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Rene Fluger Josef Horazny/Czech News Agency

Bailout costs likely to rise after S&P downgrades EU fund

Standard & Poor’s downgrades the European Financial Stability Fund, meaning our future loans will probably cost us more.

THE COST OF Ireland’s bailout borrowings is set to rise in the coming months, after the ratings agency Standard & Poor’s downgraded the European Union’s financial rescue vehicle which provides cash to the Irish government.

The European Financial Stability Facility (EFSF) – which is providing one third of Ireland’s €67.5 billion bailout – has lost its AAA rating, being downgraded to AA+ by the ratings agency.

The downgrade of the EFSF had been widely expected after France – the second-largest provider of funds to the bailout pot – suffered a similar downgrade last Friday.

S&P explained:

Following the lowering of the ratings on France and Austria, the rated long-term debt instruments already issued by the EFSF are no longer fully supported by guarantees from the EFSF guarantor members rated ‘AAA’ by Standard & Poor’s, or ‘AAA’ rated liquid securities. Instead, they are now covered by guarantees from guarantor members or securities rated ‘AAA’ or ‘AA+’.

The EFSF has been given a ‘developing’ outlook by S&P – an unusual status indicating that the AAA rating could be restored if “additional credit enhancements are put in place”.

It also indicates that the rating could be further lowered if S&P concludes that the creditworthiness of eurozone member states – who collectively fund the EFSF – is reduced.

The EFSF itself responded by insisting the downgrade would not reduce its lending capacity, and that it had the means to fulfil all of its commitments until it was replaced by the European Stability Mechanism later this year.

“EFSF has become a well-established signature in the supranational bond market. It can rely on an investor base which is well diversified in terms of both geographical region and investor type,” it said in a statement.

The downgrade is bad news for Ireland, as the loss of the AAA rating will probably mean the EFSF will have to pay higher interest rates when it borrows on the open markets – cash it then lends on to Ireland at a small margin.

The interest rate Ireland pays on its EFSF borrowing was cut significantly last year, with the EFSF commanding virtually no premium on the loans it secures for us – meaning any higher interest rates the EFSF faces would almost immediately be passed on to Ireland.

The downgrade is also a further blow to the credibility of the EU’s attempt to draw a line under its debt crisis: the bailout fund, which itself was purpose-built to assist weaker countries in getting back to the markets, now itself risks being frozen out of the same markets.

Safe: Moody’s says it will maintain France’s AAA rating

Bailout II: Will it actually happen?

Standard & Poor’s defends mass European downgrade

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11 Comments
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    Mute Seamus Hughes
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    Jan 16th 2012, 7:14 PM

    I’ve said it before and I’ll say it again.. Why these downgrades at key times? Just when a positive announcement is made or imminent there ar S+P et al downgrades. Suspiciously yours…still…

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    Mute Dave McCarthy
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    Jan 16th 2012, 8:08 PM

    If things were truly positive there would have been no downgrade.

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    Mute chicken ball ann
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    Jan 16th 2012, 8:26 PM

    I’m hearing you Seamus….,,

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    Mute Aaron
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    Jan 17th 2012, 6:56 AM

    because as soon as theyes get the downgrade email which S&P and others have to notify the party 24 hours in advance. so they flood the market with positive news to counter balance . its all political

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    Mute Dave McCarthy
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    Jan 16th 2012, 6:34 PM

    With or without a downgrade, money printing doesn’t work. The only difference is – with a downgrade someone is fu*cking you in the behind and you know it. Without a dowgrade it is the same scenario but you are simply not informed about your ass being fu*ked. Either way, this utopia is going down, with or without S&P

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    Mute Simon Cunnane
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    Jan 16th 2012, 6:34 PM

    Sound.

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    Mute Colm Mooney
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    Jan 16th 2012, 8:32 PM

    unaccountable unelected and they have power…why were they so damn quiet when we needed them!

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    Mute Dermot Purcell
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    Jan 16th 2012, 9:33 PM

    And these guys never had to fire a shot to take us over ,why did we not think of this in 1916

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    Mute Tony Skillington
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    Jan 16th 2012, 8:18 PM

    Why should one down be given such creedance ? Moodys aren’t down grading French ratings…

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    Mute john g mcgrath
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    Jan 16th 2012, 7:39 PM

    1st one or 2nd one or final frontier 3rd one

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    Mute Aaron
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    Jan 17th 2012, 6:54 AM

    as expected . no shock for me. after French downgrade that was the next logical thing . now expect more Jaw jaw and still no action till Greece goes belly up .

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