The severity and volatility of ongoing shifts in U.S. trade policy have increased the chances of a global economic slowdown and heightened uncertainty in financial markets. This could have repercussions for European structured finance, both from an issuance and a credit performance perspective.

Overall, however, we expect limited consequences for our European structured finance ratings. While idiosyncratic, direct effects might materialize, most transactions are only exposed to the indirect effects of a wider macroeconomic deterioration. In our base case, such deterioration is unlikely to cause widespread ratings movements in structured finance.

Tariffs Impair Macroeconomic Conditions

We have been regularly updating our macroeconomic forecasts to reflect the ongoing trade policy evolution of the U.S. and its trading partners. Our latest base-case forecasts for European countries (see table 1) dates from the beginning of May 2025 and was based on the following assumptions:

• A 10% across-the-board tariff on imports from all U.S. trading partners, as announced on April 2. Our assumptions did not incorporate the country-specific reciprocal tariffs, which were paused for 90 days following another announcement on April 9;
• A 25% U.S. import tariff on autos, steel, aluminum, pharmaceuticals, and semiconductors; and
• Fully escalated tariffs between the U.S. (145% on Chinese imports, except for electronics) and China (125% on U.S. imports). However, these forecasts do not reflect the temporary adoption of lower tariffs between the two countries on May 12.

Table 1

Since we formulated this macroeconomic base case, negotiations between the U.S. and various trading blocs have pointed toward a de-escalation, and financial markets have reacted positively. However, most reductions in previously announced tariffs are, so far, only temporary and uncertainty remains high. This means a normalization of trade policy is still a long way off. The global trade environment will therefore likely continue to weigh on credit conditions, even if some tail risks have eased for now.

Our economic forecasts combine both direct and indirect effects of tariffs. The direct effects are a function of the size of the tariff and countries' or regions' exposure to the U.S. as a trading partner. The indirect effects comprise lower growth among all trading partners, as well as the effects on confidence and uncertainty, which may be larger. We note that the U.S. administration's 90-day pause on many country-specific reciprocal tariffs has not fully alleviated this fundamental effect.

The latest revisions to our base-case forecasts incorporate lower eurozone inflation over 2025-2026 due to a stronger-than-expected appreciation of the euro and falling oil prices. However, we do not expect eurozone inflation to fall below the European Central Bank's (ECB's) 2% target because fiscal stimulus will coincide with a tight labor market, which will support price pressures.

We have also adjusted our monetary policy outlook and now expect the ECB to cut rates once more in June this year, followed by a pause until the end of 2026. If actual growth surpasses potential growth and labor market resilience persists, the ECB could raise rates again in the first half of 2027.

The risks to our baseline macroeconomic forecasts remain firmly on the downside and include a stronger-than-anticipated spillover from the tariff shock to the real economy. The longer-term configuration of the global economy, including the role of the U.S., is also uncertain.

New Structured Finance Issuance Ploughs On

Primary market conditions have become more challenging for European securitizations and covered bonds since the U.S. administration announced its reciprocal tariff framework on April 2, 2025. Even so, overall issuance volumes have held up, despite a slowdown in some sectors.

Securitization issuance had ended 2024 strongly and was off to a flying start in 2025. Volumes in each of the past few months have significantly exceeded recent averages, largely due to a buoyant CLO sector (see chart 1).

Chart 1

Chart 2

That said, CLO issuance, which was more than twice the latest five-year average in the first quarter of 2025, dropped to less than half the average in April because of wider financial market volatility. Issuance of residential mortgage-backed securities (RMBS) was also atypically low in April. Yet the slowdowns in these two sectors were offset by an uptick in asset-backed securities (ABS) and CMBS volumes.

In the covered bond sector, volumes returned to more typical levels in the first quarter of 2025, following above-average issuance over 2022-2024. This trend continued after the reciprocal tariff announcements, despite two multi-day periods in April when the market was closed.

Issuance over the first four months of 2025 remained close to recent averages (see chart 2). We note that covered bond issuance sometimes benefits from volatile market conditions. This is because covered bonds tend to have a higher credit quality than other forms of bank funding, such as senior unsecured debt.

