To fund these purchases, private capital will be needed (e.g. in the form of senior tranches of SPV debt). Therefore, this project lacks the firm official commitment which similar central bank (BoE, Fed) programmes not reliant on private investor participation have. 5. The latest uncertainty is the adjustment of the entire EFSF project to the loss of France’s (and Austria’s) AAA rating from S&P, followed by the downgrading of the EFSF’s own rating from AAA to AA+. In its comments on this change, S&P stated explicitly that the EFSF’s rating has a developing outlook, which means that the agency foresees the possibility both of returning the rating to AAA (if offsetting credit enhancements are adopted) and of downgrading it further to below AA+ (if key guarantor countries are downgraded). A lower EFSF rating would probably be associated with higher interest costs of refinancing. There might even be a fall in liquidity in the EFSF bond market owing to the exit of some institutional investors, who primarily target the AAA segment of issuers. 6. On a more general level, the lack of coordination of resources for supporting European countries is disturbing. It is resulting in fragmentation of resources and a lack of transparency in the setting of parameters such as “who”, “how much”, “to whom” and “how”. Specifically, the European Union, or the euro area, is planning simultaneously to lend to the International Monetary Fund, to guarantee the EFSF and to guarantee the ESM, while central banks guarantee the capital of the ECB.
Many objectives have been hinted at in the more than 18 months since it was created, but nothing specific has been implemented so far. Yet each of the objectives is highly important, be it the issuing of protection certificates or the establishment of the special purpose vehicle or the purchasing of peripheral countries’ bonds in the secondary market. 2. The ambiguity in the definition of the Facility’s mission is indicated by the changes made both to its guarantee structure, even though the structure remains based on the “per partes” principle, and to its rules of operation during its short lifetime. The fact that the term EFSF 2 has caught on for the new structure reveals just how fundamental these changes are seen to be. 3. Uncertainty also exists on the issue of increasing the effective capital strength of the Facility using concepts such as leverage (via an SPV), protection/insurance, loss tranches and short-term funds. From the reputational perspective, these are exceptionally controversial issues, because many market participants interpret them as a mere attempt to disguise the fact that the euro area countries do not currently have enough resources for a credible rescue plan for Italy and Spain. If they did want to create such resources, they would be putting their own debt arithmetic at risk, because under Eurostat methodology the guarantees for the EFSF’s bonds are included in the guarantors’ gross government debt. If the Facility is to provide effective assistance in stabilising the larger European economies, it will need more funding.