Euro bailout downgraded

BRUSSELS – Rating agency Standard & Poor’s said Monday it has downgraded the creditworthiness of the eurozone’s rescue fund by one notch to AA+, putting the fund’s ability to raise cheap bailout money at risk.

The downgrade follows ratings cuts for AAA-rated France and Austria, whose financial guarantees were key to the creditworthiness of the European Financial Stability Facility.

If replicated by other rating agencies, S&P’s move complicates the eurozone’s efforts to emerge from a debt crisis that has dragged on for more than two years. It also underlines how reliant states and financial firms still are on the opinion of rating agencies, despite policymakers across Europe vowing on Monday to curtail their influence.

Although the ratings cut had been expected after S&P downgraded nine euro countries on Friday, the EFSF’s top official quickly moved to reassure investors.

“The downgrade to ‘AA+’ by only one credit agency will not reduce (the) EFSF’s lending capacity of (euros) 440 billion,” Klaus Regling, the fund’s chief executive officer, said in a statement. He added that the EFSF has enough money to fund the bailouts of Ireland and Portugal, as well as a second rescue for Greece that is likely to be decided in the coming weeks.

Once another big agency cuts the EFSF’s rating, the eurozone faces a stark choice. Either the fund starts issuing lower-rated bonds – and accepts higher borrowing costs – or its remaining AAA contributors increase their guarantees.

So far, Germany, the biggest of the four AAA economies in the eurozone, has ruled out boosting its commitments to the fund, and increases also appear politically difficult in the Netherlands and Finland. Luxembourg is so small that its contributions have little impact.

Another option: accept that the EFSF can give out fewer loans.

Policymakers lashed out against S&P’s downgrades and promised to curtail their influence.

French President Nicolas Sarkozy, in his first public comment since France lost its AAA-rating on Friday, said the move’s importance should not be exaggerated.

“We have to react to this (the French downgrade) with calm, by taking a step back,” he said. “At the core, my conviction is that it changes nothing.”