The AAA rating of European Financial Stability Facility (EFSF) debt “largely depends” on France hanging onto its own top-notch credit status, according to Fitch Ratings.
Last week, the agency cut the outlook on France’s AAA credit rating and the ratings of six other European countries from stable to negative. The move was prompted by the heightened risk of government liabilities in light of the eurozone debt crisis.
The latest statement from Fitch confirms that the credit rating of debt issued by the EFSF bailout vehicle is tied to those of France and Germany.
“The revision of the rating outlook on France to negative last Friday implies that the risk of a downgrade of EFSF debt has increased,” the agency says.
While the downgrade of small contributors could be compensated for by increasing the size of the EFSF’s cash reserves or through extra credit enhancements, the downgrade of one of the two largest guarantors would be “far more challenging” for the fund to overcome.
Fitch adds: “We affirmed France’s AAA status but warned that that there is a slightly greater than 50% chance of a downgrade within the next year or two. This is therefore also the case for the AAA ratings assigned to the EFSF’s debt issues, unless additional credit enhancement mechanisms are introduced.”
According to the group, France – which provides €158.5 billion (£133 billion) of guarantees plus over-guarantees to the EFSF pool – is the most exposed AAA eurozone state to any more of the sovereign debt crisis.
Earlier this month, Standard & Poor’s gave the EFSF a downgrade warning following its decisions to place 15 more eurozone members, including France and Germany, on “CreditWatch negative”.
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