Although volumes have generally held up, new issuance has repriced in some sectors, given higher macroeconomic uncertainty and, possibly, execution risk. Senior tranches on new CLOs, for example, are now pricing at about 135-140 basis points (bps), compared with less than 120 bps previously. By contrast, covered bond spreads did not change materially in April, according to market indices.

Effects On Structured Finance Creditworthiness Are Mostly Indirect

For structured finance sectors linked to corporate borrowers, the new trade environment could directly affect the creditworthiness and performance of underlying collateral pools. However, changes in the macroeconomic backdrop, consumer and business confidence, and financial market volatility are likely to produce more widespread indirect effects. These could affect all structured finance asset classes, including those backed by consumer-related credit.

CLOs: Most underlying corporates are in sectors less exposed to tariffs

For European corporate issuers, we expect both direct and indirect effects to weigh on creditworthiness, with potential knock-on implications for CLOs. Direct effects are likely to be most acute for companies that derive a significant portion of earnings from exports or depend on global supply chains. Sectors that are particularly affected in this regard include automotive, building materials, capital goods, chemicals, metals producers, pharmaceuticals, shipping, and technology.

We expect potential spillover effects for European leveraged loan CLOs will be muted.  This is because CLO collateral pools are most concentrated in service-oriented industries, such as health care and software. There will likely be few direct tariff effects (if any) on these sectors, unlike some businesses that sell goods (see chart 3).

Chart 3

As a result, European CLOs' exposures to the tariff-related corporate sectors mentioned above are generally quite low. We expect the negative effects of tariffs will be most pronounced in the automotive sector. The imposition of a 25% duty on vehicles imported to the U.S. is likely to impair European and other global automakers and their extensive supply chain networks. However, European CLOs' aggregate exposure to automotive companies only amounts to 1.3% (see table 2).

Even in corporate sectors that are most at risk from tariffs, we consider that many rated European companies should be able to manage the immediate effects because of several mitigating factors. These may include an ability to move production to the U.S., pass through tariff effects to less price-sensitive customers, or redirect sales to other regions.

Table 2

Nevertheless, indirect tariff effects--including a slowdown in economic growth, ongoing corporate cost pressures, and tightening financing conditions--could weigh on leveraged corporate borrowers in all sectors.  Declining business confidence and higher uncertainty about the trading environment may slow profit growth and could pause investment, hiring, and acquisition plans. In the European CLO sector, we therefore pay particular attention to transactions with high exposure to obligors rated 'B-' or 'CCC' (or with negative rating outlooks) (see table 2), or where the tranches have low levels of credit protection.

We maintain our existing default rate forecast for speculative-grade European corporates.  In our base case, we expect the default rate to continue declining slowly to about 3.75% by the end of 2025, down from a peak of 5.1% in November 2024. However, we note that European CLO credit performance and the performance of the wider pool of speculative-grade corporate ratings have historically been somewhat uncorrelated, because CLO portfolios are constructed--and subsequently actively-managed--by collateral managers.

Recent periods of stress--including the COVID-19 pandemic, as well as rate increases and the onset of elevated inflation in 2022--have demonstrated that portfolio selection and subsequent management actions support robust CLO credit performance.

Consumer-backed ABS and RMBS: Macroeconomic headwinds are unlikely to affect ratings

Real wage growth, falling interest rates, and a return to more moderate inflation has supported the credit performance of most household borrowers backing European ABS and RMBS. Yet this could change if tariffs and the related uncertainty mar the economic backdrop.

We think consumer ABS and RMBS are only subject to indirect tariff effects, such as deteriorating macroeconomic conditions.  Some borrowers--particularly those with weaker financial resilience--may struggle to service their debt if economic growth slows, unemployment rises, inflationary pressures resume, or interest rates increase. Areas to watch in the ABS and RMBS space therefore include transactions backed by nonprime, reperforming, and legacy nonconforming or buy-to-let assets.

That said, we expect indirect tariff effects on consumer-related securitization sectors to be low.  While the tariff announcements led us to revise our base-case forecasts downward, the extent of likely economic effects is relatively modest in the context of securitization borrower performance. Historically, significantly larger swings in interest rates or inflation have hardly had any effects on ratings migration in structured finance.

Instead, ratings movements have mainly been linked to changes in unemployment rates, which exhibit a negative correlation of about 75% with one of the metrics we use when assessing ratings migration (see chart 4). However, in our base-case economic forecasts, we expect little change in unemployment rates across Europe, meaning it is unlikely to cause systemic rating pressure.

