Following their two-hour meeting yesterday, Angela Merkel and Nicolas Sarkozy refused to countenance either an expansion of the European Financial Stability Facility (EFSF) beyond its proposed €440 billion or the issuance of jointly guaranteed euro sovereign bonds. Europe’s political leaders remain reluctant to accept that the only way to resolve the region’s funding problems is for the core countries to shoulder the burden of support for the periphery.
Eventual expansion of the EFSF beyond its proposed and woefully inadequate €440 billion is seen as inevitable by most in the market. But the implications of such an increase on its guarantee structure worry national leaders. A sharp increase in the EFSF guarantee commitments of the seven triple-A rated eurozone members will weigh heavily on their debt-to-GDP ratios, threatening their ratings.
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| “The triple-A rated countries in Europe will bear the lion’s share of the support needed to sort out the region’s debt problems” |
A euro bond that would give a de facto single rating to any eurozone sovereign and potentially allow unlimited borrowing would be even more of a threat to the well-rated core. So it is hardly surprising that Merkel and Sarkozy are keen to avoid this. But in an August interview with Euromoney Ed Altman, Max Heine professor of finance at the Stern Business School at NYU, warns that all triple-A rated eurozone sovereigns could be downgraded before the crisis is over.
“The triple-A rated countries in Europe will bear the lion’s share of the support needed to sort out the region’s debt problems,” he says. “It would therefore be very surprising to me if they maintain their triple-A ratings throughout this long and arduous process.”
Altman sees the recent controversial downgrade by Standard & Poor’s of US’s triple-A rating as a catalyst for further sovereign downgrades and says that the most likely candidate is France. “There are psychological issues at play here. Previously critics would ask the rating agencies how they could consider downgrading, for example, France when they had not downgraded the US. That argument has clearly now gone.” He adds: “It is surprising to me that France still has a triple-A rating, given the weakness in its banking system. I am also surprised that [double-A rated] Italy hasn’t been downgraded, given that it is now being talked about as a bailout candidate.”
