Following its move Monday to place the credit ratings of most European sovereigns on credit watch with negative implications, Standard & Poor’s Ratings Services did the same with the European bailout fund on Tuesday.
S&P placed the European Financial Stability Facility’s ‘AAA’ long-term credit rating on on CreditWatch, noting that its ratings on the EFSF are based on guarantees from various countries, including Austria, Finland, France, Germany, Luxembourg, and The Netherlands that were put on CreditWatch negative yesterday, indicating increased credit risks.
Based on EFSF’s current structure, S&P says that if it lowers the current ‘AAA’ ratings on the fund’s guarantors, it would also lower the ratings on EFSF to the lowest sovereign rating.
It notes that ratings on Austria, Finland, Germany, Luxembourg, and The Netherlands are currently unlikely to fall by more than one notch, and the ratings on France by no more than two notches, if at all. Therefore, if it lowers the rating on EFSF, it could be by up to two notches.