S&P Issues Statement On EFSF, Says "Almost Certain" European Governments Would Support CDO

Tyler Durden's picture

The first kicker in the just released S&P statement on the revised and AAA-rated EFSF is the following: "In our opinion, there is an "almost certain" likelihood that the EFSF's 'AAA' rated member governments would provide timely and sufficient extraordinary support to the EFSF if needed." So, uh, S&P is determining the fate of trillions worth of securities on the basis of a hunch, a whim, if you will. A strong one, but a hunch nonetheless. Swell. And the second kicker:  "If we lowered the ratings on one or more of the 'AAA' rated member guarantors, we would also likely lower the ratings on funding instruments that the EFSF had issued before the date of the downgrade, if the lower ratings on the member guarantor were to lead to less than 100% 'AAA' rated coverage for the relevant EFSF funding instrument." This, in the parlance of our times, is known as a springing downgrade, which sets off the kind of cataclysm that only AIG could achieve once the investing community realized it had a rating-based collateral schedule. So once again the fate of the free world depends on FrAAAnce. Swell2.

From S&P:

Overview

  • Guarantees from eurozone member states (members) continue to be a main factor underpinning the ratings on the European Financial Stability Facility (EFSF).
  • In our opinion, there is an "almost certain" likelihood that the EFSF's 'AAA' rated member governments would provide timely and sufficient extraordinary support to the EFSF if needed.
  • We are therefore affirming our 'AAA' issuer credit rating and assigning a short-term rating of 'A-1+' on the EFSF.
  • The outlook is stable.

Rating Action

On Oct. 28, 2011, Standard & Poor's Ratings Services affirmed the long-term issuer credit rating on the European Financial Stability Facility (EFSF) at 'AAA'. At the same time we assigned a short-term rating of 'A-1+' on the EFSF. The outlook is stable.

Rationale

To assess both the quantitative and qualitative indicators of the EFSF's creditworthiness we apply our criteria, "Principles of Credit Ratings," published Feb. 16, 2011. Guarantees from European Economic and Monetary Union (eurozone) member states (members) continue to be a main factor underpinning the ratings on the EFSF. However, we also recognize that the EFSF has government-related-entity (GRE) characteristics, as outlined below. We see the EFSF as the principal source of emergency financing for its members. Loans are disbursed in tranches to a member experiencing difficult financing conditions, subject to the member's compliance with budgetary and other reforms in conjunction with IMF programs. In the future, fully guaranteed credit enhancements may be provided by the EFSF to member states that agree to implement specific measures, which may not necessarily be part of an IMF program.

In accordance with our criteria for guarantees and GREs, the ratings on the EFSF reflect Standard & Poor's opinion that there is an "almost certain" likelihood that its 'AAA' rated member governments would provide timely and sufficient extraordinary support to EFSF should it require support.Our rating on the EFSF is based on our view of its:

"Critical" role for its member governments. We consider the EFSF to be the cornerstone of the EU's strategy to restore stability to the eurozone sovereign debt market and to preserve confidence in the European financial system. The strategy is to provide conditional financing to member governments that are committed to pursuing a European Commission-backed program of fiscal and structural reforms (usually in conjunction with the European Central Bank and the IMF). In our view, member states will ensure that the EFSF can pay all its debt obligations on time and in full, given their recognition of the EFSF's importance in preserving investor confidence in eurozone sovereigns and eurozone financial sector creditworthiness; and

"Integral" link with its member governments. The EFSF's board of directors comprises senior, mostly ministry–of-finance officials, nominated by EFSF member governments. Unconditional, irrevocable, and timely guarantees from EFSF members rated 'AAA' by Standard & Poor's; or 'guarantees made by 'AAA' rated members plus liquidity reserves invested in 'AAA' rated securities will, in our opinion, cover the EFSF's potential liabilities.

The EFSF was established in mid-2010 by intergovernmental agreement among members. Its purpose is to raise capital-market funding to provide loans to members facing difficulties accessing funding from the markets at sustainable rates.

Initially, the EFSF was limited to extending direct loans to members under individual Loan Facility Agreements. At that time, the rating on EFSF and the securities it issued under its medium term note (MTN) program reflected our view that guarantees made by 'AAA' rated members and liquidity reserves invested in 'AAA' rated securities would cover all of the EFSF's potential liabilities. Each non-borrowing member was to provide a timely, unconditional, irrevocable, and several guarantee of up to 120% of its own share of the bonds issued by the EFSF (the "over-guarantee"). Under this structure, EFSF members pledged a total of €440 billion in guarantees (about 6% of 2011 eurozone GDP), of which about 62% (€255 billion) were guarantees made by 'AAA' rated members. In our view, the face amount of 'AAA' guarantees effectively limited how much the EFSF was likely to borrow to on-lend to eurozone sovereigns.

