Friday, January 20, 2012

Euro crisis : concerns about the EFSF

The European Financial Stability Facility (EFSF) was created in May 2010. It works under Luxembourg law and is considered as a company, not an institution (for those trying to make any parallel between the global IMF and the regional EFSF). On January 9th 2012, the President of the European Council, Herman Van Rompuy, acknowledged that the EFSF will be fully operational by the end of the month, with the European Central Bank (ECB) as an agent. Actually, this company (EFSF) has a lending capacity of 440 Bn EUR and, as expected, the biggest contributors are Germany (27.06%), France (20.31%), Italy (17.86%) and Spain (11.87%).

A few days ago, Standard & Poor's rating agency downgraded the EFSF from AAA to AA+ (-1 notch). Amid concerns regarding the France triple A, this EFSF downgrade was not on top of the news but the consequences could be uneasy to manage. What people maybe don't know is that the effective capacity of the EFSF has been limited to 440 Bn EUR (instead of 780 Bn EUR) in order to preserve its top rating. Nevertheless, after the S&P downgrade, this is the first "formal weakness" appearing into the new financial safety structure created by EU leaders. As it turns out, here is the reason why Mario Draghi, ECB President, said a few days ago that there's a life without rating agencies. In other words, don't admit your fragility and limit, just turn around the big hole in front of you...

However, other problems could prevent EFSF to pursue its mission smoothly. Indeed, all the 17 Eurozone countries contribute to this "safety net". If one country is in difficulty, Greece for example, only 16 countries left can help and fund this EFSF. Imagine the situation if Italy or Spain made a formal request, two of the 4 biggest contributors. Furthermore, in a "downgrading climate", the EFSF will be able to lend additional money at the same rate if (and only if) Eurozone countries with triple A accept to increase their contribution. 

Ask Berlin about it ! 

Roberto De Primis

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