Credit ratings agency Moody’s has downgraded the new Euro area bailout fund, the ESM, by one notch from triple A to AA1.
The move follows the recent loss of triple A status by France, the second biggest contributor country to the ESM.
Moody's has also downgraded the rating of the EFSF, the other Euro area bailout fund, which is supplying around one third of Ireland's financial programme assistance - again because of the loss of triple A status by France, a key backer of the fund.
In both cases Moody’s is maintaining its negative outlook on the ratings, meaning there is a strong likelihood of a further downgrade at the next review.
However Moody’s state that both entities remain highly rated at Aa1 because both have low levels of borrowings, and guarantee mechanisms that are backed by highly rated sovereigns.
France is liable for 20% of the ESM's callable capital, second only to Germany, which is liable for 27%.
Moody's is of the opinion that there is a very high credit risk correlation among the countries that are shareholders in the ESM.
"In the unlikely event of France being unable to fulfil its obligations to the ESM, there is a reasonable probability that other non-Aaa suporters would not be able to do so either", it states in a note explaining the ratings action.
In a related action, Moody’s has downgraded the ratings on all the debt securities that have been drawn down from the EFSF to date from triple A to AA1.