The Eurozone sovereign debt crisis continues to deteriorate after news came out of an imminent Italian default coupled with the downgrade of two French banks. It will probably continue to plague the market over the next two to three years, industry analysts said.

Moody's Investors Service cut the credit ratings of Societe Generale and Credit Agricole on Wednesday because of their exposure to Greece's debt. The one-notch downgrade of the two banks came ahead of a conference were eurozone leaders were to discuss measures to hold off a potential Greek default.

The next portion of the Greek bailout package must be approved by Friday, if the payments due are to be made on time. Market analysts said it is likely that the bailout loan will be paid out because Greece has sent out signals that it is not ready to throw in the towel.

For example, the country recently announced a special property tax designed to raise an extra €2 billion. The tax will be introduced over two years, collected via monthly electricity bills and be calculated based on social criteria — low cost zones, unemployment, disability, changes in the property value etc.

According to Deutsche Bank Securities analysts, while the tax may bring extra revenue for the country it will likely further stretch Greek borrower affordability and weigh on Greek RMBS fundamentals.

They explained that applying the €4 per square meter average rate — which reportedly will vary between €.50 cent to €10 per sq. meter — to a typical Greek property size (125 square meters) and mortgage balance (€65,000) could result in an extra 10% in monthly mortgage repayments.

Still, the property tax is another step that brings the country closer to reaching the austerity target set by the Eurozone in mid-July since for Greece to receive additional bailout money.
Jefferies International head of European rates Domenico Crapanzano and European financial economist Marcel Alexandrovich hosted a conference call where they discussed the situation and said that the market is likely to force a solution and not politicians nor the European Central Bank.

"It's clear that the level of debt in Greece is unsustainable and the country will have to restructure or opt for an outright default," Crapanzano said. "It's a question of timing and now is not the right time."

Greece isn't the only thorn in the Euro markets side. Another storm has been steadily brewing in Italy. According to Jefferies economist Alexandrovich, Italy's downgrade is eminent and, while well flagged, muddies the waters. The Italian parliament is supposed to adopt the latest austerity package by Thursday, while Italian spreads keep rising against the background of large refinancing needs.

In the event of a default, structured finance ratings and covered bond transactions should remain and above the sovereign and above the bank ratings. Bank of America Merrill Lynch analysts said  the general rule of thumb is a typically a six notch differential. However, the analysts said that it is uncertain what effect a default would have on in banks, personal and corporate credit and their willingness to service such credit.

"In this regard, the question arises as to whether the notching between the sovereign/ bank and the securitization/covered bond compresses as the country is downgraded to triple-C and below, and in case of default," analysts said. "The behavior of governments and consumers alike near and post sovereign and bank default is highly unpredictable, the risks of default at individual or company level are likely to rise significantly."

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