Ireland is the latest country to test the resiliency of European securitization structures against sovereign risk.
Investors increasingly fear that Ireland could follow in Greece's footsteps as it is forced to opt for some kind of bailout given its ailing banking sector. The European Union aid being discussed for the country ranges from €45 billion to €90 billion, depending on whether bank support is needed or not.
Market analysts said that it is difficult to gauge what impact the crisis is having on RMBS spreads as not much paper is effectively trading in secondary. However of what has traded has widened significantly with reports that senior Irish RMBS has seen prices down six to eight points.
At the moment, the problem is more about illiquidity than where spreads are. For example, two Irish RMBS tranches included in a larger bid list did not trade last week, Societe Generale analysts said.
But if Greece's RMBS trajectory is anything to go by, the latest sovereign problems will be reflected in securitized products as well.
"A deterioration in borrowers' affordability, another plunge on the housing market, an ongoing deterioration in mortgage performance as well as originator/counterparty problems are imminent in Ireland," Unicredit analysts said. "This will definitely lead to further downgrades (following downgrades in Ireland, potentially also rating agency criteria revisions) and a continuation of deteriorating fundamentals in Irish RMBS and increasing implied credit risk for Irish transactions."
Meanwhile, Royal Bank of Scotland analysts said that another concern is the risk that some of the stock of retained bank paper is forced into the markets as domestic ABS ratings fall out of compliance with the European Central Bank repo liquidity criteria.