http://www.zerohedge.com/news/2012-11-30/european-rescue-mechanism-loses-aaa-rating
Submitted by Tyler Durden on 11/30/2012 16:44 -0500
Moody's decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which Moody's believes is present among the ESFS' and ESM's entities' largest financial supporters.
Moody's downgrade of France reflects the rating agency's view that there has been a marginal diminution in the certainty that the sovereign will fulfil its financial obligations. France is the second largest contributor to the two entities' financial resources, as a provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.
European Rescue Mechanism Loses AAA Rating
S&P futures are bleeding back down again after-hours (and EUR -30pips) as Moody's announces the downgrade of the EFSF and ESM from AAA to Aa1. "Moody's decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which Moody's believes is present among the ESFS' and ESM's entities' largest financial supporters." Of course, this is nothing to worry about as we are sure that some Middle East sovereign wealth fund will still buy their bonds? Or China? Or Supervalu?
- *MOODY'S DOWNGRADES ESM TO Aa1 FROM Aaa, EFSF TO (P)Aa1 FROM Aaa
Not entirely surprising given the underlying rating moves - but yet more AAA-rated collateral bites the dust.
Full statement to follow:
Moody's downgrades ESM to Aa1 from Aaa and EFSF to (P)Aa1 from (P)Aaa, maintains negative outlook on ratings...
Moody's decision was driven by the recent downgrade of France to Aa1 from Aaa and the high correlation in credit risk which Moody's believes is present among the ESFS' and ESM's entities' largest financial supporters.
Moody's downgrade of France reflects the rating agency's view that there has been a marginal diminution in the certainty that the sovereign will fulfil its financial obligations. France is the second largest contributor to the two entities' financial resources, as a provider of callable capital in the case of the ESM and as a guarantor country in the case of the EFSF.
Moody's view that there is a high correlation in credit risk among the entities' supporters is consistent with the evolution to date of the euro area debt crisis and the close institutional, economic and financial linkages among the major euro area sovereigns. As a result, the credit risks and ratings of the ESM and the EFSF are closely aligned to those of its strongest supporters.
* * *
Moody's acknowledges that the ESM benefits from credit features that differentiate it from the EFSF, including the preferred creditor status and the paid-in capital of EUR80 billion. However, in Moody's view, these credit features do not enhance the ESM's credit profile to the extent that it would warrant a rating differentiation between the two entities.
In a related rating action, Moody's has additionally downgraded the ratings on all the debt securities that have been drawn down to date from the EFSF to Aa1 from Aaa.
A provisional rating for a debt facility is an indication of the rating that Moody's would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance.
In a related rating action, Moody's has additionally downgraded the ratings on all the debt securities that have been drawn down to date from the EFSF to Aa1 from Aaa.
A provisional rating for a debt facility is an indication of the rating that Moody's would likely assign to future draw-downs from the facility, pending the receipt of documentation detailing the terms of the debt issuance.
...
Hence, the combination of France's large ESM capital share and the elevated default correlation of euro area member states leads to the conclusion that, in such a scenario, the effectively accessible capital -- subscribed capital of EUR700 billion minus the callable capital of defaulting countries -- will likely fall short of covering the outstanding issuance.Accordingly, in light of its anticipated highly concentrated credit portfolio and the high correlation of euro area member states' creditworthiness, Moody's considers the ESM's rating to be currently constrained by France's government bond rating.
Hence, the combination of France's large ESM capital share and the elevated default correlation of euro area member states leads to the conclusion that, in such a scenario, the effectively accessible capital -- subscribed capital of EUR700 billion minus the callable capital of defaulting countries -- will likely fall short of covering the outstanding issuance.Accordingly, in light of its anticipated highly concentrated credit portfolio and the high correlation of euro area member states' creditworthiness, Moody's considers the ESM's rating to be currently constrained by France's government bond rating.
-- EFSF
Similarly to the ESM, the one-notch downgrade of the EFSF's rating to Aa1 from Aaa follows the recent downgrade of France's government bond rating to Aa1 from Aaa. France's share in the EFSF contribution key is 21.8%, second after Germany's 29.1% share. France's share corresponds to a guarantee commitment of EUR158 billion (out of EFSF's total guarantee commitment of EUR726 billion). Further to France's loss of its Aaa rating, only 67% instead of the previous 100% of the EFSF issuances are now backed by guarantees issued by Aaa-rated sovereigns. The full coverage of EFSF issuances by guarantees issued by Aaa-rated sovereigns had been a key factor for the EFSF's Aaa.
Similarly to the ESM, the one-notch downgrade of the EFSF's rating to Aa1 from Aaa follows the recent downgrade of France's government bond rating to Aa1 from Aaa. France's share in the EFSF contribution key is 21.8%, second after Germany's 29.1% share. France's share corresponds to a guarantee commitment of EUR158 billion (out of EFSF's total guarantee commitment of EUR726 billion). Further to France's loss of its Aaa rating, only 67% instead of the previous 100% of the EFSF issuances are now backed by guarantees issued by Aaa-rated sovereigns. The full coverage of EFSF issuances by guarantees issued by Aaa-rated sovereigns had been a key factor for the EFSF's Aaa.
