Deteriorating macro-economic conditions in Spain are continuing to weigh on the performance of structured finance assets across different sectors, according to Fitch. The agency notes that while historically low interest rates are providing some support and banks are rolling out loan modification and restructuring programmes in an effort to minimise defaults, difficult labour market conditions will likely drive further RMBS and ABS deterioration over the near-term.

Rui Pereira, md in Fitch's structured finance team in Madrid, says: "Performance across structured finance sectors in Spain continues to be affected by the challenging domestic economic environment, with a sharp rise in unemployment and the ongoing correction in the housing market acting as key catalysts."

The agency expects that SME CDO transactions will also remain under pressure due to their significant exposure to the construction and real estate-related segments, and because of tighter credit conditions which have increased refinancing risk.

The deterioration of asset performance has resulted in a growing number of rating actions in recent quarters, with 158 downgrades recorded by the agency in H109. The most affected transactions involve collateral originated at the height of the housing market boom with more aggressive credit attributes. The agency continues to assign negative outlooks to existing transactions, particularly on more vulnerable subordinate classes, reflecting ongoing concerns about Spanish macroeconomic conditions and their impact on performance.

Despite continued difficulties in the securitisation primary market, Spain continues to represent the second-largest structured finance market in Europe, with 41 transactions issued in the first half of 2009, representing €54.2bn in debt. This represents a 9.5% decline in volume compared with the first half of 2008. Fitch expects ECB-driven structured finance volume to decline over the near-term due to weak credit growth and easing liquidity conditions for banks.