Ireland's 'real economy' could be hurt by a default event, says Fitch
Published 06/04/2011 | 05:00
ANY default on sovereign debt by countries such as Ireland or Greece could impact negatively on companies headquartered in those countries, a new report has warned.
The report, written by reseachers at Fitch, said that while companies like CRH, which generates most of its turnover outside Ireland, might have "immunity'' from the impact of a default, others might not be so lucky.
For example, it mentions that ESB generates most of its revenue on the island of Ireland and is facing a major refinancing challenge in 2012 after it bought an electricity competitor in Northern Ireland.
The report, which pays particular attention to Greece, Ireland and Portugal, points out that once a sovereign defaults, it can throw up risks for companies, even those at arm's length from the government.
These include possible disruptions to:
- Government payments to firms that supply services;
- Supply chains for companies;
- Firms and their banking facilities;
- There can even "in extremis'' be disruptions to payment systems.
It warns: "Many (companies) would suffer economically but avoid default, provided strong internal liquidity remained available,'' it said.
Even if the companies were not hit by any of these risks, they would still be placed at a disadvantage, the authors suggested.
"These corporations' positions would nonetheless most likely be weakened relative to their peers in non-defaulting jurisdictions."
The key consideration would be the amount of revenue generated outside Ireland.
"As an example, CRH plc, a building-materials company headquartered in Ireland, receives only 2pc of revenues from that market."
But risks would be elevated for utilities or telecoms operators based in only one country.
The agency also made it clear that the underlying financial performance would, as ever, be a major factor.
The attractiveness of the company to international lenders would also be key in any default scenario, it added.