Chart 4

Counterintuitively, some tariff effects might be credit positive.  For example, if tariffs and retaliatory measures were to increase building costs and constrain new housing development in European markets, they could indirectly support existing home prices. This would be credit positive for mortgage-backed structured finance.

CMBS: Exposed to corporate tenants and further declines in real estate values

The potential reshuffling of international trade flows could have direct implications for some of the property types that back European CMBS. For example, higher costs could weigh on retailers, while lower international trade could affect logistics and warehouses. Similarly, a decline in tourism could have negative consequences for lodging properties.

Indirect effects that could hamper the CMBS sector include a wider deterioration in macroeconomic fundamentals.  Lower GDP, rising unemployment, higher interest rates, or increased inflation could each reduce the rent-paying ability of commercial tenants, especially in the office and retail sectors. The downstream effects may become apparent in retail commercial real estate, with a potential decrease in consumer confidence and spending.

Lodging properties could also suffer from a reduction in discretionary spending. Corporate tenants' exposure to long-term financial strain could reduce landlords' ability to increase rents or maintain occupancy levels.

Moreover, a slowdown in policy rate reductions or a sustained widening in government bond yields could derail the recovery in real estate valuations and hinder property owners' ability to refinance or dispose of assets quickly.

We are closely monitoring transaction-specific factors in CMBS.  This is especially the case if transactions are more exposed to the office sector, where vacancy and rent developments were already credit negative before the additional tariff-induced uncertainty. We also note that the office CMBS sector's exposure to lease rollovers and near-term loan maturities is significant.

Covered bonds: Issuer and sovereign linkages are unlikely to increase rating sensitivity

Most European covered bonds are backed by mortgage loans and will therefore be subject to the same dynamics as consumer-related securitizations. This means tariff effects are likely to be weak and indirect, resulting from a modest economic deterioration. However, covered bonds are typically also exposed to the creditworthiness of the issuer and the respective sovereign.

More than 80% of the European banks we rate have stable rating outlooks, while more than 10% have positive outlooks. We think they should continue to benefit from solid profitability, sound capitalization and liquidity, and relatively benign asset quality in 2025. Rating drivers include favorable interest rates and most banks' recent focus on derisking their balance sheets and controlling their costs.

Intensifying trade tensions and policy uncertainty will affect financial institutions, including those that issue covered bonds.  While most banks enter this period from a position of strength, the highest immediate risk is capital market volatility. Over the longer term, the drag on economic growth could lead to lower business volumes and higher credit losses.

Asset quality deterioration should remain limited to the corporate sectors that are most affected by U.S. tariffs, including chemicals, pharmaceuticals, metals, and automotive. For most major European banks, these tariff-related exposures are contained to less than 5% of lending.

For sovereigns, the key risks emanate from the secondary effects of trade instability.  Additionally, we think global geopolitical tensions are at their worst level in decades and pose a serious risk of economic disruption. In Europe, we already see the fiscal effects, as many nations embark on a process of rearmament not seen since World War II.

Despite some pressures on bank and sovereign ratings, covered bond programs tend to be insulated from any corresponding credit effects.  Our ratings on most programs include a buffer and are usually not lowered if we downgrade the underlying issuer. The same applies to the downgrades of related sovereigns. For example, more than 75% of the covered bond programs we rate could withstand a one-notch downgrade of the issuer and the respective sovereign, without the program rating being lowered (see chart 5).

Chart 5

Related Research

• Global Credit Conditions Special Update: U.S.-China Tariff De-Escalation Brings Some Temporary Relief, May 15, 2025
• Global Macro Update: Seismic Shift In U.S. Trade Policy Will Slow World Growth, May 1, 2025
• Corporate Default Forecasts Maintained, But Risks Are Rising, April 25, 2025
• CLOs' Diverse Top 30 'B-' Credits Will Face Differing Pressures In 2025, April 24, 2025
• Global Financial Institutions: The Tariff Hits Won't Land Evenly, April 17, 2025
• Tariff Impacts Will Vary By Sector In U.S. Structured Finance, April 17, 2025
• Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
• Most European Corporates Can Manage The Immediate Effects Of U.S. Tariffs, April 4, 2025