How Will the EFSF Downgrades Affect the Pound?

The recent downgrades of several European countries by the S&P have spelled bad news for these economies but there is a bigger picture to consider too. The EFSF bears the brunt of the impact. But, these downgrades have also had and will continue to have an impact on the entire European market in general, and consequently on the Euro.

Those analysts who were quite happy with the fact that the U.K. has retained its grading have no choice but to admit that downgrade or not, the U.K. market is reeling. Binary options traders focussing on currency trades involving the Euro should understand exactly what the downgrades mean for the EFSF and for the Euro.

The French and Austrian Connection

In spite of its recent downgrade to double A+, France still holds considerable clout in the market. The AA+ rating is actually quite a strong rating considering that the nation is expected to have an 85% of GDP government debt figure and a budget deficit exceeding 5% for 2011. This nation carries a fifth of the funding guarantee in the EFSF and any such downgrades are bound on reflect on the bail out fund too.

Austria was also part of the EFSF’s line up of six countries that originally had triple A ratings. The rating downgrade brought this nation to the double A+ right alongside France.

Italy’s Woes

When compared with France, Italy is in far worse shape with its brand new BBB+ rating, a two step downgrade. Hovering close to undesirable status and nowhere near improving its debt position, this nation seems to be in bad straits indeed. Two of the other nations that also suffered double notch downgrades, Spain and Portugal, are not as bad off as Italy owing to various other factors.

How is the EFSF Impacted? 

To put it simply, there are simply not enough Triple A guarantors backing the fund post downgrades. This has lead to the downgraded AA+ rating given to the fund itself. This downgrade may translate into difficulties in raising money cheaply to aid stricken Eurozone nations. Given the high level of anticipation that the EFSF generated as the possible ‘saviour’ of these nations, this comes as a real disappointment to many.

There is still hope though. The S&P is quite willing to upgrade the EFSF rating if the fund manages to find new guarantees from stable nations to make up for the ‘fall from grace’. Otherwise, the size of the fund could be reduced so that the existing guarantees cover it adequately.

Until then, for Euro based binary options, the continuing uncertainty in the Eurozone fortunes is not good news and the currency is most likely to stay subdued. Traders should avoid risk sell offs until there is some clarity on what exactly is going to happen now.