On June 24, 2011, the EU Heads of State and Government agreed to increase the effective lending capacity of the EFSF to €440 billion through an increase in the maximum-guarantee commitments of member states to €780 billion (about 8% of 2011 eurozone GDP) and a related increase to 165% from 120% in the over-guarantee provided by each non-borrowing member. As Ireland, Greece, and Portugal are "stepping-out" guarantors, the level of maximum guarantees is reduced to €726 billion from €780 billion. We estimate that applying the over-guarantee of 165% to €726 billion gives the EFSF an effective direct-lending capacity of €440 billion. However, as 62% of the €780 billion in guarantee commitments is from 'AAA' rated sovereigns, we expect that the EFSF can borrow up to €452 billion without putting downward pressure on its 'AAA' rating.

The scope of EFSF activity has also broadened as part of a March 11 announcement to the effect that it may, exceptionally, intervene in the debt primary market.

At the eurozone summit held on July 21, 2011, the decision was taken to further widen the EFSF's scope of activity, allowing it to:

    Act on the basis of a precautionary program.
    Recapitalize financial institutions through loans to governments, whether or not they are program countries.
    Intervene in the secondary markets if European Central Bank (ECB; AAA/Stable/A-1+) analysis reveals exceptional financial-markets circumstances and risks to financial stability, and if EFSF members mutually agree to act to avoid contagion.

As a result, the EFSF will have new lending instruments that are designed to enable it to react in a timely manner to members' financing needs. As part of this, it will issue short-term debt under its current €55 billion issuance program. Based on our view of the program's documentation, we expect to be able to assign a 'A-1+' rating to this short-term debt.

These changes to the EFSF are encompassed in the amended EFSF framework approved by all member parliaments as of Oct. 14, 2011. Under the amended structure, EFSF potential issuance of bonds, notes, commercial paper, debt securities, or other financing arrangements (collectively, funding instruments) will be matched solely by guarantees made by 'AAA' rated members.

The requirement for liquidity reserves invested in 'AAA' rated securities will be removed. However, outstanding funding instruments issued before the amended EFSF framework--those relating to the Irish and Portuguese programs--will remain backed by unconditional, irrevocable, and timely guarantees from 'AAA' rated EFSF members and liquidity reserves invested in 'AAA' rated securities.

We consider that EFSF's use of funds it raises in the capital markets does not directly affect our issuer credit rating on EFSF--as long as these funds continue to be backed by guarantees made by 'AAA' rated members (amended framework) or guarantees made by 'AAA' rated members and liquidity reserves invested in 'AAA' rated securities (original framework).

On Oct. 26, 2011, EFSF members agreed to leverage the resources of the EFSF through investments, partly in special purpose vehicles (SPVs), which will provide risk insurance and/or conditional direct financing or investment in member states. We do not expect this will affect the ratings on the EFSF as long as EFSF's liability is limited to its equity-at-risk and not associated with the assets and operations of the SPVs. In our view, the EFSF's borrowing capacity will remain constrained, at €452 billion, by the amount of guarantees made by 'AAA' rated members.

However, if EFSF-funded financial support programs do not improve market confidence in the eurozone, and contagion puts 'AAA' rated members' ratings under pressure, this could indirectly affect EFSF's creditworthiness.

The EFSF has a limited life span and is not expected to enter into new loan agreements after June 2013. The incoming European Stability Mechanism (ESM) may assume the EFSF's prior financial obligations and commitments. We expect any outstanding EFSF funding instrument with interest or principal due after 2013 will remain secured either solely by guarantees made by 'AAA' rated members, under the amended EFSF framework, or guarantees made by 'AAA' rated members and 'AAA/A-1+' rated securities as defined under the original EFSF framework.

Outlook

The stable outlook reflects our view of an "almost certain" likelihood of the EFSF's 'AAA' rated member governments providing timely and sufficient extraordinary support to the entity in the event of financial distress.

Our rating and outlook on EFSF are based on our view of the guarantees on EFSF liabilities that 'AAA' rated members provide, as well as on our opinion of EFSF's critical role for and integral link with its members.

If we lowered the ratings on one or more of the 'AAA' rated member guarantors, we would also likely lower the ratings on funding instruments that the EFSF had issued before the date of the downgrade, if the lower ratings on the member guarantor were to lead to less than 100% 'AAA' rated coverage for the relevant EFSF funding instrument. However, despite the reduction in the number of 'AAA' member guarantors, the ratings on such funding instruments could remain at 'AAA', if we saw that additional credit enhancements were in place to offset the lowering of the sovereign rating, so that coverage that we viewed as commensurate with a 'AAA' rating was maintained.

