European Rescue Mechanism Loses AAA Rating

Tyler Durden's picture


S&P futures are bleeding back down again after-hours (and EUR -30pips) as Moody's announces the downgrade of the EFSF and ESM from AAA to Aa1. "Moody's decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which Moody's believes is present among the ESFS' and ESM's entities' largest financial supporters." Of course, this is nothing to worry about as we are sure that some Middle East sovereign wealth fund will still buy their bonds? Or China? Or Supervalu?


Not entirely surprising given the underlying rating moves - but yet more AAA-rated collateral bites the dust.



Full statement to follow:

Moody's downgrades ESM to Aa1 from Aaa and EFSF to (P)Aa1 from (P)Aaa, maintains negative outlook on ratings
Moody's decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which Moody's believes is present among the ESFS' and ESM's entities' largest financial supporters.
Moody's downgrade of France reflects the rating agency's view that there has been a marginal diminution in the certainty that the sovereign will fulfil its financial obligations. France is the second largest contributor to the two entities' financial resources, as a provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.

Moody's view that there is a high correlation in credit risk among the entities' supporters is consistent with the evolution to date of the euro area debt crisis and the close institutional, economic and financial linkages among the major euro area sovereigns. As a result, the credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters.

At the same time, Moody's explains that both entities remain extremely highly rated at Aa1 because the ESM and the EFSF benefit from the following common credit strengths:
(i) Low leverage: the ESM has a maximum lending capacity of EUR500 billion, which is backed by subscribed capital of EUR700 billion; while the EFSF has a guarantee mechanism which results in an overcollateralisation of up to 165%; and

(ii) The creditworthiness of the members: both entities have a weighted median shareholder rating of Aa1 (changed from Aaa further to the downgrade of France's government bond rating to Aa1); both the ESM's and the EFSF's purpose is to provide an inter-governmental support mechanism which extends financial assistance to members that are either unable to access the capital markets, or able to do so only at very high interest rates.
Moody's acknowledges that the ESM benefits from credit features that differentiate it from the EFSF, including the preferred creditor status and the paid-in capital of EUR80 billion. However, in Moody's view, these credit features do not enhance the ESM's credit profile to the extent that it would warrant a rating differentiation between the two entities.
In a related rating action, Moody's has additionally downgraded the ratings on all the debt securities that have been drawn down to date from the EFSF to Aa1 from Aaa.
A provisional rating for a debt facility is an indication of the rating that Moody's would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance.
Hence, the combination of France's large ESM capital share and the elevated default correlation of euro area member states leads to the conclusion that, in such a scenario, the effectively accessible capital -- subscribed capital of EUR700 billion minus the callable capital of defaulting countries -- will likely fall short of covering the outstanding issuance. Accordingly, in light of its anticipated highly concentrated credit portfolio and the high correlation of euro area member states' creditworthiness, Moody's considers the ESM's rating to be currently constrained by France's government bond rating.
Similarly to the ESM, the one-notch downgrade of the EFSF's rating to Aa1 from Aaa follows the recent downgrade of France's government bond rating to Aa1 from Aaa. France's share in the EFSF contribution key is 21.8%, second after Germany's 29.1% share. France's share corresponds to a guarantee commitment of EUR158 billion (out of EFSF's total guarantee commitment of EUR726 billion). Further to France's loss of its Aaa rating, only 67% instead of the previous 100% of the EFSF issuances are now backed by guarantees issued by Aaa-rated sovereigns. The full coverage of EFSF issuances by guarantees issued by Aaa-rated sovereigns had been a key factor for the EFSF's Aaa.

In the very unlikely scenario of the French sovereign bond default, Moody's does not expect that France would be able to fund its commitments to the EFSF. Furthermore, given the credit risk correlation of the EFSF guarantor countries, Moody's considers it unlikely that lower-rated member states would be in a position to honour their own commitments to the EFSF and fully compensate for a potential shortfall arising from France. Hence, in light of the elevated credit risk correlation among the guarantor countries, the EFSF's rating is -- similar to that of the ESM -- currently constrained by France's government bond rating.
-- ESM
The negative outlook on the ESM's long-term rating reflects the negative outlooks on the ESM member states with significant capital contribution keys and high ratings. Specifically, the Aaa ratings of Germany (which holds a 27.1% share in the subscribed capital) and the Netherlands (5.7%), as well as the Aa1 rating of France (20.4%) all have negative outlooks.
The negative outlook on the EFSF's (P)Aa1 rating reflects the negative outlooks on euro area sovereigns that are EFSF guarantors, including some countries with significant shares in the EFSF's guarantor pool. Specifically, the Aaa ratings of Germany (which holds a 29.1% share in the guarantor pool) and the Netherlands (6.1%), as well as the Aa1 rating of France (21.8%) all have negative outlooks.

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Fri, 11/30/2012 - 17:46 | 3025116 nobusiness
nobusiness's picture

They will just sue the rating agency

Fri, 11/30/2012 - 17:50 | 3025123 prains
prains's picture

I've recently been downgraded to flaccid as well......sigh

Fri, 11/30/2012 - 18:01 | 3025154 Manthong
Manthong's picture

Wow, that’s a surprise.

That toilet paper is full of some of the best fecal matter in Europe.

