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Fitch Ratings has downgraded the European
Financial Stability Facility's (EFSF) guaranteed and long-term debt Long-term
rating to 'AA+' from 'AAA'. The EFSF's short-term (less than 12 months
contractual maturity) guaranteed debt instruments' Short-term rating has been
affirmed at 'F1+'.
KEY RATING DRIVERS
High Weight
The rating actions were prompted by Fitch's downgrade of France's Long-term
Issuer Default Ratings (IDRs) to 'AA+'/Stable and the affirmation of its
Short-term rating at 'F1+' on 12 July 2013. EFSF's ratings rely on the
irrevocable and unconditional guarantees and over-guarantees provided by euro
areas member states (EAMS). These commitments are governed by an international
agreement dated in June 2012 by the 17 EAMS - the EFSF Framework Agreement (FA)
- and by a Deed of Guarantee. The downgrade of France's IDR had a high weight in
Fitch's rating actions.
The original version of the FA ensured that all payments due on EFSF debt are
covered by guarantees provided by EAMS, pro-rata based on their contribution key
in the European Central Bank, which could be extended to 120% of their initial
amount. Subsequent amendments to the FA and Deed of Guarantee, applicable to all
debt issued since October 2011, reduced the credit enhancement through cash
buffers and extended the percentage of over-guarantee percentage to 165%.
Following the downgrade of France's IDR, the EFSF's long-term debt issues are
not fully covered by 'AAA' guarantees and over-guarantees and, for debt issued
before October 2011, by the cash reserve. However, short-term debt issues remain
entirely covered by guarantees and over-guarantees issued by EAMS rated 'F1+'.
RATING SENSITIVITIES
As of 12 July 2013, 100% of the long-term debt issued by the EFSF is covered by
guarantees and over-guarantees rated 'AA+' and 'AAA'. In the event that one or
more of the 'AAA' and 'AA+' guarantors, namely Germany (AAA/Stable), France
(AA+/Stable), Netherlands (AAA/Negative), Austria (AAA/Stable), Finland
(AAA/Stable), and Luxembourg (AAA/Stable), are downgraded below 'AA+', and if
the coverage by 'AA+' guarantees falls below 100%, Fitch would also review the
Long-Term rating assigned to EFSF debt issues.
KEY ASSUMPTIONS
Fitch assumes there will be progress in deepening fiscal and financial
integration at the eurozone level in line with commitments by euro area policy
makers. Fitch also assumes that the risk of fragmentation of the eurozone
remains low.
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