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Key Rating Drivers
The affirmation reflects the following key rating factors:
The ratings assigned to EFSF's guaranteed debt rely on irrevocable and unconditional guarantees and over-guarantees provided by euro area Member States (EAMS) pro rata to their share in the European Central bank (ECB), and on a cash reserve. They are governed by an intergovernmental agreement (the Framework Agreement; FA) and by a deed of guarantee, both amended in June 2011. They ensure EFSF debt is fully covered by guarantees from the most highly rated EAMS or by the reserve.
EFSF issued €13 billion of debt under the original FA (EFSF 1) to fund sovereign loans to Portugal and Ireland. Debt is covered by guarantees from EAMS and by a cash reserve, part of which is loan specific. Guarantees can be extended to 120 per cent of their initial amount if a guarantor defaults on its commitment, which brings the maximum amount of coverage by guarantors rated 'AA+'/'F1+' and above to €9.6 billion. The cash reserve, dedicated to EFSF 1 debt issues, totals €3.5 billion.
Outstanding debt issued after the June 2011 amendment (EFSF 2) totalled €171 billion at end-2013, raised mostly to fund loans to Greece. The amendment has allowed EFSF to extend the over-guarantee percentage up to 160.4 per cent for long-term debt and 151.4 per cent for short-term debt. This ensured greater coverage of debt by the highest-rated EAMS. The cash reserve is no longer required as a credit enhancement under EFSF 2.
EFSF stopped approving lending programmes at the end of June 2013 and will continue operating until all outstanding loans and bonds, which amounted to €184 billion at end-December 2013, are repaid. The requirement to have full coverage of debt by 'AAA' rated EAMS or by cash was replaced in 2012 by the requirement for coverage by the most highly rated EAMS. Under EFSF 2, loan maturities are not fully matched to liabilities, while EFSF 1 applied a back-to-back funding principle.
Since October 2011, the cash reserve has to be sufficient to service any debt payment at least three days before the payment date. 10 days before the servicing of debt, it has to be at least equal to the share of the payment not covered by the highest-rated guarantors. The cash reserve has to be conservatively managed and invested in high-quality assets. Debt and treasury are managed on EFSF's behalf by the European Stability Mechanism (ESM; AAA/Stable).
Rating Sensitivities
The triggers that could individually or collectively affect EFSF's ratings are:
Key Assumptions:
Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy-makers. It also assumes that the risk of fragmentation of the eurozone remains low.