Fitch Ratings said that increasing unemployment levels in Spain will result in a continued rise in borrower delinquencies and defaults in Spanish ABS and RMBS transactions.

With the unemployment rate reaching 17.4% in 1Q09 (13.9% 4Q08 and 8.6% 4Q07) and with little sign of improvement in the short term, the rating agency said it is not inconceivable to see levels surpassing the early 1990s recession and entering ranges where one in four or one in five are unemployed.

While lower interest rates should help borrowers maintain their payments, it will become inconsequential if the borrower loses their job, thereby driving default levels higher, Fitch analysts pointed out.

Government initiatives especially for the unemployed are welcome and should help borrowers, but Fitch mentions that there has not been a take-up of the scheme at sufficient levels to help credit performance, thus the risks to the near term remain high.

Since the end of 2007, mortgage arrears, as reported by the Bank of Spain, increased from 0.73% in 4Q07 to 2.4% at the end of 4Q08. This is likely to cause further rating actions and as arrears rise, various triggers in Spanish RMBS transactions could be met, with the consequence of potential interest deferral for the junior notes, therefore aiding the senior portion of the capital structure.

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