Fitch Ratings on Friday affirmed the top notch credit rating of the European Stability Mechanism, the permanent rescue fund for Eurozone countries.

The agency also affirmed the stable outlook on ESM's 'AAA' rating, indicating that the downside risks to the rating are currently not material.

"ESM's ratings are underpinned by the strong level of support provided by the 17 euro area member states (EAMS), reflected in the large amount of callable capital subscribed (EUR 620 billion) and the high share (61.6 percent) of callable capital provided by shareholders rated 'AA-' and above," Fitch said.

The liquid assets and the callable capital of EAMS would cover 92.3 percent of the ESM's debt, if it operates at full capacity, Fitch reckoned.

However, the agency pointed out that the credit quality of EAMS has deteriorated since the launch of the ESM and this may adversely affect the quality of support.

ESM's callable capital mechanism is stronger than that of other multilateral development banks, Fitch noted.

Further, the rating firm noted that the rescue fund benefits from a relatively high capitalization ratio and the requirement that paid-in capital/reserves will always be equal to at least 15 percent of outstanding debt.

The ESM's lending capacity limit of EUR 500 billion equals an equity-to-assets ratio of 13.8 percent, which is in line with other triple-A rated multilateral development banks.

Conservative risk management policies for liquidity ensure that ESM will not suffer a cash shortfall in the event of a default from a borrower, Fitch said.

The preferred creditor status enjoyed by ESM is only junior to that of the IMF and this reduces sovereign credit risk and enhances recovery prospects in the event of a default, Fitch said.

"These features offset the extremely high concentration of assets, which constitutes ESM's main weakness," Fitch said.

According to the agency, ESM lending was concentrated on only two sovereign borrowers, Spain and Cyprus, as of end-December 2013.

"ESM has no concentration limit and all its financing could, in an extreme scenario, be concentrated on a single borrower," the rating firm said.

Fitch also said that capital injections into banks, under the Direct Recapitalization Instruments, which are inherently riskier than loans and not protected by preferred creditor status, will likely weaken ESM's intrinsic credit quality, making its IDR reliant on support from EAMS.

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