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.