Moody's Investors Service has changed the outlook on the provisional (P)Aaa long-term rating of the European Financial Stability Facility (EFSF) to negative from stable, a blow to a fund that was supposed to backstop struggling EU members.
The ratings agency said the move followed on from its decision earlier in the week to change the outlooks for Germany, the Netherlands and Luxembourg to negative. All three are guarantors for the EFSF, with Germany holding the largest share at just over 29 per cent.
"The change in the outlook of the EFSF reflects the now negative rating outlooks on all but one of its Aaa guarantors – namely Finland," Moody's said in a statement.
The move comes as Spain has seen its borrowing costs soar to levels that are not manageable indefinitely, reflecting a growing belief that it will need a sovereign bailout that the euro zone can barely afford.
The EFSF was set up in 2010 with a mandate to safeguard financial stability in Europe by providing financial assistance to euro area member states.
The EFSF is backed by guarantee commitments for a total of €780-billion ($962-billion Canadian) and has a lending capacity of €440-billion. It is rated Aaa by Moody's and Fitch Ratings, though Standard & Poor's has rated it at AA+.
Moody's said risks that could lead to a downgrade of the EFSF's rating, would include a deterioration in the creditworthiness of euro area member states, particularly Germany, France and the Netherlands.
Any weakening of the commitment among euro area member states to the EFSF could also have negative rating implications, it added.
Moody's said the provisional (P)Aaa long-term and (P)Prime-1 short-term ratings for the debt issuance programme of the EFSF remain unchanged. Moody's also affirmed the Aaa ratings on all of the facility's outstanding drawn-downs.