Greece's liquidity and growing credit concerns with respect to the Portugal, Ireland, Greece and Spain (PIGS) sovereigns, has stirred rising concern about the potential consequences of a Greek shortfall for the European securitization market as a whole.
Unicredit analysts said that the concern is still very much theoretical and said that, for the moment, increasing risk aversion remains the only true link between the Greek debt malaise and any potential widening in ABS spreads.
The impact of a creeping Greece sovereign default would initially affect only a number of Greece ABS and RMBS outstanding. In total, 44 Greek transactions have been structured with an estimated total current outstanding of roughly €41billion ($57 billion).
But the growing concern is over how the outcome for Greek securitization could impact the overall European securitization market in a Greek doom scenario.
A slowly proceeding Greek liquidity shortfall could trigger several consequences for Greek structured finance exposure, Unicredit analysts said.
For instance, further sovereign downgrades would lead to negative rating migration in Greek tranches, resulting downgrades of counterparties (e.g. Greek banks) would breach counterparty triggers in structured finance deals and in case of a real credit event scenario materializing, several severe negative feedback loops would massively hit Greek securitization exposure.
“Should Greece, for example, theoretically leave the eurozone, an ejection of Greece from the euro could hit euro-denominated Greek bonds if the underlying portfolio is revalued in a non-euro currency, like the former drachma, with a fixed revaluation rate,” Unicredit analysts said. “If Greece leaves the euro zone or even in a worst still theoretical and unthinkable case defaults, massive pricing problems will arise with Spanish, Irish and Portuguese structured finance as investors would flee out from any exposure related to suspicious jurisdictions.
“One could expect a flight to quality triggered by sovereign risk out of securitization exposure related to other ‘shaky sovereigns," analysts said. These together build a major stake in European structured finance and mark-to-market declines will follow as a consequence.