European Rescue Funds Downgraded by Moody's

How bad is the situation in the Eurozone?

Moody's cut its rating for the Eurozone rescue funds ESM and EFSF to Aa1 from Aaa.

It said the downgrade of the ESM and the EFSF, which were created to stabilize the euro zone by providing financial assistance to euro area member states in difficulty, was prompted by the high correlation in credit risk among the rescue funds and their largest financial supporters.

Moody's said the 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