Standard & Poor's downgrades EU bailout fund to AA+

The Standard and Poor's ratings agency downgraded the EU bailout fund EFSF by one notch to AA+ but said it would restore the top AAA ranking if the fund obtains additional guarantees. The decision was the result of downgrades to France's and Austria's ratings from AAA since they served as top-level guarantors of the European Financial Stability Facility, S&P said in a statement. "The EFSF's obligations are no longer fully supported either by guarantees from EFSF members rated 'AAA' by Standard & Poor's, or by 'AAA' rated securities," said S&P. The eurozone's temporary bailout fund uses guarantees from its top-rated members to borrow funds at low rates on the market to loan onwards to countries which can no longer borrow on their own at affordable rates. S&P's downgrade of France and Austria to AA+ deprived the eurozone of two of the six triple-A countries that had underpinned the EFSF's top rating. "The outlook is developing, which reflects that we could raise the EFSF's long-term rating to 'AAA' if we see that additional credit enhancements are put in place," said S&P. Eurozone countries have already been looking at whether to boost the EFSF, as it is now seen as insufficient if either Spain or Italy stumble, but so far Germany has stood squarely against increasing its contribution. German Finance Minister Wolfgang Schaeuble told Deutschlandfunk public radio: "The guarantees for the EFSF are largely enough for what it has to do in the coming months." Following the S&P downgrade the German finance ministry said no immediate action was needed on the EFSF. However European Central Bank head Mario Draghi warned Monday that if the eurozone wanted to have the same level of rescue funds at the same cost it then top-rated countries would have to stump up more guarantees. "If you want the same price and lending capacity ... you have to have additional contributions from triple-A countries," said Draghi, adding otherwise the EFSF would have less capacity or higher costs. The EFSF, which started off with borrowing power of 440 billion euros, has 250 billion euros left following rescues of Portugal and Ireland. Greece is also awaiting a second bailout, leaving scant funds to come to the aid of Italy or Spain, the eurozone's third and fourth economies, which have been faced with elevated borrowing costs. A permanent fund, the European Stability Mechanism (ESM), is due to begin operating in July. It will run in parallel with the EFSF, a temporary instrument, for one year. The combined capacity of both funds is supposed to be capped at 500 billion euros, but several countries, the European Central Bank and the European Commission want it to be bigger. S&P warned that if it concludes credit enhancements are not likely to be made on the EFSF it will switch its rating outlook to negative to mirror the outlooks on France and Austria, and continue to be linked to changes in their ratings.