DBRS Confirms the European Financial Stability Facility at AAA, Stable Trend

DBRS Ratings GmbH (DBRS) 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.

KEY RATING CONSIDERATIONS

The ratings depend entirely on the EFSF’s Support Assessment. The Support Assessment is at a level equivalent to AAA and reflects (1) the unconditional and irrevocable guarantees and over-guarantees provided by Euro area member states as stipulated by the EFSF Framework Agreement; (2) the creditworthiness of EFSF guarantors; and (3) the strong commitment of the member states to support the institution.

RATING DRIVERS

The EFSF’s ratings could come under downward pressure if there is a deterioration in its Support Assessment.
For example, multiple downgrades of core shareholders or a marked deterioration in creditworthiness of a single core shareholder, particularly if it reflected a weakening in their cohesion or a reduction of their political commitment to the Monetary Union, could put downward pressure on the EFSF’s ratings.

RATING RATIONALE

The Support Assessment and the Core Guarantors’s Commitment to the EFSF are the Key Rating Drivers

DBRS does not provide a full Intrinsic Assessment of the EFSF, given its financial structure that is based on guarantees and overguarantees. 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, 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 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.

DBRS assesses the commitment of core guarantors to support the EFSF as very strong. In DBRS’s view, the 2017 election outcomes in France, the Netherlands (AAA, Stable), Austria (AAA, Stable) and Germany, somewhat reinforced the commitment from core members to Europe and its institutions. DBRS therefore considers that Euroscepticism risk to Member States’ cohesion remains low. For instance, the current Italian government, while it initially took a more confrontational stance towards the European Commission, continues to support European institutions. Going forward, DBRS considers that the upcoming European Parliamentary elections scheduled for May 2019 will be a relevant checkpoint to assess any potential rise in Euroscepticism across the continent.

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 continues to believe core guarantors are highly likely to meet their obligations and provide support in a stress scenario.

A High Concentration in the Loan Portfolio, Inherent to the EFSF’s Missions

The EFSF’s loan portfolio is characterised by a high degree of concentration and relatively weak asset quality. Loans
totalling €174.6 billion remain outstanding to the Hellenic Republic (B (high), Positive), the Republic of Portugal (BBB, Stable) and the Republic of Ireland (A (high), Stable). Of this amount, €130.9 billion is concentrated on 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 the Hellenic Republic in recent years do not affect the institution’s
creditworthiness. Indeed, these imply no direct costs for the EFSF and the European Stability Mechanism (ESM, AAA, Stable) member states. The short-term and medium-term measures are in line with the institution’s key mandate of supporting member states and exclude a nominal haircut on the Greek debt.

These measures include (1) a further deferral of EFSF interest and amortisation by 10 years on €96.4 billion of EFSF loans to Greece; (2) an extension of the maximum weighted average maturity by 10 years; and (3) contingent on compliance with the terms of the enhanced post-programme surveillance, a waiver of the step-up interest margin on loans of the second programme that relate to the debt buy-back.

DBRS also views positively the high degree of integration between the EFSF and ESM, which replaced the EFSF at the end of 2012. Both institutions operate under the same management and benefit from the same early warning system, which allows the EFSF/ESM’s teams to oversee debt repayments and would allow the institutions to take swift action, if it became ever necessary.

RATING COMMITTEE SUMMARY

The main points discussed during the Rating Committee include Greece debt relief measures, EFSF’s risk profile and EFSF’s core guarantors commitment to the institution.

Notes:

All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Supranational Institutions, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

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 to be of satisfactory quality.

This is an unsolicited 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 GmbH are subject to EU and US regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions and
Sovereign Ratings Group
Initial Rating Date: 27 July 2012
Last Rating Date: 27 July 2018

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