Fitch Ratings says a disorderly Greek sovereign default would weaken Greek corporates’ credit profiles, but the severity of the outcome would depend greatly on whether or not Greece remained within the euro. The agency considers Greece leaving the euro a far more damaging scenario than a disorderly Greek default within monetary union.
In July Fitch looked at two hypothetical disorderly default scenarios – one where a country defaults on its debts but stays in the euro, and one where it leaves the euro (see Scenario: Euro-zone Default Stress for Corporates ). Where the country stays in the euro, many previously strong credit profiles drop below investment grade due to a worsening macroeconomic climate, a temporary lack of access to funding, and potential stress on utilities’ regulatory remuneration mechanisms. However, we would generally expect companies to struggle on, with limited numbers of low-impact defaults driven by liquidity problems.
The “euro-exit” scenario introduces the further challenges of redenomination of local currency cash balances and earnings, capital controls, and hyperinflation. Combined, these make it very hard for companies to cover what would now be foreign currency euro debt owed to non-domestic bondholders and banks. A permanent redenomination of, say, a utility’s receipts, makes its debt load comparatively greater, making debt harder to service and debt rollover more challenging.
This second scenario tips traditional sector default probabilities on their head. The highly rated utilities sector is the most heavily hit due to its typically domestic focus, high debt load, and the likely disruption to regulatory tariff frameworks. Industrials and telecoms fare better – they have greater geographical diversification to shield them from a struggling domestic economy and give them access to foreign currency.
In a related report Fitch Ratings’ most recent EMEA Corporate forecasts underline the agency’s caution about 2012 revenue and profitability.