We’re detecting a slight theme here.
Standard & Poor’s completed a hat-trick of top ratings for the European Financial Stability Facility on Monday — veritably dilly-dallying behind Moody’s and Fitch’s earlier pronouncements. From S&P’s release:
It is our opinion that the eurozone governments are strongly and publicly committed to EFSF. At the time EFSF was established, its members assumed that it would have a limited life span and that it would not grant any new loans to member states after 2013. However, we consider it likely that its mandate would be extended if market conditions remained unsettled.
If a eurozone member receives approval for EFSF funding, EFSF would issue bonds in the capital markets and onlend the proceeds to the sovereign borrower after deducting an amount to serve as a fungible reserve. The reserve could be deployed to support all EFSF bonds issued if needed. We understand that EFSF will also establish a loan-specific cash buffer funded by issuance receipts not onlent to the borrowing eurozone member state…
The stable outlook reflects the outlook on the ‘AAA’ sovereign guarantors and EFSF’s policy of investing both the reserve and the buffer in ‘AAA’ securities at all times. The buffer will be sized to ensure that all cash available (i.e., the buffer and reserve), plus all guarantees issued by ‘AAA’ rated sovereigns, at least match the amount of EFSF’s outstanding bonds.
EFSF’s rating and rating outlook depend on the ratings and outlooks on the ‘AAA’ guarantors. EFSF’s outlook or its rating could be revised if we revised the rating outlook or the rating on one or more of the ‘AAA’ guarantors, unless EFSF introduced additional credit enhancements to offset the potential reduction in ‘AAA’ guarantees supporting EFSF’s bonds. If EFSF had no bonds outstanding and the rating on a ‘AAA’ sovereign guarantor was lowered, EFSF’s rating would not automatically be lowered, but under its current policies EFSF’s potential lending capacity would be curtailed.
So that completes the set of AAAs for the EFSF.
The market’s celebrated by promptly shoving Portuguese 10-year bonds to their widest spread over bunds in the history of the eurozone:
And by doing the same to Irish government bonds:
Also — and apologies to go on about it — both governments are still paying yields well over the 5 per cent that would be offered by the EFSF.
Ah well, at least the fund is coming prepared.
Related links:
A Portuguese canary – FT Alphaville
European SPV, meet Russian playwright – FT Alphaville