend AAA ratings of the existing EFSF bonds”.
In short, a smaller pool of triple-A countries in the euro zone makes it more difficult to fight back. Furthermore, the failure after seven months of talks to reach agreement on a haircut on Greece’s sovereign debt increases the risk of a default.
The downgrades deal a heavy blow to the pride of political leaders, not least Sarkozy, who had hoped to show his electorate that he had insulated them from the crisis, before the French elections later this year.
But they will also make it harder to build a financial firewall around Greece.
The bad news for the Eurozone is that S&P is still not coming out and forcing Europe to face reality: the euro is doomed
Predictable, and predicted. That’s a line that critics of the European super-state project have been using for some time now as the whole rotten edifice lurches from one crisis to another.
On Black Friday the 13th, as it is being called, it was something of a two banger with nine Eurozone economies, including France, seeing their credit ratings downgraded by Standard & Poor’s, while negotiations on Greek debt went disastrously wrong in Athens.
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