As Euromoney has said for a while, the European Financial Stability Facility (EFSF) is always at pains to emphasise that its creditworthiness is based on the value of the guarantees provided by its AAA constituents.
In fact, the downgrade by Standard & Poor's was so certain in our eyes that by the time we uploaded a story about how it would be imminently downgraded – after France and other AAA's being given a credit-rating chop – we had to update it quickly to show the deed had just been done.
Interestingly, according to media reports, the spokesperson for Klaus Regling, the head of the euro-area bailout facility, revealed that:
Regling, who heads the €440 billion ($567 billion) European Financial Stability Facility, “still expects that the EFSF’s funds can be leveraged between three and four times”, Christof Roche said by phone from Luxembourg, where the EFSF is based. Options to leverage the fund will be in place “soon”.
With about €250 billion of the facility’s resources still to be committed, leveraging the fund by a factor of four would yield a buffer of as much as €1 trillion to help shield Spain and Italy from the debt crisis. tod
“€1 trillion of leveraged power is a magic figure that may go a way to restore confidence in the fund,” Thomas Costerg, an economist at Standard Chartered Bank in London, said in a telephone interview. Investors lost confidence in the “cumbersome and complex” fund because of its perceived lack of firepower and a dearth of support from Group of 20 nations, Costerg said. “Any evidence that it has the firepower to help Spain or Italy will be viewed positively by markets.”
The EFSF, designed to fund rescue packages for Greece, Ireland and Portugal partially with bond sales, was downgraded by S&P on Monday, three days after S&P stripped contributing nations France and Austria of their top ratings. Investors bid for 3.1 times the amount sold at an EFSF debt auction on Tuesday.
Despite this optimism, we still maintain that the S&P downgrade is a nail in the coffin for EFSF.
For the full story, click here.
- Euromoney Skew Blog