DBRS Confirms European Financial Stability Facility at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the European Financial Stability Facility’s (EFSF) Long-Term Issuer Rating at AAA and Short-Term Issuer Rating at R-1 (high). The trend on both ratings is Stable.

The ratings reflect the unconditional and irrevocable guarantees and over-guarantees provided by Euro area member states as stipulated by the EFSF Framework Agreement, the creditworthiness of EFSF guarantors, and the strong commitment of the member states to support the institution. The Stable trend reflects DBRS’s view that the EFSF is well positioned to manage near-term risks as a result of the strong commitment of its member states to support it on an ongoing basis.

The ratings depend entirely on the EFSF’s Support Assessment. This assessment is at a level equivalent to AAA, primarily reflecting the credit ratings of the EFSF’s core guarantors as well as their collective commitment to support the institution. DBRS does not consider it necessary to provide a full Intrinsic Assessment to the EFSF given the limited amount of paid-in capital and the importance of guarantees and over-guarantees in the EFSF Framework Agreement. DBRS defines the core guarantor group as the Federal Republic of Germany (AAA, Stable), the Republic of France (AAA, Stable), the Republic of Italy (BBB (high), Stable) and the Kingdom of Spain (A (low), Stable). These four guarantors are the largest by guarantee size, each representing more than 10% of the EFSF contribution key on an individual basis and accounting cumulatively for 83% of the overall guarantor pool.

The EFSF’s loan portfolio is characterised by a high degree of concentration and relatively weak asset quality. Loans totalling €174.6 billion were provided to Greece (CCC (high), Stable), Portugal (BBB (low), Stable) and Ireland (A (high), Stable) to support their economic adjustment programmes. Of this amount, €130.9 billion was disbursed to Greece. Nevertheless, the elevated credit risk does not call into question the commitment of the Euro area member states to honour their EFSF guarantees. DBRS believes the debt relief measures provided to Greece in recent years –including those announced on 5 December 2016–do not affect the institution’s creditworthiness. Indeed, these imply no direct costs for the ESM and the EFSF member states. The short-term measures are in line with the institution’s key mandate of supporting member states and exclude a nominal haircut on the Greek debt. The measures include an extension of the country’s debt maturities, a reduction in interest rate risks and a waiver of the step-up interest margin on some of the EFSF’s loans.

The EFSF ratings rely primarily on the guarantees provided by Euro area member states, given the very low amount of paid-in capital. Proceeds from loan repayments are used to meet EFSF debt obligations. In the event of default by a beneficiary member state, the shortfall would be covered by the guarantees and credit enhancement measures. The over-guarantee structure backing EFSF obligations (with maximum over-guarantees of 165% by each guarantor) provides additional support to the ratings through its core guarantors. In particular, the guarantees and over-guarantees from Germany and France alone cover a substantial portion of all EFSF loan commitments.

DBRS currently assesses the commitment of core guarantors to support the EFSF as very strong. While such commitment is expected to remain, DBRS will continue to monitor the European political landscape throughout 2017, given upcoming elections in the Netherlands (AAA, Stable), France, Germany, and potentially Italy. The EFSF has been an integral part of a broader policy response to the Euro area sovereign debt crisis, and so far, an illustration of the commitment of member states to preserve the monetary union. Given the importance of the mandate of the EFSF, DBRS believes core guarantors are highly likely to meet their obligations and provide support in a stress scenario.

DBRS also views positively the high degree of integration between the EFSF and the European Stability Mechanism (ESM, AAA, Stable) which replaced the EFSF at the end of 2012. Indeed, both institutions operate under the same management and benefit from the same early warning system, which allows the EFSF/ESM’s teams to gain visibility over debt repayments and would allow the institutions to take swift actions, if ever necessary.

RATING DRIVERS

The EFSF’s ratings could come under downward pressure if there is a deterioration in its Support Assessment. Namely, the downgrade of core guarantors, particularly if it reflected a weakening in the cohesion among the Euro area countries or a reduction in their political commitment to the Economic and Monetary Union (EMU), could put downward pressure on the EFSF’s ratings. Similarly, although multiple sources of support provide added benefits to the support Assessment, indications that the guarantors’ willingness or timeliness of support to the institution would be weaker than currently anticipated would add downward pressure on the EFSF’s ratings.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodologies are Rating Supranational Institutions and Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the European Financial Stability Facility, the European Stability Mechanism and the International Monetary Fund. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: 27 July 2012
Last Rating Date: 12 August 2016

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