Moody's Investors Service said in a report that it expects further write-downs for the large European banks' structured finance portfolios resulting from continued widening in U.S. subprime RMBS spreads and deterioration in the credit quality of financial guarantors.
Although the agency said the second-quarter impact on these banks is likely to be significantly less than what has been observed in the first quarter of 2008, it could, however, be substantial in a few cases.
Moody's expectation of further write-downs in the second quarter of 2008 stems chiefly from two key factors.
"Firstly, U.S. subprime RMBS spreads continued to widen for 2006 and 2007 vintages during the second quarter, with 'Aaa' marks dropping by a further 5% to 10%, which should result in further write-downs mostly for these vintages. Secondly, the downgrades of several financial guarantors and the continued widening of guarantors' CDS spreads will likely lead to further write-downs of banks' financial guarantor exposures," said Anthony Parry, a Moody's analyst and co-author of the report.
Moody's also expects that the combination of these two developments, together with falling property prices and a worsening U.S. economic outlook, will likely have a negative impact on CDO of ABS and SIV marks.