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

DBRS Ratings GmbH (DBRS Morningstar) 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. This 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 Morningstar does not provide a full Intrinsic Assessment of the EFSF, given its financial structure that is based on guarantees and over-guarantees. DBRS Morningstar 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, Positive). 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 May 2019, the European Parliamentary elections confirmed the pro-European parties’ majority, although traditional groups received fewer votes than in previous elections. The Greens and Liberals increased their share, as well as the right-wing nationalists and populist groups. DBRS Morningstar expects environmental and European integration themes to continue to dominate Parliamentary discussions, while Euroscepticism, although still a risk to European cohesion, has somewhat receded in the last quarters.

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 Morningstar 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 totaling €172.6 billion remain outstanding to the Hellenic Republic (Greece, BB (low), Positive), the Republic of Portugal (BBB (high), 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 Morningstar considers that the debt relief measures provided to Greece 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 of these same loans; 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. On 9 January 2020, the EFSF’s Board of Directors decided to reduce to zero the 2% step-up margin due from Greece for the period between 17 June 2019 and 31 December 2019. This represented a reduction of €122 million for the country and confirmed Greece’s compliance with post-programme policy commitments.

DBRS Morningstar also views positively the high degree of integration between the EFSF and the ESM, that took over the role of providing financial assistance 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 the EFSF’s risk profile and the EFSF’s guarantors and 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 Morningstar 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 Morningstar 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 Morningstar 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 Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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: Thomas R. Torgerson, Managing Director, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: July 27, 2012
Last Rating Date: July 26, 2019

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