Euro zone faces lower EFSF lending power or higher guarantees

Sun Jan 15, 2012 3:00pm EST
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By Jan Strupczewski

BRUSSELS (Reuters) - The euro zone's bailout fund EFSF can retain its AAA rating with Standard & Poor's through higher guarantees from the euro zone's remaining triple A countries or lower lending capacity, a senior euro zone official said.

The choice follows a downgrade by S&P on Friday of France and Austria's credit rating by one notch to AA+, which reduced the number of AAA rated countries guaranteeing the issuance of the European Financial Stability Facility (EFSF) to four.

The EFSF has an effective lending capacity of 440 billion euros thanks to guarantees from euro zone governments.

Because only six of the 17 countries sharing the euro had the highest AAA rating when the EFSF was set up, rating agencies demanded that the guarantees be much higher than the EFSF's actual lending power and equal 780 billion euros.

The loss of S&P's top rating by France and Austria means that without any changes, the EFSF's lending capacity will fall by 180 billion euros - the share of guarantees by Vienna and Paris for the fund, the senior official said.

Since the EFSF has now committed 43.7 billion euros to a financing programme for Ireland and Portugal, the loss of 180 billion would leave it 216.3 billion to finance a second programme for Greece and any other future euro zone needs.

Euro zone countries can also decide that a downgrade by just one of three major rating agencies is not a reason for great concern because the EFSF still has top ratings from the other two - Moody's and Fitch, euro zone officials said.

But euro zone finance ministers said in a statement on Friday they were determined to "explore the options for maintaining the EFSF's AAA rating".   Continued...