Fitch Publishes Report on Hypothetical Eurozone Country Redenomination

In a special report, Fitch Ratings explores the likely events surrounding a hypothetical eurozone country exit including redenomination of its currency, and the ‘known unknowns’ of other factors such as the scope and effectiveness of capital controls, nationalisation and the potential magnitude of a devaluation.

The report summarises illustrative rating actions and the potential effects across the different groups of rated entities if a single country were to exit the eurozone. It follows on from the agency’s publication “The Future of the Eurozone – Alternative Scenarios” dated 3 May 2012. The agency believes a full break-up and demise of the euro remains highly unlikely, but the risk of a Greek exit is material and rising.

Ratings of entities from the exiting country would reflect the severe adverse effects from recession, inflation, lack of credit, bank deposit restrictions and capital controls, and potential social and political instability. Combined with the application of rating criteria on distressed debt exchanges (DDEs) to a redenomination scenario, many ratings are likely to go to low speculative-grade or default.

As has been previously stated, Fitch would view a redenomination of sovereign debt into a markedly devalued currency as a default, in accordance with its DDE criteria.

Aftershocks would impact heavily on the banking sector, for which a redenomination of liabilities, deposit restrictions or capital controls which are disadvantageous to creditors would typically constitute bank default. Structured Finance ratings, upon a redenomination of the transaction’s domestic assets and whether or not its notes remain in euro, would likely be a default.

In the corporate sector, certain entities with international activities or parent companies could survive by accessing off-shore euros to service their euro-denominated debt. Conversely, the fate of corporates with mainly domestic earnings yet euro-denominated debt would be more problematic. The outcome for both sets of corporates’ would also depend heavily on the scope and effectiveness of capital controls.

The likelihood and impact of different scenarios are inherently uncertain and the rating guidelines in the report are purely illustrative. Any actual future rating actions would reflect all material information at the time, which might be different.


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