Eurozone's bail-out fund is left in tatters by S&P downgrade

[dutchman]

Plans for a €1 trillion "big bazooka" to stem the debt crisis were crushed on Monday night as Standard & Poor's stripped the European Financial Stability Fund (EFSF) of its AAA credit rating.



The EFSF, which is tasked with supporting indebted countries, was itself hobbled as S&P gave it a AA+ rating, reflecting the downgrade of France and eight other eurozone countries on Friday.

As the standoff with Greece's creditors continued and Italy pleaded for help to reduce the cost of borrowing, S&P said the EFSF's rating would be cut again if member states' creditworthiness eroded further.

Leaders appeared to abandon hopes for the EFSF and turned their focus on the European Stability Mechanism (ESM) instead. Herman van Rompuy, co-president of the European Union, said he would assess the size of the ESM "without delay" and ensure it is operational by July.

Klaus Regling, chief executive of the EFSF, said the fund would have "sufficient means to fulfil its commitments under current and potential future adjustment programmes until the ESM becomes operational in July 2012".

S&P was severely criticised across the eurozone, even before the EFSF decision was announced. Olli Rehn, an EU Commissioner, said ratings agencies are the tools of "American financial capitalism".

The euro fell to an 11-year low against the yen and a 17-month low against the dollar. Stockmarkets rose marginally after a successful sale of French Treasury bills but the Paris faces a bigger test at a bond auction on Thursday.

A summit between Germany, France and Italy, scheduled for Friday in Rome, has been postponed until February.

Stresses in the European banking sector were shown by a record €493bn of deposits being parked with the ECB on Friday night. Latest figures showed that the central bank also bought €3.766bn of eurozone bonds last week, up from €1.104bn the previous week.

[rebbonk]

A touch rude, but close to the truth?

Spoiler: