Saturday, January 21, 2012

S&P Cuts European Bailout Fund’s Credit Rating – Who is Going to Bailout the Bailout?

Hey, We’re Talking to You Germany

In order to restore confidence in the ability of European countries to pay their debts the European have put together a bailout fund.  It goes by the unwieldy name of the European Financial Stability Facility, or EFSF for short.  It’s job is to insure credit markets and lenders that Europe stands behind Europe.

The ESFS as it shall be know here, since the other name is terribly awkward, is at about $500 billion in commitment from European countries.  Now that may sound like a lot, but it’s not.  It could be used to bailout Greece, and maybe Portugal, but it is no where near enough to bailout out Italy or Spain.

But the really interesting thing is that the triple A rated bailout fund is no longer triple A rated.

Uncertainty about the triple-A rating on the bailout fund, known as the European Financial Stability Facility, had been growing since the sovereign-debt crisis in Europe escalated last summer. S&P warned in early December that an EFSF downgrade would likely follow any adjustment to the credit ratings of the euro-zone countries that guarantee the fund. France, which lost its triple-A rating from S&P on Friday, is the fund's No. 2 guarantor.

and since S&P downgraded France it felt it had to downgrade the ESFS since France is one of the major supporters of the Fund.

While the downgrade is not a big deal in and of itself, it does produce a rather strange irony, in that the fund that is supposed to prevent Europe from having a financial meltdown is itself starting on the road to meltdown.

1 comment:

  1. that is why it is named EFSF, not "ESFS." Because Eventually French Spreads Fail.