While the ratings agencies may be restricted in their ability to downgrade the debt of sovereign countries, the legislation is silent as to European institutions:
Yesterday, the ratings of both the ESM and EFSF were downgraded one notch by Moody’s after France, the second largest guarantor of both funds, had its credit rating lowered a level.
The Eurocrats have buried their heads in the sand with the leader of both entities responding to the downgrade,
‘Moody’s rating decision is difficult to understand,’’ Klaus Regling, managing director of the ESM and chief executive officer of the EFSF, said in a statement. “We disagree with the rating agency’s approach, which does not sufficiently acknowledge ESM’s exceptionally strong institutional framework, political commitment and capital structure.”
Why is it hard to understand, Klaus? Only 37.5% of the ESM’s and EFSF’s funds are guaranteed by AAA-rated countries, Finland, Austria, the Netherlands and Germany, while an almost equal amount is guaranteed by the countries to be bailed out. That’s right, 37% of the guarantee comes from Portugal, Ireland, Italy, Greece and Spain.
Even if those countries default or avoid a default by being bailed out, they still have to make their ESM contributions. We have a blood-from-stone situation here.
The bottom line is that the rich countries will not keep throwing money into the black hole that the periphery becomes forever. At a certain point, they will stop paying. If the rating reflected this reality, it would be CCC for “on the verge of default.”