On January 13, the credit-rating agency Standard & Poor’s lowered the credit ratings of nine eurozone countries, including France, which was downgraded from AAA to AA+, and which guarantees some e150 billion of the EFSF‘s lending ability. S&P‘s decision was based on two main arguments:
The political agreement does not supply sufficient additional re- sources or operational flexibility to bolster European rescue operations…[and] a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating.
The effectiveness, stability, and predictability of European policymaking and political institutions have not been as strong as we believe are called for by the severity of a broadening and deepening financial crisis in the eurozone.
In my opinion, S&P has overlooked many elements and actions taken in Europe during the last eighteen months that will assure that the European Monetary Union will function better after this crisis than before. Many decisions have been made to resolve the crisis. In addition to the progress in Ireland, Portugal, Spain, and Italy that I mentioned in the interview, the entire eurozone will benefit from a new financial supervisory architecture, stronger fiscal coordination, broader macroeconomic surveillance, and a new mechanism for crisis resolution.
I agree with S&P‘s second argument—that austerity alone cannot solve the crisis. It has, of course, been necessary for member states to implement spending cuts in order to reduce their debt burden. However, S&P has ignored many measures that have been taken on both the European and national levels to regain competitiveness and promote growth. Austerity measures with dramatic announcements of spending cuts tend to grab the headlines; but it is often the case that little attention is paid to structural measures taken in parallel to improve growth and employment.
To conclude, it is hard for us to understand the decision by S&P to downgrade certain euro-area member states. S&P ignores or underestimates the po- litical will and the many measures that have been implemented by the euro-area member states.
With regard to the EFSF as issuer of financial assistance, there is no need to act in response to S&P‘s rating action. The EFSF continues to be assigned the best possible long-term and short-term credit rating by Moody’s (Aaa) and Fitch (AAA). Neither rating agency has indicated any rating action for the EFSF in the immediate future. At the same time, S&P—like the other rating agencies—affirms that the EFSF‘s short-term rating remains unchanged at the highest possible level of A-1+.
The downgrade of the EFSF to AA+ on January 16 by only one credit agency, S&P, will not reduce the EFSF‘s lending capacity of e440 billion. The EFSF has sufficient means to fulfill its commitments under current and potential future adjustment programs until the new European Stability Mechanism becomes operational in July 2012. Nor does S&P‘s rating action affect the EFSF‘s plans to increase its leverage using two options: the partial risk protection plan and the Co-Investment Fund I discussed at the end of the interview. These will be in place soon and have already drawn interest from potential investors.
—Klaus Regling, January 26, 2012