In my last column three weeks ago, I said that none of the major monolines was in any danger of losing the triple-A, national-scale ratings on its wrap in Mexico.

Now, I'm not so sure.

Given the velocity with which disasters are unfolding in the structured finance market, Moody's Investors Service downgrade of Financial Guaranty Insurance Co. (FGIC) and XLCA to 'A3' from 'Aaa' probably seems like old news. But for players in Mexico's structured market these moves beg a new question: how far down does a monoline rating go before the national-scale wrap in the peso market is in trouble?

Moody's followed its action on FGIC with a downgrade of two FGIC-wrapped RMBS deals by GMAC Financiera to 'A3.' But that was on the global scale. The national scale rating on the transactions was affirmed at Aaa.mx.'

Moody's has a system for mapping the national and global scale ratings. In the case of Mexico, which as a sovereign is rated Baa1', the Aaa.mx' and Aa1.mx' ratings are analogous to a global scale rating of Baa1'. That means that if a monoline were to fall to Baa1', the national scale rating would have to be reassessed and possibly lowered.

"We'd generally downgrade to the higher of the two ratings: the wrap or the published underlying rating," said Maria Muller, senior vice president at Moody's. In the case of the two GMAC deals, the published underlying rating is 'Baa3' on the global scale, so they could hit that level if FGIC were downgraded further. And as 'Baa3' corresponds to either 'Aa2.mx' or 'Aa3.mx', the national scale rating would see a corresponding drop.

For the other rating agencies, the approach is analogous.

Fitch Ratings would re-assess the triple-A national scale ratings of a wrapped deal in Mexico if the guarantor fell into the single-A range on the global scale, according to a Fitch official. So far, none of the monolines with wrapped deals in Mexico have been downgraded to this level.

Similarly, at Standard & Poor's, where the sovereign's foreign currency rating is BBB+' and local currency rating is A+', the national scale rating of a wrap could be affected if the corresponding monoline has a global scale rating in the A category. So far, none of S&P's ratings on monolineswith a Mexican presence has dropped to this point. Also, most wrapped Mexican deals have an underlying rating of triple-A on the national scale, according to Juan Pablo de Mollein, managing director at S&P. This means that unless the underlying rating falters, the top-tier rating would remain regardless of what happens to the wrap.

Which raises the question: What kind of value-added were Mexican originators looking for if the underlying ratings on most of their deals were triple-A to begin with?

On the cross-border front, the Moody's downgrades have already led to deals in which the underlying rating trumps the wrap. This happened to FGIC-insured, DPR deals from HSBC Brazil and Unibanco, which are now at 'A1.'

While the persistent anxiety around monolines isn't helping issuance anywhere, Mexico appears to be sputtering back to life after a moribund start to 08. Remarkably enough, a deal has closed from a mortgage originator, Metrofinanciera, and priced at a spread to local treasurys of about 177 basis points, only around 50 basis points higher than a Metro RMBS in last June, according to a source on the deal. There's debate in Mexico as to whether RMBS is falling under sharper investor scrutiny than other asset classes, even with the heavily reported fact that there are no subprime mortgages in the country.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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