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

DBRS Ratings GmbH (Morningstar 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 CREDIT RATING CONSIDERATIONS
The credit 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 the EFSF guarantors; and (3) the strong commitment of the member states to support the institution.

CREDIT RATING DRIVERS
The credit ratings could be downgraded if one or a combination of the following occur: (1) there is a marked deterioration in the creditworthiness of a single core guarantor, particularly if it reflects a material weakening of the cohesion of core member states or of the strength of their political commitment to the Monetary Union; or (2) although unlikely given their Stable trend, France (AA (high), Stable) or Germany (AAA, Stable) are downgraded.

CREDIT RATING RATIONALE

The Core Guarantors’ Commitment To The EFSF Continues To Drive The Credit Ratings

Morningstar DBRS does not provide a full Intrinsic Assessment of the EFSF, given its financial structure that is based on guarantees and over-guarantees. Morningstar DBRS defines the EFSF's core guarantor group as the Federal Republic of Germany (AAA, Stable), the Republic of France (AA (high), 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’s shareholder structure has not been impacted by Croatia’s accession to the Euro area in January 2023 as the latter joined only the European Stability Mechanism (ESM, AAA, Stable) but not the EFSF.

The weighted median guarantor credit rating of this group, which is the primary driver of the Support Assessment, currently stands at AA (high), in line with France's credit rating. Despite the AA (high) weighted median guarantor rating, Morningstar DBRS considers that the EFSF's Support Assessment remains at AAA. This reflects the strong credibility of the commitment of Euro area member states towards the institution combined with the additional diversification benefits stemming from AAA governments outside the core guarantor group.

The EFSF credit ratings rely primarily on the guarantees provided by Euro area member states, given the very low amount of paid-in capital. In the event of default by a beneficiary member state on an EFSF loan, the shortfall would be covered by the guarantees and credit enhancement measures provided by member states. The over-guarantee structure backing the EFSF's obligations (with maximum over-guarantees of 165% of the original guarantee by each guarantor) provides additional support to the credit ratings through its core guarantors.

Economic Headwinds For Euro Area Economies Have Increased

The strong increase in inflationary pressures and the subsequent tightening of monetary conditions have weighed on private consumption and particularly housing investment. Furthermore, increases in borrowing costs are projected to raise the interest burdens of Euro area governments moderately over the next years. Morningstar DBRS will monitor potential divergences in economic, fiscal and debt positions across European countries, particularly if they were to lead to lower cohesion. Perceptions of greater divergences may give rise to further Euroscepticism and could bring new challenges to additional European integration.

The EFSF’s Mandate And Commitment From Member States Remain Very Strong

Morningstar DBRS continues to assess the commitment of core guarantors to support the EFSF as very strong. The EFSF has been an integral part of a broader policy response to the Euro area sovereign debt crisis about a decade ago, and an illustration of the commitment of member states to preserve the Monetary Union. Given the importance of the mandate of the EFSF, Morningstar DBRS continues to believe that its guarantors are highly likely to meet their obligations and provide support to the institution in a stress scenario. While the EFSF's mandate has not been affected by the coronavirus pandemic, the ESM, which took over its role of providing financial assistance in the Euro area at the end of 2012, was part of the EU response package to the pandemic. This has confirmed the key role of both institutions as well as the commitment of their member states to support them if needed.

The High Concentration In The Loan Portfolio Is Inherent To The EFSF’s Mission

The EFSF’s loan portfolio is characterised by a high degree of concentration and relatively weak asset quality. As of January 2024, loans totaling EUR 170.9 billion remain outstanding to the Hellenic Republic (Greece, BBB (low), Stable), the Republic of Portugal (A, Stable) and the Republic of Ireland (AA (low), Stable). Of this amount, EUR 129.2 billion (76%) was granted to Greece, which in turn gives rise to a high degree of concentration risk. Nevertheless, the relatively elevated credit risk related to this exposure does not call into question the commitment of the Euro area member states to honour their EFSF guarantees. In addition, the European Commission continued to acknowledge in its post-programme surveillance report published in December 2023 Greece's progress with reform implementation. In February 2023, the EFSF approved the release of the eighth tranche of policy contingent medium-term debt relief measures for Greece, as agreed at the end of 2018, due to the country's reform progress over the past year.

Morningstar DBRS also views positively the high degree of integration between the EFSF and the ESM. 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 ever became necessary.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (04 July 2023) https://dbrs.morningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Supranational Institutions (16 February 2023) https://dbrs.morningstar.com/research/409963/global-methodology-for-rating-supranational-institutions. In addition, Morningstar DBRS uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include the EFSF’s financial statements as of December 31, 2022, the EFSF and ESM Investor Presentation (January 2024), the EFSF’s prospectus for its guaranteed debt issuance programme (29 June 2023), the ESM 2022 annual report, the ESM homepage, the EFSF and ESM carbon footprint report, the ESM ESG Summary Report 2022, the European Commission’s post-programme surveillance report on Greece (December 2023), the European Commission Autumn 2023 forecasts (November 2023). Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, there are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/426913.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Yesenn El-Radhi, Vice President, Credit Ratings, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Credit Ratings, Global Sovereign Ratings
Initial Rating Date: July 27, 2012
Last Rating Date: July 21, 2023

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