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European Financial Stability Facility

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European Financial Stability Facility

This report does not constitute a rating action.

Credit Highlights

The ratings on the European Financial Stability Facility (EFSF) reflect that its obligations are fully covered by irrevocable, unconditional, and timely guarantees provided by sovereigns rated 'AA' or higher.  As of March 31, 2021, the EFSF had €195.1 billion of debt outstanding, which was 106% covered by guarantees from sovereigns with long-term ratings of 'AA' or higher. Importantly, the ratings do not depend on the quality of the EFSF's borrowers, namely Greece, Ireland, and Portugal.

The EFSF no longer engages in new programs.  On Oct. 8, 2012, the European Stability Mechanism (ESM) replaced the EFSF's activities. However, the EFSF continues to manage existing loan programs and will continue refinancing maturing debt, backed by explicit guarantees from the participating sovereigns.

Outlook

The stable outlook on the EFSF is based on S&P Global Ratings' expectation that the long-term ratings on the EFSF's largest guarantors will remain at 'AA' or higher over the next two years.

Downside scenario

We could consider lowering our ratings on the EFSF if we were to lower to below 'AA' our long-term sovereign credit ratings on one or more member state guarantors currently rated 'AA' or higher. This would imply that the similarly rated guarantees and liquid securities were no longer sufficient to cover all of the EFSF's funding instruments. We currently have a stable outlook on France, which is a 'AA' rated guarantor.

Upside scenario

We could raise our long-term ratings on the EFSF if we were to raise our ratings on France or upgrade, to higher than 'AA', one or more EFSF member-state guarantors we currently rate 'AA' or lower.

Rationale

The EFSF was established as a temporary rescue mechanism in 2010 under a multilateral framework agreement among eurozone member states. It is a supranational entity incorporated in Luxembourg, and its mandate was to provide financial assistance to eurozone members, if needed. The ESM replaced the EFSF's activities on Oct. 8, 2012, and as of July 1, 2013, the EFSF no longer engages in new programs, although it continues to manage existing loan programs. When Latvia and Lithuania joined the eurozone and the ESM (in 2014 and 2015, respectively), they were not obliged to join the EFSF.

Guarantors of the EFSF's bond issuances include most eurozone member states, among which we rate France and Belgium 'AA'. The coverage of outstanding EFSF long-term debt by outstanding guarantees from sovereigns rated 'AA' or higher is currently greater than 100%.

Our ratings on the EFSF hinge on the creditworthiness of its guarantors because the EFSF's paid-in capital is minimal. All EFSF funding instruments are severally (but not jointly) guaranteed by eurozone members, except those that stepped out--namely Greece, Ireland, Portugal, and Cyprus as of Dec. 21, 2013--and Latvia and Lithuania, which did not step in. As of Sept. 30, 2021, the EFSF had disbursed €185.5 billion in loans to Ireland, Portugal, and Greece through its assistance programs, with the majority (€141.8 billion) going to Greece.

The second Greek program ended in June 2015, with a total outstanding balance of €130.9 billion to the EFSF (€10.9 billion in EFSF bonds were returned). The subsequent program for Greece in August 2015 came from the ESM and ended in August 2018. Ireland's program concluded in December 2013, with the EFSF having disbursed a total of €18.4 billion. Portugal's program ended in May 2014, with the EFSF having disbursed a total of €27.3 billion. In October 2019, Portugal made an early repayment to the EFSF of €2 billion. EFSF currently has €174.7 billion of outstanding loans. The weighted-average tenor at inception of Greece's debt to the EFSF was extended to 42.5 years as a result of the medium-term relief measures approved for the country by the EFSF's board of directors in November 2018. The weighted-average loan tenor is 20.8 years for Portugal and Ireland. The first principal repayments will be in 2023 for Greece, 2025 for Portugal, and 2029 for Ireland.

