The performance of the consumer loan asset-backed securities (ABS) market in Europe, the Middle East and Africa (EMEA) deteriorated in September, according to the latest indices published by Moody's Investors Service. Moody's gross default trend reached 1.93 percent in September, which is an increase of 0.5 percent from September 2008. Moody's delinquency trend, an indicator of the expected increase in defaults, increased to 0.86 percent in September from 0.60 percent one year previously. Moody's constant prepayment rate (CPR) trend continued its stable performance and stands currently at 13.1 percent. At present, 14 transactions have drawn on the reserve fund and three transactions in this market recorded a principal deficiency. “The performance of the EMEA consumer loan market is closely linked to labor markets and hence, has been negatively affected by rising unemployment which is expected to intensify given the time lag that labor markets have to economic cycles,” said Olimpia da Silva, a Moody's Associate Analyst. Worsening labor markets increase pressure on consumer loan pools and point to an increase in delinquencies and defaults. In Spain in particular, consumer loan pools are under increased pressure as a result of the macro-economic deterioration. Indeed, Moody's noted that the large majority of consumer loan ABS downgrades occurred in Spain due to weaker than expected collateral performance. The euro zone economy is slowly recovering from the recession. The French and German economies posted positive increases in gross domestic product (GDP) in Q2 2009 and are likely to be followed by other European economies in Q3 and Q4 2009. However, the recovery is likely to be slow. Unemployment is expected to continue to rise into the middle of 2010, due to the lagged response from the labor market to recovery in GDP. Also the governments of European countries are likely to be held back by increasing fiscal deficits. Uncertainty of when fiscal tightening will take place may weigh on consumer confidence. However, on balance continued accommodative fiscal and monetary policy in the euro area is likely to assist the recovery after the deepest recession since the Second World War. Moody's outlook for consumer loan ABS in this region is negative. Consumer loan pools in Spain are particular under pressure due to the rapid rise in unemployment in 2009 and high consumer leverage. On the upside, recent interest rate cuts should flow through to consumers given that Spanish consumer loans, contrary to most other European jurisdictions, typically charge a variable interest rate. This will lead to lower installments and may ease some of the pressures currently faced by Spanish borrowers. Pressure is milder in Italy due to overall low consumer leverage; however, the fixed interest nature of Italian consumer loan ABS reduces the benefits of recent interest rate cuts. As of September 2009, the total outstanding pool balance in the EMEA consumer loan ABS market remained stable with 8.8 billion euros. Transactions in this market are collateralized by unsecured consumer loans originated by specialized lenders and banks to provide both funding and capital relief. The most important markets for consumer loan ABS in EMEA are Spain and Italy.