Sat, 12/01/2012 - 01:35 | 3025979 CPL
CPL's picture

Let's see.


Rating agencies all down grading each other and shitting in each other's corn flakes.


Illusionary Lending agencies being downgraded to anything but -BBB.


News on MSM, nothing about anything but Dancing stars or something about dancing.



Monday = Bullish

Sat, 12/01/2012 - 09:35 | 3026209 Urban Redneck
Urban Redneck's picture

They will just modify the regulations which inhibit their "flexibility" as a result of the lower ratings, and perhaps finally move forward with their plan for a new ratings agency (of, by, and for "them").

Fri, 11/30/2012 - 17:47 | 3025118 blabam
blabam's picture


Fri, 11/30/2012 - 17:48 | 3025122 Cdad
Cdad's picture all the arb at the close makes sense.  I'm sure no one was trading on the knowledge of that downgrade, right?

Good grief...and by that I mean "Break out the orange jump suits!"

Fri, 11/30/2012 - 18:06 | 3025164 HelluvaEngineer
HelluvaEngineer's picture

Remind me how the hell the Euro is at 1.30+ again?  Oh wait, I guess I know the answer to that.

Fri, 11/30/2012 - 18:16 | 3025203 Cdad
Cdad's picture

It is a mystery to me, brother Helluva.

Fri, 11/30/2012 - 18:25 | 3025238 ThirdWorldDude
ThirdWorldDude's picture

No mystery, Europe has a much longer tradition of jawboning...

Other than that, both the EUR and USD are as good as divided by zero.

Fri, 11/30/2012 - 18:58 | 3025321 HelluvaEngineer
HelluvaEngineer's picture

My PC doesn't like that operation.  Can someone please try it on their iPhone?

Fri, 11/30/2012 - 17:51 | 3025128 vote_libertaria...
vote_libertarian_party's picture be forgotten by Monday morning.


buy buy buy

Fri, 11/30/2012 - 19:43 | 3025436 Wolferl
Wolferl's picture

True. AA1 will be the new AAA soon.

Fri, 11/30/2012 - 17:51 | 3025129 no life
no life's picture

They accept sweaty socks as collateral.

Fri, 11/30/2012 - 17:54 | 3025136 magpie
magpie's picture

Pundits should argue if gold knew this already

Fri, 11/30/2012 - 17:55 | 3025141 Cursive
Cursive's picture

Long overdue since FrAAAnce was lost.  Really, all this shit should get the Triple Hooks unless they really cram down the austerity.  Problem is, austerity doesn't mean welfare state rollback, it just means everyone must bow down to our bankster overlords.  There will be blood.

Fri, 11/30/2012 - 22:36 | 3025756 Non Passaran
Non Passaran's picture

There will be totalitarianism.
The Eurosheep like to be told what to do.

Fri, 11/30/2012 - 17:59 | 3025147 kito
kito's picture

mooooooo-dys continues to dance around the elephant in the room....................

Fri, 11/30/2012 - 18:03 | 3025160 Yen Cross
Yen Cross's picture

 Who would buy bonds from that joke of a rescue fund anyways?

Fri, 11/30/2012 - 18:08 | 3025172 RopeADope
RopeADope's picture

2008 certainly ruined the market for pigs with lipstick didn't it.

Fri, 11/30/2012 - 18:10 | 3025179 swissaustrian
swissaustrian's picture

Now we know why everything sold off into Europe's close...

Fri, 11/30/2012 - 18:20 | 3025221 Joe A
Joe A's picture

Oops. France has become a liability to the EU. I guess Hollande's solution would be to nationalize Moody and other rating companies.

Fri, 11/30/2012 - 19:41 | 3025432 knukles
knukles's picture

... and declare France "la saviour du EUrpoe et mankinde!"

It weeel last unteeel aftair ze weeeende.

Stupide Americaines

Fri, 11/30/2012 - 18:22 | 3025230 The Reich
The Reich's picture

... but it's not a fiscal cliff, or is it?

Fri, 11/30/2012 - 18:34 | 3025268 Yen Cross
Yen Cross's picture

  Shity "factual news" comes after the markets are closed...  "Superfluous", one line MEANINGLESS tape bombs are aloud during normal trading hours...

Fri, 11/30/2012 - 19:17 | 3025380 zerozulu
zerozulu's picture

Than so what!

Fri, 11/30/2012 - 19:22 | 3025386 Joebloinvestor
Joebloinvestor's picture

Now you know why the EU said they were gonna develop their own ratings agency.

Fri, 11/30/2012 - 19:40 | 3025429 knukles
knukles's picture

I toldja, if the ratings agencies had been nationalized this wouldn't have happened.  Jeeez...

Fri, 11/30/2012 - 19:47 | 3025447 machineh
machineh's picture

'Further to France's loss of its Aaa rating, only 67% instead of the previous 100% of the EFSF issuances are now backed by guarantees issued by Aaa-rated sovereigns.'

And that's with only a few tens of billions of EFSF bonds floated. Ever heard of an asymptote, Mr. Juncker?

On a long enough timeline, the survival rate for Aaa backing drops to zero.

Sat, 12/01/2012 - 02:28 | 3026043 jonjon831983
jonjon831983's picture

Hm waitasec, why does this sound like something ZH said would happen.

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