Two main guarantors need to shore up European Financial Stability Facility

The top credit rating of Europe's bailout fund depends on additional financial backing from Germany and the other three remaining AAA-rated eurozone countries, Standard & Poor's said on Friday.

The fund, also known as European Financial Stability Facility (EFSF), has its AAA rating at risk after S&P stripped two of its guarantors, France and Austria, of their top credit ratings.

If downgraded, the EFSF could face higher borrowing costs, reducing its firepower to rescue troubled countries in the region.

“If you have a greater commitment from the other countries, then the EFSF could retain its AAA rating,'' John Chambers, the Chairman of S&P's sovereign rating committee, told Reuters Insider in an interview.

“If you've lost two of the six AAA guarantors, either they need to increase the backing from the four remaining AAA guarantors or they need to raise some cash buffers,'' Mr. Chambers said.

Another option would be that the fund raises collateral to cover its outstanding obligations.

Germany and France, the two largest eurozone economies, are the main guarantors of the EFSF.

Mr. Chambers also said the European Central Bank's recent measures to increase liquidity to banks promoted a substantial monetary easing in the euro zone, which was ‘good news' for the ratings.

Some banks may have used the low-cost money from the ECB to invest in government bonds, he added.

Eurozone banks received almost half a trillion euro in the ECB's first-ever injection of 3-year liquidity last month. Analysts have been watching for signs that banks would use this to buy bonds, especially those issued by fiscally troubled euro zone countries.

A stellar Spanish bond auction earlier this week led some to believe that some of that money had indeed made its way into the sovereign debt. Chambers' comments contrast with recent comments from Fitch Ratings, which said this week the euro-zone debt crisis will not be solved without more active engagement of the ECB.

Some European leaders said the move was unjustified. But most said the downgrades wouldn't severely hurt their ability to fight off the continent's debt crisis.

A look at some reactions:

Not a catastrophe

Speaking on France-2 Television, French Finance Minister Francois Baroin said the loss of the triple-A rating was not “a catastrophe” and underscored that France still had a solid AA+ rating.

“The United States, the world's largest economy, was downgraded over the summer,” he said. “You have to be relative, you have keep your cool. It's necessary not to frighten the French people about it.”

Meanwhile, with just under 100 days until the start of the French presidential election in two rounds in April and May, the opposition Socialists pounced.

Party leader Martine Aubry issued a statement saying the “loss of the AAA is a rebuke of the policies taken since 2007” the year Sarkozy was elected.

“Whatever one thinks of the ratings agencies, it's bad news, and even more so because the French people are going to pay the price. It could've been avoided,” she wrote.

Legacy of the past

An official with the Economy Ministry who spoke on condition of anonymity because of ministry policy said:

“We take note of the agency's decision. It is a legacy of the past (the administration of the former Socialist government), as well as others. The goal of this government is to recover Spain's economic growth potential so that this situation will be reversed in the near future. We reiterate that economic policy is committed to balanced budgets and structural reforms.”

Rating shortcomings

The Finance Ministry in Portugal said there were “significant methodological shortcomings” in the S&P appraisal because it overlooked the bailed—out country's debt-reduction and economic reform efforts.

Inconsistent

European Commission Vice President Olli Rehn said he “regrets” S&P's decision, which he deemed “inconsistent.”

He said the euro area had taken “decisive action in all fronts of its crisis response” to push reforms and strengthen banks.

Eurogroup President Jean-Claude Juncker stressed that governments that used the euro had already taken far-reaching measures to ease tensions in the debt markets. He said eurozone countries were determined to do “whatever it takes” to recover from the debt crisis and return to growth.

Beginning of the end

Nigel Farage, leader of Britain's U.K. Independence Party, which has no lawmakers at the House of Commons and favors withdrawal from the European Union, said the rating decision could cause the eurozone to collapse.

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