TEXT-Fitch:Criteria for the asset analysis of European public entities' covered bonds

Jan 30 - Fitch Ratings has published a criteria report explaining its asset analysis ofEuropean public entities' covered bonds, incorporating the proposals detailed in "ExposureDraft: Asset Analysis Criteria for Covered Bonds and CDOs of European Public Entities" dated 10October 2012.

The main proposals from the exposure draft that have been incorporated into the criteriaare:

-- Modelling of material contagion risk among eurozone members

Given the current situation in the eurozone, Fitch is of the opinion that diversity creditbetween eurozone countries is not warranted, especially when modelling severe and high stressscenarios. As a consequence, Fitch assumes high contagion risk between sovereigns in suchscenarios. For the avoidance of doubt, Fitch believes a full-break-up and demise of the euroremains highly unlikely.

-- Revised recovery assumptions for most European sovereigns

Fitch uses an identical set of recovery assumptions for all advanced economies. This isbecause, in Fitch's opinion, advanced economies would likely default because of overindebtedness given elevated debt levels of many sovereigns in the developed world whereas otherreasons of default are highly unlikely. The proposal approach will see lower recovery rateassumptions than were previously applied for most European sovereigns.