(eToro Blog) Operating under the credo “there’s no time like the present,” S&P yesterday downgraded the European Financial Stability Facility (EFSF) by a single notch to AA+, an act which could make it more difficult for the facility to find investors. Following the mass downgrade of several Eurozone member states last Friday, which included then AAA rated France and Austria, S&P cautioned that the Eurozone’s bailout fund was also at risk of a downgrade and suggested that one could come as soon as this week. The news sent the common currency Euro lower but only temporarily, as investors seem to better understand how S&P operates.
While Fitch and Moody’s have not yet downgraded the EFSF, most analysts believe it is only a matter of time. For now, though, the downgrade will not reduce the facility’s current lending capacity of €440 billion. However, another downgrade could mean stark choices for the fund’s administrators; either the fund issues lower-rated bonds which would lead to higher borrowing costs, or the existing AAA contributors, i.e. Germany, Finland, Luxembourg and the Netherlands, agree to increase their existing guarantees.
The German government has said already that they would not agree to an increase of its existing guarantee, and it is likely that Finland and the Netherlands will have difficulty pushing through an increase with their respective parliaments. In issuing an AAA-rated bond, only an AAA-rated guarantee can underpin it. What that means is that the existing guarantees now amount to only €260 billion, as France’s and Austria’s guarantees of €180 billion are, for all intents and purposes, now worthless.
Of the €260 billion loan capacity, €40 billion has been earmarked for Ireland and Portugal’s bailouts, and another €100 billion could soon be committed to Greece’s new rescue. The remainder is sorely inadequate to serve as a buffer in the event of an Italian and/or Spanish rescue, making it vitally important that the Eurozone’s leadership quickly finds a way to bolster the facility’s firepower.
As previously stated, news of the downgrade sent the Euro temporarily lower. Currently, the EUR/USD pair has rebounded to 1.2729 and sentiment on the OpenBook trading platform continues to favor sellers over buyers. Trader Hschinner is also quite bearish on the Euro-Dollar, opening several short positions over the past 24-hours.
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