Euro Re-Denomination Would Trigger Debt Defaults, Fitch Says

A currency re-denomination for any euro nation would lead to “multi-category” downgrades for companies and some may voluntarily decide to default, according to Fitch Ratings.

While companies that regularly sell debt may find that servicing outstanding bonds would foster investor relations, those businesses may also opt for a “clean break,” analysts John Hatton and Richard Hunter wrote in a report.

“Faced with a maxi-devaluation of their post-euro currency, management may deem it preferable to take the pain of higher new interest costs on new debt, and the initial stigma of default, than soldier on for years under a greatly increased leverage burden,” the analysts wrote in the report.

Opinion polls in Greece show that parties supporting the European Union’s bailout agreement are gaining ground amid warnings an exit from the currency could lead to a fragmentation of the euro. Antonis Samaras, the leader of Greece’s New Democracy party that backs bailout agreements, said the cost of leaving the currency would be higher than staying in the euro.

Companies that are focused on domestic markets would have their issuer default ratings cut to the B range or lower in the event of a currency re-denomination, Fitch said. Distressed debt exchanges, non-payments because of capital controls or incomplete debt payments would lead to a further cut to RD or D default ratings, according to the ratings company.

To contact the reporter on this story: Ben Martin in London at bmartin38@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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