Ratings with queries on how Argentina’s 2001/2002 default and subsequent currency devaluation may shed light on some of the likely repercussions that would follow a Greek exit from the euro. With few instances of recent sovereign defaults with large corporate sectors, the de-pegging of the Argentinian peso in 2002 and the forced conversion of dollar deposits and local debt into pesos offers some pointers to redenomination risks in a worst-case scenario of a euro exit. To highlight the potential impact, Fitch is republishing four special reports that were originally issued by Fitch in 2002.
The devaluation of the peso immediately increased Argentine corporate debt and put pressure on free cash flow generation, especially for smaller, domestically focused companies. A similar situation could be expected in Greece; limited export ability, price controls, a potentially long recession and restricted local market refinancing options could all limit the ability of companies to meet interest and principal repayments. Greek companies could be even more exposed to a fall in trade because an exit from the euro would complicate broader relations with the EU free trade area.
As well as de-pegging from the dollar, the Argentinian government introduced several other emergency measures that damaged the financial flexibility and credit profiles of Argentinian corporates. These included: restricting the transferability of foreign currency, which caused some companies to miss scheduled debt payments; prohibiting price adjustments based on foreign currency indexation; and government regulation of prices of critical goods and services.
The combined impact meant that, by the middle of 2002, most of the Argentinian corporates we rated that had not already defaulted were rated in the C to CCC range. While sharply increased debt burdens and weak cash flows created an incentive to default, most of the companies that did so were forced through inability to pay, rather than unwillingness.
Several utilities were among the companies that defaulted by mid-2002. This underlines our recent analysis that utilities are the sector that is most at risk from eurozone turmoil due to their high leverage and mix of regulated domestic revenue streams and large foreign creditor bases. In contrast, the few companies that kept up their foreign debt obligations in the Argentinian crisis were those that were able to generate export revenue in dollars – generally in the oil and gas sector. In Fitch’s recent analyses, internationally diversified industrial companies consistently show greatest resilience to a euro exit.
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