In the very unlikely scenario of the French sovereign bond default, Moody's does not expect that France would be able to fund its commitments to the EFSF. Furthermore, given the credit risk correlation of the EFSF guarantor countries, Moody's considers it unlikely that lower-rated member states would be in a position to honour their own commitments to the EFSF and fully compensate for a potential shortfall arising from France. Hence, in light of the elevated credit risk correlation among the guarantor countries, the EFSF's rating is -- similar to that of the ESM -- currently constrained by France's government bond rating.
* * *
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_30/11/2012_472470
Tax law a new obstacle
As coalition bristles, Stournaras says measures could change but targets are fixed 
The tax bill due to be submitted to Parliament soon is proving a new source of friction for the coalition government, prompting Finance Minister Yannis Stournaras to show a degree of flexibility on Friday in accepting that some aspects could be changed, although he stressed that any alterations would have to be matched by equivalent revenue-raising measures.
Leaving a meeting with Prime Minister Antonis Samaras, Stournaras faced a barrage of questions regarding the most controversial change to the tax system, which abolishes breaks for families with children. “There is always room for maneuver,” he said, but added that there are 2.5 billion euros of revenue-raising measures to be implemented and if some are scrapped, the equivalent amount would have to be derived from alternative taxes.
Coalition partners PASOK and Democratic Left have raised objections to families losing tax breaks that rise according to the number of children they have. The new law would hit families with three children or more particularly hard. A family with three children that earns 25,000 euros pays 2,970 euros a year in income tax, whereas under the proposed scheme it would pay 3,650 euros. It would also lose about 1,000 euros a year in benefits, amounting to a 1,744-euro loss overall.
“Anyone who proposes something should be abolished has to suggest what would replace it,” said Stournaras, who added that Greece needs to retain its trustworthiness in the eyes of its lenders since it has “agreed and voted on these things.”
Stournaras’s comment came a few hours after German lawmakers approved the debt deal for Greece agreed by the eurozone and the International Monetary Fund earlier this year. Although 23 lawmakers from Chancellor Angela Merkel’s coalition opposed the agreement, the opposition Social Democrats (SPD) and Greens backed the deal, giving it 473 of 584 votes.
Finance Minister Wolfgang Schaeuble said during the debate that a Greek default “could lead to the breakup of the eurozone” but he added that any talk of writing down Greek debt could be detrimental at this time. “If we say the debts will be written off, [Greece’s] willingness to make savings is correspondingly weakened,” he said. “Such false speculation does not solve the problems.”
For the Brussels deal to stand, Greece will need to execute a successful buyback of 30 to 40 billion euros of its bonds. Stournaras suffered an initial setback in his pursuit of this target on Thursday, when Greek banks, which hold about 15 billion euros of government bonds, expressed reluctance to take part in the scheme. However, the head of Greece’s main social security fund (IKA), Rovertos Spyropoulos, indicated on Friday that he would recommend to IKA’s board that the organization should take part in the buyback. “IKA’s interests are linked to the sustainability of the Greek economy,” he said. Greece’s social security funds hold at least 8 billion euros of government paper.
and......
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_30/11/2012_472444
Extra measures could be imposed early next year
Troika monitoring to get even tighter
Greece will from now on be under the constant threat of new fiscal measures – i.e. cutting expenditure or increasing taxation – according to the draft of the new memorandum Athens has agreed on with its creditors, who will be closely monitoring the country’s implementation of the new bailout terms. The draft dated November 27 – one day after the Eurogroup agreement – reveals it is possible that in the first quarter of 2013 the government will have to take fresh measures for 2014, while it is made clear that by August 2013 Greece must make specific plans for the measures to be implemented in 2015 to secure a primary surplus of 3 percent of gross domestic product. The draft also describes in detail the monitoring and automatic correction mechanisms for any problems or shortfalls that may emerge. For instance, the agreement provides for an automatic mechanism for increasing primary surplus in case of a shortfall in revenues from privatizations. There is, however, a ceiling of 1 billion euros per year, above which the primary surplus cannot grow regardless of the lagging in the sell-off program. According to sources, the technical teams of the troika – which comprises the European Commission, the European Central Bank and the International Monetary Fund – will now visit Athens once a month to establish the course of the memorandum’s implementation. The Finance Ministry will also have to send reports to the troika on a regular basis concerning the execution of the budget and the general implementation of the agreement’s provisions. Some of these reports will have to be sent on a weekly basis. The troika inspectors will pay especially close attention to the clauses of the new tax bill, once it is voted by Parliament, to establish whether the fiscal adjustment is secured in the way it has been planned for 2013 and 2014. The memorandum provides for an increase in tax revenues by 1.67 billion euros next year and by 1.82 billion in 2014.
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