We expect the EFSF will continue refinancing maturing debt well ahead of the due dates, backed by the explicit guarantees from participating sovereigns. In our view, despite recent uncertainties regarding the eurozone's economy due to the COVID-19 pandemic, the EFSF is unlikely to need to call on the sovereign guarantees in the foreseeable future, since we expect Portugal, Greece, and Ireland to make their loan repayments in full and on time.

EFSF had already achieved its target issuance of €16.5 billion for 2021 by end of September 2021. The EFSF uses the ESM's "Early Warning System" to anticipate any shortfall risk related to countries where it has loan exposure. If this cash shortfall were to materialize, each guarantor would be required to pay an amount up to their individual guarantee commitment corresponding to the shortfall. For this reason, our 'BB' long-term sovereign credit rating on Greece, the EFSF's main debtor, does not affect our ratings on the EFSF. We analyze the strength of the guarantees and the reliability of the mechanisms in place to assure timely payment by guarantors if the guarantees were called on.

As of March 31, 2021, the EFSF had €195.1 billion of debt securities in nominal amounts outstanding. The EFSF bill program was replaced by the ESM bill program in January 2013. The EFSF has benefited from low funding costs since its inception, and we expect it will continue to do so. Under the Basel framework, EFSF bonds are considered to have 0% risk weights. Furthermore, the European Central Bank has included the EFSF in its expanded public-sector asset purchases program, which started again in November 2019 after halting in December 2018.

We rate the EFSF's long-term debt issues 'AA'. For supranational institutions where we are confident all financial obligations benefit systemically from shareholder guarantees--such as in cases where the entity is in wind-down mode, and such guarantees may be called on in advance to meet maturing obligations--we may equalize the issuer credit rating with the issue rating determined as per paragraphs 114-117 of "Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology," published Dec. 14, 2018.

Key Statistics

European Financial Stability Facility--Selected Indicators
Member Ratings EFSF amended contribution key (%) AAA' guarantee coverage on long-term issues (%) AA+' and above guarantee coverage on long-term issues (%) AA' and above guarantee coverage on long-term issues (%) A-1+' coverage on short-term issues (%)

Austria

AA+/Stable/A-1+ 3.0 -- 4.8 4.8 4.5

Belgium

AA/Stable/A-1+ 3.7 -- -- 6.0 5.6

Cyprus

BBB-/Positive/A-3 0.0 -- -- -- --

Estonia

AA-/Positive/A-1+ 0.3 -- -- -- 0.4

Finland

AA+/Stable/A-1+ 1.9 -- 3.1 3.1 2.9

France

AA/Stable/A-1+ 21.9 -- 35.1 33.1

Germany

AAA/Stable/A-1+ 29.1 46.7 46.7 46.7 44.1

Greece

BB/Positive/B 0.0 -- -- -- --

Ireland

AA-/Stable/A-1+ 0.0 -- -- -- --

Italy

BBB/Stable/A-2 19.2 -- -- -- --

Luxembourg

AAA/Stable/A-1+ 0.3 0.4 0.4 0.4 0.4

Malta

A-/Stable/A-2 0.1 -- -- -- --

Portugal

BBB/Stable/A-2 0.0 -- -- -- --

Slovakia

A+/Stable/A-1 1.1 -- -- -- --

Slovenia

AA-/Stable/A-1+ 0.5 -- -- -- 0.8

Spain

A/Negative/A-1 12.8 -- -- -- --

Netherlands

AAA/Stable/A-1+ 6.1 9.8 9.8 9.8 9.3
Total 100.0 57.0 64.9 106.0 101.2
Cyprus, Greece, Ireland, and Portugal have stepped out as EFSF guarantors. Ratings as of Oct. 12, 2021.

Related Criteria

Related Research

Primary Credit Analyst:Pierre Hollegien, Paris + 33 14 075 2513;
Pierre.Hollegien@spglobal.com
Secondary Contacts:Marta Saenz, Madrid + 34 91 788 7231;
marta.saenz@spglobal.com
Alexander Ekbom, Stockholm + 46 84 40 5911;
alexander.ekbom@spglobal.com

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