The EU's bail-out fund, the EFSF, enjoyed strong demand today at an auction of six-month debt, Germany's central bank said, only a day after ratings agency Standard and Poor's downgraded it.
The Bundesbank, which organised the auction, said it received €4.6 billion worth of bids for €1.5 billion of six-month bonds, at an average yield of 0.2664%. The bid-cover ratio, closely watched by the markets, was 3.1, meaning the auction was oversubscribed by that amount.
The Standard and Poor's ratings agency yesterday downgraded the EFSF by one notch to AA+ but said it would restore its top AAA ranking if the fund obtains additional guarantees.
The decision was the result of downgrades to France's and Austria's ratings from AAA since they serve as top-level guarantors of the fund, S&P said in a statement. The auction, which pushed down the borrowing costs of the debt-wracked countries on the euro zone's periphery, followed other successful sales from Greece and Spain.
Euro zone won't break up, says Regling
The euro zone will not break up despite the debt crisis sweeping the currency bloc, the chief executive of the European Union bail-out fund said today.
Klaus Regling, head of the European Financial Stability Facility (EFSF), also said that a ratings downgrade by Standard and Poor's yesterday will have limited impact on the fund.
"The euro will not break up. The economic costs of that will be very high," Regling told reporters in Singapore, adding that investors' fears over such a development were "unfounded".
"No country will be forced to leave the euro area," he said at a news conference after meeting with government officials and major investors in the wealthy city-state.
"That's clearly not a policy objective. We are family and no family member is forced out as a policy objective," he added.
"If things go terribly wrong it might happen but it's not something that is actively pursued by anybody with something to say in the euro area," he said.
Regling said that a move by Standard and Poor's to downgrade the EFSF's credit rating will have little impact because two other credit risk evaluators, Moody's and Fitch, have maintained their triple A ranking for the bail-out fund.
"There's no need to get overly excited yet," he said, referring to the decision by S&P yesterday to slash EFSF's credit rating by one notch to AA+. "As long as it is only one ratings agency, there is no need to do anything really," he said.
S&P's decision was the result of downgrades to France and Austria's triple-A ratings since they served as top-level guarantors of the EFSF, a temporary bail-out fund that uses guarantees from members to borrow money at low rates.
The EFSF, which started off with borrowing power of €440 billion, has €250 billion left after rescues of Portugal and Ireland. Greece is also awaiting a second bail-out, leaving scant funds to come to the aid of Italy or Spain, the euro zone's third and fourth economies, which have been hit by higher borrowing costs.
A permanent fund called the European Stability Mechanism (ESM) is due to begin operating in July. It will run in parallel with the EFSF, a temporary instrument, for one year. The combined capacity of both funds is supposed to be capped at €500 billion, but several countries, the European Central Bank and the European Commission want it beefed up.
Regling said "the probability that everything will be in place by July is very high," referring to ESM, which he added will be less vulnerable to a ratings downgrade.
But Regling said there were enough funds available to help troubled countries in the euro zone. "More than €1 trillion has been made available or is potentially available," he said.
"These are substantial amounts and sometimes I don't really understand why the markets and analysts and journalists say there's not enough firepower because that's a lot of unused firepower."
Regling described the euro as the "the highest and deepest level of European integration". The determination of European governments to preserve financial stability and the single currency is "very strong" but "is often underestimated" outside the continent, he added.
European Investment Bank put on negative outlook
Standard and Poor's put the EU's European Investment Bank (EIB) on negative outlook today, meaning it could be downgraded, just days after cutting the credit ratings of nine of the 17 euro zone states.
"The negative outlook reflects our view of the possibility of a downgrade in 2012 or 2013," S&P's said in a statement, citing weaker prospects for three of the EIB's Triple-A shareholders in the Netherlands, Finland, and Luxembourg.
With €360 billion of loans on its books last June, S&P said the EIB is the largest supra-national financial institution it follows. It kept the bank's Triple-A long-term rating and A-1+ short-term rating based on its historical performance despite "less-favourable" capital and liquidity ratios compared to most other Triple-A rated institutions.
S&P removed AAA ratings on Friday from France and Austria, which in turn meant the euro zone rescue fund, the European Financial Stability Facility, lost its gold-plated status.
The result for the EIB of the decision to downgrade the credit ratings of the governments in Paris and Vienna was that the EIB's callable capital from Triple-A backers, including non-euro EU states, fell from €137 billion to €96 billion.
Some 90% of EIB loans are tied up in loans within the European Union and almost all are guaranteed by the EU or individual EU governments.