The same is likely to apply to EFSF funding instruments issued after the downgrade of one or more of the 'AAA' member guarantors. Although full coverage that we viewed as commensurate with a 'AAA' rating could be maintained, the EFSF's lending capacity would be reduced under these circumstances.

We could lower our issuer credit rating on the EFSF if the total of EFSF's liquid 'AAA/A-1+' rated securities and its guarantees made by 'AAA' rated members were to become less than the total of its outstanding funding instruments.

In general, we expect the outlook on EFSF's issuer credit rating to reflect the outlook on the sovereign ratings of its weakest 'AAA' guarantors.

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Deadpool's picture

the raters have always been glorified weather men. it's a farce.

slaughterer's picture

Does France have an inside man at S&P?  I do not understand how the USA is AA+ while France stays AAA. 

**

Market will look at AAA long-term rating without reading the fine print: rally time. 

falak pema's picture

'cos France has 300 types of cheeses.....smile, and say "cheese"!

NotApplicable's picture

Farce? Do you have any idea how hard it is to maintain plausible deniability in the face of this disaster? Why, without them managing expectations the way they do, just think of the uncertainty that would displace the calm, yet irrational apathy we see today. They're doing God's work, I tell ya.  ;-)

 

Basically, they're saying "Governments, how the fuck do they work?"

jcaz's picture

So much for the objectivity of rating services-  they're now admitting themselves that they're just pimping the system.

Very nice.

NotApplicable's picture

Well, since there's truly no such thing as objectivity, it's better that the facade crumble, no?

Boilermaker's picture

It's somewhat possible that maybe they will potentially agree to it!

RALLY ON!

GeneMarchbanks's picture

Sarkozy will fuck this up. As a result of Berlusconi fucking up Italy. Then we'll see FrAA-nce.

Market Efficiency Romantic's picture

Oh yeah, he already seemed pretty worn out after those long debates. Bu to be serious, you know, why it is spelled Fr-A-nce, even AA overrates them once the death spiral confronts the gap between the aspiration and the illusion of being a world power.

fuu's picture

What did they find in those raided S&P offices?

gatorengineer's picture

I would guess coke residue and some slightly soiled hooker panties.....

gatorengineer's picture

I would guess coke residue and some slightly soiled hooker panties.....

LawsofPhysics's picture

Lower the rating on the Earth and just be done with it already.  Paper-pushing fucknuts.

Deadpool's picture

bet France wishes De Gaul got their gold back from Nixon even more now.

SheepDog-One's picture

Theyre now micromanaging so hard they had to release this 'news' just as the DOW was down -40...immediately back up to green again, job well done.

vegas's picture

The only thing you can count on the French for is surrender; they have always been pretty good at it.

Tsar Pointless's picture

You mean kinda like the majority of Americans have surrendered to their debt masters?

I guess we won the wars, but lost the battle.

Usually it's the other way around.

At least we're unique in that respect.

vegas's picture

Nobody in the world can beat Amerikans when it comes to taking on debt they can't repay. Problem is, the world continues to lend the dolts the money. Go figure.

LawsofPhysics's picture

Actually, many foreigners have stopped lending the U.S. money and stopped buying treasuries and bonds.  Problem is, Ben has a printing press.  Time to negociate with China for just how much the reserve currency is worth to them.  Call their bluff, they don't want it and why would they when oil-producing countries are already taking other currancies for oil anyway.

Tortfeasor's picture

UPDATE: From this date forward, the rating of 'AAA' is no longer in use.  The highest rating given by any rating agency shall be 'AA+', and all other ratings shall be adjusted upwards accordingly.

Schmuck Raker's picture

"In general, we expect the outlook on EFSF's issuer credit rating to reflect the outlook..."what could possibly go wrong?

gwar5's picture

No problemo. The TBTF can always force out the top guy at the agencies and get somebody who will get it right.  The NWO is at stake dontcha know.

disabledvet's picture

This reminds of the scene in the movie Fletch where he's reporting on police corruption...the police come, throw him in jail, the chief of police comes down, points a gun at his head and Fletch says "thank God! The police!" the rest of the story is fairly straightforward.

Amish Hacker's picture

"member governments would provide timely and sufficient extraordinary support"

These clowns are leaving the landing lights on for Amelia Earhart.

oogs66's picture

so the Eurobonds wouldn't be AAA :D

lolmao500's picture

So they won't downgrade France tonight? Awwwwww.

Belarus's picture

No, at best S + P hs said France won't be under review until end of year. 

Belarus's picture

"In our opinion, there is an "almost certain" likelihood that the EFSF's 'AAA' rated member governments would provide timely and sufficient extraordinary support to the EFSF if needed." 

