As the U.S. works to put together its Troubled Asset Relief Program (TARP), comments by U.S. Treasury Secretary Henry Paulson suggest that similar schemes are being crafted in some non-U.S. countries.
Troubled sectors in Europe include U.K. assets in the nonconforming and CMBS space, Spanish RMBS and CLO assets, and Spanish and U.K. banks that are particularly dependent on wholesale funding. The more recent the vintage, the worse off the assets. Any TARP-like programs would likely be aimed at the above-mentioned asset types in Spain and the U.K.
"We suspect that several central banks are poring over the Treasury's plans, wondering if such a program might work in the U.K., Spain or Ireland," Royal Bank of Scotland analysts said. "However, new lending stimulus remains key in our view. We expect at least consideration of similar plans, with the U.K., Spain, and Ireland the most likely jurisdictions, with perhaps a broader solution envisaged for Europe."
But there might still be hope for increased capacity in other assets in non-U.S. countries. European finance ministers and policymakers said that the scale of problem assets in Europe does not compare to the U.S. situation.
The one major difference between troubled U.S. and European structured finance assets is that the U.S. paper is toxic in terms of credit risk as well as liquidity and market risk; by contrast, European paper became toxic mainly as a result of market risk and liquidity as spreads - driven by technicals - gapped out significantly.
"From a pure credit risk perspective, we feel that there is no need for a European TARP," said Markus Ernst, a senior ABS/securitization research analyst at UniCredit Markets & Investment Banking. "Banks might even sell assets of better quality into such a fund while they might prefer to sit out those bonds which might achieve only very poor prices at the moment before selling them at distressed prices. Moreover, we believe that the majority of European banks have the power to digest actual credit losses in mortgage markets."
Deutsche Bank analysts also said that Europe would see even greater challenges than the U.S. in creating a workable and economically efficient government-funded buyer of last resort. This is because risk assets are much more widely distributed in Europe and a U.S.-style bailout would be more costly.
Initiation of a similarly sized rescue of the U.K. nonconforming market would cost the U.K. government around £20 billion ($37.12 billion); this figure equals around 14% of GDP, according to Deutsche analysts.
The U.K. nonconforming market isn't directly comparable to the U.S. subprime market, and is far smaller in size - standing at Ä72 billion ($106 billion). Thus it would not be a significant help to include only nonconforming assets in a relief program, and it remains questionable whether the prime U.K. RMBS or CMBS markets really need government support for nonconforming pools.
"Some market players would certainly welcome such an action, but moral hazard aspects might be involved," Ernst said.
In Spain, the housing and economic slumps, as well any potential weakness in the banking system, are related to illiquid toxic high-LTV assets and poorly performing CLOs. Ernst believes that the present Spanish economic difficulties are much more complex than what could be solved with an RMBS/ CLO related program. Any relief program for these specific troubled assets would only provide limited help for Spanish banks.
"We do not expect the European banking system to be in a similar weak circumstance as the U.S. system proved, and thus do not expect that a pan-European program would be justified at present," Ernst said. "Repo activity already helps to support against wholesale funding dependencies, also it influences primary market activity and secondary trading negatively."
Nonetheless, players believe that the U.S. TARP program will help to clear the air in terms of the immediate realization of losses, but not slowly emerging future losses on nonperforming paper. TARP should also help to ease the dislocation in the secondary market between demand (willingness to sell, but not at any price) and supply (willingness to buy only at very distressed levels). It will additionally transfer credit risk from ailing banks to the government/ tax payer in order to help stabilize the financial banking system.
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