As if Greece didn't have enough on its plate, now banks looking to securitize Greek assets face a 'AA' threshold on many of the country's deals. This is a result of its sovereign and domestic downgrade to triple-B that happened a month ago.
Fitch Ratings today said that that the elevated sovereign risk considerations in Greece mean that new ratings on Greek RMBS transactions are capped at the 'AA' rating category. This happened after Fitch downgraded Greece’s sovereign rating to ‘BBB’in December 2009.
Moody's Investors Service on Monday downgraded a large proportion of senior Greek RMBS to the 'A2' to 'Baa1' range. This means that that Greek ABS is likely to become ineligible for European Central Bank (ECB) repo funding.
In most cases, the deals already placed with the ECB are at risk of losing their eligibility, Royal Bank of Scotland analysts said. If Greece is downgraded further, many of these securitizationls could move into the 'B' category.
Under current ECB rules, 'A' deals issued before March 1 are required to have at least one rating of 'A3'/'A-' or better to be repo eligible. From March 1, 2011 the requirement will be tightened to at least two 'A3'/'A-' ratings. According to RBS, nearly 92% of all retained transactions from Greece is single-rated, of which 77% (€15.3 billion ( $19.71 billion) outstanding nominal) have a Moody’s-only rating.
"Most of the latter bonds have no further rating downgrade headroom before being ineligible at the ECB repo window," RBS analysts said.
Greek banks, used the ECB window as of the end of 2009 for about 10% to 20% of total funding. It's likely that this ratio is higher currently, RBS analysts said. If retained ABS assets become ineligible, there are fears that banks might force these securitizations into the capital markets as a means of tapping liquidity or funding.
"We cannot see how the €33 billion of retained Greek ABS could possibly be placed in the securitization capital market, and would therefore argue that any such fallout is not an ABS market problem per se, but will instead pose a deeper funding issue for the domestic banking system," they said.
Fitch Rating Action
Fitch Ratings updated its rating criteria for assessing credit risk in Greek prime residential mortgage loans used as collateral for structured finance transactions and covered bond programs, the agency announced today.
The updated criteria consider the increased level of sovereign risk in Greece and reflect the rating agency ’s view on the general economic outlook, the implementation of substantial austerity measures, and the uncertainty concerning future asset performance. Assumptions at high rating levels have been amended to ensure stresses are remote.
The updated criteria assumptions include the implementation of a record three-year International Monetary Fund-Europrean Union financial support package of €110 billion on May 2.
Fitch has increased its base foreclosure frequency and house price decline assumptions based on the expected impact of the support package on the real economy.
Gross loss rates of Greek mortgage portfolios have increased across all rating categories, the rating agency said.