Standard & Poor’s on Monday removed its top credit rating from the European Financial Stability Facility, a funding mechanism created to assist debt wracked European countries.
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The ratings cut follows similar cuts by S&P on Friday to nine European countries, including France and Austria, two key contributors to the EFSF.
S&P lowered the EFSF’s rating to AA+ from AAA, the same downgrade France and Austria received on Friday.
The move will make it more expensive for the EFSF to raise money from lenders for its bailout fund. Credit downgrades occur with the ratings firms believe a borrower has become a bigger risk, and the higher the risk the higher the fees charged by lenders.
In a statement announcing the EFSF downgrade, S&P cited the “reduced creditworthiness” of France and Austria for the EFSF downgrade.
“The outlook is developing, which reflects that we could raise the EFSF's long-term rating to 'AAA' if we see that additional credit enhancements are put in place, but also the likelihood that we could lower the rating further if we conclude that the creditworthiness of the EFSF's members will likely be further reduced over the next two years,” S&P said in the statement.
Meanwhile, European leaders were critical Monday of the influence held by ratings firms.
European Central Bank President Mario Draghi said Monday that fiscal leaders, investors, regulators and bankers should all rely less on ratings. Moreover, he was critical of the role ratings firms played in the recent financial crisis. He called for more competition among ratings firms.
French President Nicolas Sarkozy said S&P’s downgrade of France would not impact the country’s fiscal policies.
Critics of the ratings system have said conflicts of interest led the firms to rubber stamp their highest ratings on mortgage backed securities that later soured. The defaults played a big role in the recent financial crisis.
The EFSF is a bailout fund financed by members of the eurozone authorized to borrow up to 440 billion in euros to help countries struggling with heavy debt burdens and threatened with default.