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S&P Downgrades Likely to Hit Europe Rescue Fund

The European Financial Stability Facility may lose its top credit rating after the sovereign debt downgrades announced by Standard & Poor’s on Friday.

The European bailout fund has guarantees from 17 countries. But the credit ratings agencies only considered the guarantees from triple-A-rated countries when granting the EFSF its triple-A rating.

Before the downgrades, there were six triple-A guarantors — Germany, France, the Netherlands, Finland, Austria and Luxembourg. France and Austria lost their triple-A ratings on Friday.

Standard & Poor’s warned in December that it might cut the rating of the rescue fund if any of the guarantors had its rating cut.

“We could lower the long-term credit rating on EFSF by one or two notches if we were to lower the triple-A sovereign ratings, which are currently on Creditwatch, on one or more of EFSF’s guarantor members,” S&P said in a statement on Dec. 6.

It’s unlikely that the EFSF will be able to maintain its triple-A status after the downgrades. The only way for it to do so would be for the four triple-A countries remaining to increase the size of their guarantees — something everyone agrees is unlikely.

A downgraded EFSF would have to issue bonds rated below triple-A, which would diminish the firepower of the rescue fund and make its bonds more expensive for beneficiaries.

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