The European Union flag flies amongst member countries' national flags in front of the European Parliament in Strasbourg, France.
Ratings agency Moody's announced a downgrade Friday of the continent's main bailout vehicle, the European Stability Mechanism, knocking it one notch from prized Aaa status to Aa1.
The ESM, which was finalized in October, is a bailout fund designed to have a lending capacity of €500 billion that can issue bonds and also receives funding from European member states. It was conceived as an eventual replacement for the European Financial Stability Facility, which has backed bailouts for Greece, Portugal and Ireland.
The EFSF received a similar one-notch downgrade Friday.
Moody's said the moves were driven by its downgrade of France earlier this month from Aaa to Aa1. France is the second-largest contributor to the two bailout vehicles after Germany, kicking in roughly 20% of the funding for each. Moody's said there was "a high correlation" between the creditworthiness of the bailout funds and that of their largest contributors.
The agency maintained its negative outlook for both the ESM and EFSF, meaning further downgrades are possible.
Klaus Regling, managing director of the ESM and CEO of the EFSF, called the downgrades "difficult to understand."
"This rating action does not inhibit ESM or EFSF in any way," he said in a statement Friday night.
In downgrading France earlier this month, Moody's cited the country's fiscal challenges, weak growth prospects and exposure to additional eurozone shocks.
Yet Moody's said France was still in good shape when compared to its neighbors, citing its large and diverse economy and praising its commitment to structural and fiscal reform. France's borrowing costs remain low, with the country's 10-year bond yielding around 2% in recent months, suggesting investors do not view the country as a credit risk.
Fellow ratings agency Standard & Poor's downgraded France from AAA back in January.
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