S&P downgrades euro zone rescue fund

Tue Jan 17, 2012 12:02pm EST
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By Luke Baker

BRUSSELS (Reuters) - U.S. rating agency Standard & Poor's cut its credit rating of the euro zone's EFSF rescue fund on Monday, and Greece was under pressure to break a deadlock in debt swap talks if it is to avoid an unruly default.

French Finance Minister Francois Baroin said there was no need to shore up the European Financial Stability Facility after S&P downgraded it by one notch to AA+ from triple-A, echoing the view of Germany, the only major euro zone member to retain a top-notch credit rating.

S&P said in a statement the decision was all but inevitable following identical cuts three days earlier to the creditworthiness of France and Austria, two of the EFSF's guarantors.

"We consider that credit enhancements that would offset what we view as the now-reduced creditworthiness of the EFSF's guarantors and securities backing the EFSF's issues are currently not in place," the agency said in a statement.

"We have therefore lowered to AA+ the issuer credit rating of the EFSF, as well as the issue ratings on its long-term debt securities."

Financial markets, which had fallen after the mass downgrades of euro zone members on Friday, showed little reaction to the latest blow -- which had been expected -- and Japan, a major buyer of EFSF bonds, said they remained an "attractive" investment.

A growing number of experts, including a Standard & Poor's official, warned that a Greek default was on the cards, after Greece's talks with creditors broke down on Friday.

Greece was under growing pressure to secure a last-ditch agreement with its private creditors to accept voluntary losses on their holdings of Greek bonds.   Continued...