So, they are saying Germany will go all in after witnessing the money-pit that Greece has been and will continue to be....just as Italy and Spain are joining the Greek ranks? 

At any rate, this is exactly why stocks will rally into the year-end. No one in the world believes that assets won't be saved at any and all costs...along with the EURO, etc. 

And intermidate and long-term they would be right, even if Germany and France leave the EURO, about assets being saved at any and all costs--there is no reason to ever fear real assets like silver, oil, agricultrual, and even banks for that matter. There is no reason to short anything anymore.....all collasping debts will merely be pushed up against with ongoing and endless central bank printing until objective is achieved (which eventually is runaway inflation impossible to stabilze without setting off the next great depression). Even a failed bond auction just means more money printing. 

It's no wonder why the QE trade has been well underway....because it doesn't matter when it happens again, it just simply will at some point. And that is all that matters when world-wide cash flows don't and can't support world-wide debts. China will continue easy money, the U.S., etc. depsite whatever clusterfuck happens in Europe. The only thing Europe might achieve is a better entry point into solid assets.


 


reload's picture

I am almost certain I posted the cheque,

I am almost certain I will not come in your mouth.

trampstamp's picture

Let's see what Moody's says. They may not see it this way.

lolmao500's picture

That how you freaking protest. That's how you show who's a slave and who's not.

Veterans with AR15s protecting Occupy Phoenix

http://www.youtube.com/watch?v=-BeH1nTqy14

Caviar Emptor's picture

Amidst our 'consumer renaissance': Whirlpool announces laying off 5,000, most since 08. 

http://www.bloomberg.com/news/2011-10-28/whirlpool-to-eliminate-5-000-jo...

Caviar Emptor's picture

Amidst austerity for the 99%, prosperity for the 1%:

 

Italian govenment buys 19 Maserati supercars despite austerity cuts

 

Italy may be in the midst of a savage austerity drive but that has not stopped defence ministry officials ordering a fleet of armoured Maseratis to ferry themselves around Rome.

 

http://www.telegraph.co.uk/finance/financialcrisis/8856149/Italian-goven...

Schmuck Raker's picture

That's Stimulus. And that's beneficial for your lawn.

Market Efficiency Romantic's picture

Google pictures of Italian Lamborghini police cars. No, not kidding, seriously, they only want to make sure they capture escaping sports cars such as politicians in their government-leased Maserati.

Manthong's picture

Likely probability of assumptions based on the possibility of projections regarding plans for future conditionalities and optimistic assessments.. for sure.

Caviar Emptor's picture

I knew things were about to start changing fast, but this is ridiculous: 


It's a Girl! British royal succession rules to change

 

http://www.reuters.com/article/2011/10/28/us-commonwealth-monarchy-idUST...

NotApplicable's picture

Once a Catholic heads the Church of England, I'd say that after nearly 500 years, the Counter-Reformation will be complete.

*goes for popcorn*

LawsofPhysics's picture

Well I don't think I would enter into a contract with anyone who was "almost certain" they would pay for my services.  Bye bye paper.

machineh's picture

'As 62% of the €780 billion in guarantee commitments is from 'AAA' rated sovereigns, we expect that the EFSF can borrow up to €452 billion without putting downward pressure on its 'AAA' rating.'

Implicitly, S&P assumes that €452 billion of EFSF debt issuance has no effect on the AAA guarantors. Is that realistic?

This enormous volume of supply is likely to raise borrowing costs for all European sovereigns, including the AAA ones. Higher borrowing costs add to fiscal deficits and accelerate the rise in debt-to-GDP ratios.

How can S&P's static model ignore this rather direct dynamic linkage? Something is wrong with this picture!

Epicurus's picture

In case you haven't picked this up yet. Here's the link to an explanation on the EFSF (Q&A format).

http://www.efsf.europa.eu/attachments/faq_en.pdf

 

YesWeKahn's picture

They didn't say "outlook positive", it's pretty positive.

slewie the pi-rat's picture

case study in how ratings agencies and the banksters who (wink-wink) are subject to their ratings under (wink-wink) generally acceptepted accounting rules build CONFIDENCE in their wunnerful, wunnerful TBTF pyramides du papier

if someone from S&P were pitching this to me, i would think throughout the presentation:  even this doucebag wouldn't touch this festering mess of criminality and fraud with a 10-ft. pole! 

see you in oakland, BiCheZ!  goooooo raiderz!

 

slaughterer's picture

Every fucking dip will be bought from now till EUR/USD 1.50 Christmas. 

Mr_Wonderful's picture

Fitch says acceptance of 50% haircuts on Greek debt would constitute default. Bloomberg reports