With peripheral bond yields tightening and the Eurozone breathing a generalized sigh of relief after Greece was given enough cash to survive for a few months, Moody’s decided to ruin the party and downgrade the credit ratings of the EU’s bailout facilities and blaming France.  As of Friday, the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) no longer carry Moody’s’ triple-A blessing. After downgrading France last week, Moody’s had no choice but to ax, by one notch, the long-term rating of both bailout facilities to Aa1, while keeping the rating in negative outlook.  Despite the Eurozone being spared, in the short-to-medium-term, of the risk of an implosion by the release of a new tranche of bailout money for Greece, Moody’s considered that the EFSF and the ESM no longer merit their highest credit rating as the second largest backer of both facilities, France, saw its credit rating fall to Aa1.  France is the Eurozone’s second largest economy, making it the second biggest contributor to both bailout facilities. Moody’s notes that France is responsible for 20.4% of the ESM’s callable capital, or €126 billion ($164 billion) of the total €620 billion ($805 billion) in callable capital; Germany, the largest contributor, is responsible for 27.1% and the ESM has a total lending capacity of €500 billion ($649 billion). In terms of the EFSF, France’s share reaches 21.8% or €158 billion ($205 billion) of the total €726 billion ($942 billion).  The credit rating agency noted that it was “very unlikely” that France would be unable to fulfill its obligations, but added that it wasn’t logical to have a higher rating on the ESM than on its second largest backer. Moody’s justified its negative rating on the outlook by pointing at its negative outlook on both Germany and the Netherlands’ triple-A ratings.  Announcing the downgrade after markets had closed for the week, Moody’s didn’t give investors much of an opportunity to react. European equities had a decent week after the Eurogroup announced it was giving Greece a few more years to hit its budget and debt targets and that it would receive the next tranche of bailout money. Germany’s DAX gained 1.6% over the past five trading sessions while France’s CAC40 rose 1.2%.  Across the pond, U.S. stocks suffered through a headline-driven market tied to the fiscal cliff negotiations in Washington. Major financials had a mixed week, with Citigroup ending in negative territory, Bank of America and Wells Fargo coming in practically flat, and JPMorgan Chase gaining approximately 2%.  While not unexpected, Moody’s downgrade of Europe’s bailout facilities comes amid mild optimism in Europe. ECB chief Mario Draghi was quick to note that they were nowhere near out of this mess yet, but acknowledged improvement. Still, after so many downgrades across the Old Continent, markets appear relatively inoculated from their negative effects.
Credit rating agency Moody's announced it was cutting its triple-A rating by notch on Europe's two bailout facilities, the EFSF and the ESM. The downgrade was a response to its axing of France's credit rating last week.