There goes plan A. With the threat to downgrade the credit ratings of the eurozone’s six triple A rated nations, Europe’s bail-out fund has been holed below the water line. The European Financial Stability Facility’s appeal to investors lay in its triple A status, backed by the creditworthiness of Germany, France, the Netherlands, Luxembourg, Finland and Austria. But with the future of the eurozone in doubt, the idea that any of its strongest members is still a top-notch credit must be fanciful. If the eurozone’s core loses its triple A status – which looks likely if there is not significant progress at this weekend’s summit – the bloc’s finances could become unsustainable.
It may not come to that, however. The timing of the downgrading threat, by Standard & Poor’s, looks deliberate. The European Union is having yet another “summit to save the euro” at the weekend. This time Germany and France claim to have agreed a deal that will convince investors that they are getting to grips with the debt crisis. S&P’s move essentially holds them to that. If the outcome is less than Paris and Berlin are promising, a downgrade could follow quickly. And with France desperate to retain its triple A status, the prospect of losing it should help to galvanise decisive action at the summit.
Either way, the EFSF looks doomed. Its creditworthiness was already diminishing in investors’ eyes: the yield on its 10-year bonds has risen by a percentage point since late September, to 3.63 per cent on Tuesday. That is the same as the yield at which the bonds were sold in June, so the move is not yet that dramatic. But investors in China and Japan, who flocked to the EFSF’s four bond issues to date, are unlikely to buy anything less than triple A rated paper. The eurozone is already running out of financing options. It needs to keep those investors sweet.