Fitch Ratings expects downward pressure on covered bond ratings to ease in 2014 due to the stabilisation of sovereign rating outlooks. However, it said that most covered bond ratings in Cyprus, Greece, Ireland, Italy, Portugal and Spain have a Negative Outlook.
“This is despite the easing of the eurozone crisis and the much lower risk of a break-up as well as the currency bloc’s exit from recession. The negative outlooks on the covered bonds mainly reflect the negative outlook on many bank issuer default ratings (IDRs) and the challenges faced by mortgage markets”, Fitch pointed out.
Given the significant downward migration of ratings from peripheral countries since 2010 and the current economic stabilisation, Fitch sees little room for further downward potential.
The rating agency also noted that in countries where the "bank resolution" legislative agenda is further advanced, including prospects for bail-in of senior unsecured creditors, support-driven bank IDRs could come under pressure. However, covered bonds are expected to be exempt from bail-in, which is credit positive compared with senior unsecured debt.
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