Fitch: EMEA Structured Finance Increasingly Vulnerable to Sovereign Risk

London - 23 November 2011

The prolonged sovereign credit unrest in Europe may leave EMEA structured finance transactions susceptible to further performance declines in the coming months, Fitch Ratings says in its latest EMEA Structured Finance Snapshot.

To date, the only transactions to be explicitly affected by sovereign downgrades are those secured by collateral in the peripheral eurozone countries of Greece, Ireland and Portugal. These represent only a small proportion of Fitch's portfolio of EMEA SF ratings. However, the weakening credit profiles of other countries that contribute more to SF collateral (most notably, Italy and Spain) make sovereign risk an increased concern.

'Greek, Irish and Portuguese transactions provide useful illustrations of the potential effects on structured finance transactions of a significantly weakening sovereign or an asset market collapse', says Senior Director Gioia Dominedo. She discusses these developments in the Fitch Voice section of the latest Snapshot where she summarises a recently published report entitled 'Peripheral Euro Zone Structured Finance Performance - The Credit Crisis Four Years On.'

Fitch maintains the best indicator of overall sovereign risk to be a country's Issuer Default Rating (IDR). A falling IDR indicates increased uncertainty and a heightened likelihood of extreme stress scenarios. Recent experience in Greece, Ireland and Portugal has also shown how conventional performance indicators can lose their value, or even become misleading, in cases where a severe stress has resulted in government intervention in asset markets or originator manipulation of transactions.

Fitch's quarterly Snapshot provides a detailed analysis of developments in the structured finance sector and was created in response to investor requests for high quality, transparent and timely research and ratings analysis. This report covers the EMEA region, with a separate report covering US structured finance.

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