If S&P follows thru, what will it mean for EFSF?

While the announcement by S&P last night was not a total surprise (it is for Germany and Finland I believe but market says France and Austria are not AAA), if downgrades follow of all or some of the 6 remaining AAA rated euro zone countries, how will the EFSF keep a AAA rating? It likely won’t and will it be an effective bailout tool with a subsequent higher cost of capital? The EFSF 2 3/4% bond maturing 12/16 is trading slightly lower today. Merkel and Sarkozy in a joint statement said they “took note” of the move but the German Economic Minister wasn’t as diplomatic, saying “we are not impressed by such threats.” Schaeuble, the German Finance Minister thinks it’s a good wake up call to the region “to take the necessary decisions step by step and to win back the confidence of global investors.” The bonds of the AAA rated countries are lower but Italian bonds in particular are rallying again. European bank stocks are trading down but the euro basis swap is falling to a 3 week low. The ECB today was able to fully sterilize its 207b euros of bond purchases after last week’s failure. The RBA cut interest rates for a 2nd straight month by 25 bps to 4.25% as their lower inflation outlook gave them room to move. On Asia, they said “trade in Asia is now seeing some effects of a significant slowing in economic activity in Europe.” The Shanghai index fell for a 3rd straight day to the lowest since Oct 21st.

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