The credit markets must be getting tired of watching the unthinkable happen. But when Fitch Ratings finally downgraded monoline insurer Ambac on January 18 it sent shock waves through the market that were reminiscent of the worst of the sub-prime crisis last summer. "The monolines now represent the biggest threat to the credit market – this will be sub-prime all over again," warns an investment banker.
The downgrade of a monoline has always been seen as an Armageddon prospect in the credit market – and one that many participants believed would never happen (see Monolines: Beyond protection, Euromoney, December 2007). The impact of Ambac’s downgrade on MBIA is plain to see (see chart) and confidence in their guarantees has evaporated fast.
| MBIA equity and CDS levels |
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| Ambac equity and CDS levels |
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| Source: SG |
The sense of confusion and disarray in the monoline sector has been stoked by the rating agencies, which have repeatedly revised their loss assumptions and capital requirements for the insurers. Standard & Poor’s announced a further review of the entire sector in early January following changes to its methodology on US RMBS and CDOs.
