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Flailing UK could be ticking time bomb for EU ABS

A tattered Union Jack flag fluttering in the wind against a blue sky.

Economic woes derailed market in September and could do so again in 2023

After such a miserable year for European ABS markets, there is a sense that it can’t possibly be much worse in 2023. With volatility a prominent feature of markets this year, whether that be after Russia invaded Ukraine or after former prime minister Liz Truss’s disastrous mini-budget, there was almost always something to recover from. The shocks were short and sharp.

There are lots of transactions just waiting for the right moment to be brought to market, which should boost volumes in 2023. Then, as the ECB’s purchase programmes wind down, High Street banks, which have kept well away from securitization in recent years, could make a comeback.

That has all led to a sense of cautious optimism that there is just a little turbulence to be navigated before everything returns to to normal. But that thinking seems to brush the torrid state of the UK economy under the carpet.

The Bank of England said on November 3 that the UK will be in a recession for eight consecutive quarters until mid-2024. Then on Monday, the Confederation of British Industry (CBI) downgraded its growth forecast for the UK economy from 1% in 2023 to minus 0.4%, adding that “Britain is in stagflation”.

The UK was now in danger of a “lost decade”, the CBI said.

Meanwhile, the UK’s Office for National Statistics (ONS) said the cost of living crisis was starting to impact mental health of those UK consumers feeling the sharpest pinch.

Respondents who reported difficulty paying their energy bills were three times more likely to experience moderate to severe depressive symptoms than those who found it easy, the report said.

Red lights flashing

Just a few months ago, one analyst GlobalCapital spoke to likened broader economic conditions now to his time at a ratings agency in the run-up to the global financial crisis in 2008.

Back then, few were paying attention as the “red lights started flashing” and it feels as though the same is happening today, he said in April. He wasn’t quite sure where the pain would strike but it could well be in the UK.

A steady UK is crucial to a stable European securitization market, as it makes up by far the largest portion of the European RMBS market. The Truss saga showed how volatility in the UK can jam up the whole market.

Meanwhile, consultancy firm Rockstead said on Tuesday that more problems are coming down the track, with mortgage borrowers coming off of expiring fixed rate deals replacing them with ones at much higher rates — in some cases more than doubling repayments.

In 2008, the global economy was threatened by the instability of institutions that were famously “too big to fail”. This time around, the failures could be described as too small to matter. But, sticking with mortgages as the example, it was a crisis in US mortgage repayments that led to the horrors of 2008. Minnows matter, especially in their millions.

The big statistic to watch will be unemployment. It remains close to record lows but it could tick up and then snowball as the economy worsens.

In April, the analyst told GlobalCapital it felt as though the capital markets were an elastic band being pulled tighter and tighter. A drifting UK economy could make it snap in 2023.