ESM granted top AAA credit rating by Fitch
by Daniel Mason
08 October 2012
The eurozone's new permanent bail-out fund, the European Stability Mechanism – which will have a lending capacity of some €500bn – has been awarded a top notch AAA credit rating by Fitch. The rating agency made the announcement on the day of the inaugural meeting of the ESM's management board in Luxembourg.
Originally scheduled to be operation in July, the launch of the ESM was delayed as a German court ruled on whether it was compatible with that country's constitution. Having been finally ratified by Germany, from today the ESM will run alongside the temporary bail-out fund, the European Financial Stability Facility – which was set up in 2010 to rescue Greece – until 2014 when the new mechanism will stand alone.
By then the ESM will be backed by €700bn of paid-in and callable capital and have a lending capacity of €500bn. A total of €80bn will be paid in over the next two years, with the other €620bn to be made available as needed.
It will be able to lend to governments, buy their bonds on the primary or secondary markets, and later – once a single eurozone banking supervisor is up and running via the European Central Bank – directly recapitalise banks. Conditions such as fiscal and structural reforms will be set before any financial assistance is granted to struggling euro area countries. The paid-in capital will not be lent out, instead acting as a liquidity buffer.
Meanwhile the ECB has said that its own bond-buying programme, designed to bring down unsustainably high borrowing costs, would only be activated once a country had requested help from the ESM.
Germany will be the biggest contributor to the ESM, providing 27 per cent of the capital. France will provide 20 per cent and Italy 18 per cent. The fund will be headed by Klaus Regling, the German official who has been in charge of the EFSF. The board of governors consists of finance ministers from the 17 eurozone countries, with voting power determined by the size of a country's contribution.
In a statement Fitch said the ESM's AAA rating was down to "exceptionally strong mechanisms" for exercising callable capital, a relatively high capitalisation ratio, high quality and liquid assets, its preferred creditor status, the strength of its governance, strong political support and prudent investment guidelines.
Fitch said the rating was "robust" enough to withstand any downgrade of the individual top-rated shareholders – which include Austria, Finland, France, Germany, Luxembourg, and the Netherlands. But it warned that a Greek eurozone exit would see all ratings in the region, including the ESM's, on review for a downgrade.
The ESM's first use is set to be to fund the bail-out of Spain's banking sector after eurozone countries agreed to lend as much as €100bn for that purpose in July. The Spanish government is likely to ask for about €40bn of that.
Originally scheduled to be operation in July, the launch of the ESM was delayed as a German court ruled on whether it was compatible with that country's constitution. Having been finally ratified by Germany, from today the ESM will run alongside the temporary bail-out fund, the European Financial Stability Facility – which was set up in 2010 to rescue Greece – until 2014 when the new mechanism will stand alone.
By then the ESM will be backed by €700bn of paid-in and callable capital and have a lending capacity of €500bn. A total of €80bn will be paid in over the next two years, with the other €620bn to be made available as needed.
It will be able to lend to governments, buy their bonds on the primary or secondary markets, and later – once a single eurozone banking supervisor is up and running via the European Central Bank – directly recapitalise banks. Conditions such as fiscal and structural reforms will be set before any financial assistance is granted to struggling euro area countries. The paid-in capital will not be lent out, instead acting as a liquidity buffer.
Meanwhile the ECB has said that its own bond-buying programme, designed to bring down unsustainably high borrowing costs, would only be activated once a country had requested help from the ESM.
Germany will be the biggest contributor to the ESM, providing 27 per cent of the capital. France will provide 20 per cent and Italy 18 per cent. The fund will be headed by Klaus Regling, the German official who has been in charge of the EFSF. The board of governors consists of finance ministers from the 17 eurozone countries, with voting power determined by the size of a country's contribution.
In a statement Fitch said the ESM's AAA rating was down to "exceptionally strong mechanisms" for exercising callable capital, a relatively high capitalisation ratio, high quality and liquid assets, its preferred creditor status, the strength of its governance, strong political support and prudent investment guidelines.
Fitch said the rating was "robust" enough to withstand any downgrade of the individual top-rated shareholders – which include Austria, Finland, France, Germany, Luxembourg, and the Netherlands. But it warned that a Greek eurozone exit would see all ratings in the region, including the ESM's, on review for a downgrade.
The ESM's first use is set to be to fund the bail-out of Spain's banking sector after eurozone countries agreed to lend as much as €100bn for that purpose in July. The Spanish government is likely to ask for about €40bn of that.
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