While the redenomination specter haunts the more financially fragile members of the eurozone, Kazakhstan has actually gone through the exercise, sparking deep losses in a local RMBS, according to a note by Moody’s Investors Service.

Curiously enough, the decision to ban the indexation of Kazakh mortgages in US dollars came from the judicial quarter. The Supreme Court of Kazakhstan passed the judgment last December, and made it retroactive. Lenders were forced to swap dollar-indexed-loans into ones denominated in tenge, the local currency, at the exchange rate that was in effect at the time the mortgages were originated. What is more, some borrowers are potentially entitled to compensation for losses incurred by the indexation.

The redenomination immediately triggered a 12% loss in the portfolio of KMBS 2007-1, given the exchange rate used and its divergence from the current one. Now investors in the notes, which are in US dollars, are fully exposed to the exchange rate.

The switchover to tenge mortgages led Moody’s to cut the ratings of the multi-tranche notes in early February. The senior tranche, with an original volume of $123 million, fell to ‘Ba3’ from ‘Ba2.’ They are also under Review for Possible Downgrade.

The first public existing-asset transaction for Kazakhstan, the deal came out in March of 2007 during a time of head-spinning economic growth. It was originated by BTA Bank unit BTA Ipoteka, and its senior tranches at issuance garnered a rating of 'A-' from Fitch Ratings and 'A3' from Moody's.

This move in Kazakhstan, and a similar turn of events in Hungary, has led Moody’s to conclude that under periods of severe distress, mortgage assets are highly likely to be redenominated.

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