The prospect of negative rating actions on sovereign issuers has risen since the start of the year on the back of spiralling fiscal deficits in Europe. And, according to a report from Fitch Ratings, sovereign uncertainty could also hit corporate ratings, with companies in Greece, Spain and Portugal most at risk.
In the event of sovereign ratings falling by one or more notches, Fitch says there could be a knock-on effect on the corporate sector with lower-rated and unrated companies in cyclical industries most likely to be downgraded.
In the worst-case scenario of a sovereign defaulting, few corporates in that country would be left unaffected. “A wide spread of corporate rating actions for corporations in that country could be contemplated,” Fitch said.
Though an economy’s stronger corporates may suffer downgrades in the event of a sovereign default, it is suggested they themselves would avoid default and only suffer economically, providing they have access to internal sources of liquidity.
While investment grade corporates in high grade countries are at less risk from sovereign contagion, the real worry for these companies is what could happen if there is a double-dip recession, added the rating agency.
More on Credit Risk
A copula-based model for wrong way risk
A new product could smoothe the gap between capital and accounting rules
The Basel Committee on Banking Supervision has introduced strict regulatory guidance on how to validate and backtest internal model methods for credit exposure. Fabrizio Anfuso, Dimitrios Karyampas ...
Adjoint algorithmic differentiation is one of the principal innovations in risk management in recent times. Luca Capriotti and Jacky Lee show how this technique can be used to compute real-time risk...
Loomis Sayles vice-chairman discusses the US credit markets
The US has recovered from recession but still faces an enormous debt burden. The onus is now on companies to pick up the slack in the economy and keep bonds buoyant
The head of European credit portfolio management at Pimco talks to Credit's Alex Monro about the ongoing Eurozone crisis, and the likely investment themes for 2011.
The European securitisation markets were among the hardest hit by the financial crisis: large losses on a range of securitised products led to a drop-off in investor demand, while prohibitive spreads made...
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.