The European Financial Stability Facility (EFSF) was established to provide a financial backstop to potential sovereign debt default among eurozone nations. Backed by guarantees, primarily from Germany and France, the debt was rated ‘AAA’ by Fitch Ratings and equivalently by other ratings agencies. Not any longer.

Fitch today lowered its default rating on EFSF debt to ‘AA+’ due to last week’s downgrade of France’s sovereign debt. Last Friday, Fitch cut France’s debt rating from ‘AAA’ to ‘AA+’.

Here’s the agency’s reasoning:

The original version of the [Framework Agreement] ensured that all payments due on EFSF debt are covered by guarantees provided by [eurozone members], pro-rata based on their contribution key in the European Central Bank, which could be extended to 120% of their initial amount. Subsequent amendments to the [Framework Agreement] and Deed of Guarantee, applicable to all debt issued since October 2011, reduced the credit enhancement through cash buffers and extended the percentage of over-guarantee percentage to 165%.

Following the downgrade of France’s [Issuer Default Ratings], the EFSF’s long-term debt issues are not fully covered by ‘AAA’ guarantees and over-guarantees and, for debt issued before October 2011, by the cash reserve. However, short-term debt issues remain entirely covered by guarantees and over-guarantees issued by [eurozone members] rated ‘F1+’.

The ratings outlook is ‘stable’.

Fitch also notes that long-term EFSF would review EFSF’s ratings if any of the ‘AA+’ or ‘AAA’ eurozone members are downgraded below ‘AA+’. Currently Germany, the Netherlands, Austria, Finland, and Luxembourg enjoy ‘AAA’ ratings on long-term sovereign debt. France is the only eurozone member with a ‘AA+’ rating.

The impact of this decision is likely to be an increase in the interest rates that the eurozone’s troubled periphery will have to pay for their borrowing.

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