(The following statement was released by the rating agency)
Oct 03 - Investor interest in the relationship between ratings of sovereigns and of the rated entities and transactions in their jurisdiction remains high despite recent positive developments in the eurozone crisis. In a report issued today, Fitch Ratings notes that ratings of all asset classes in eurozone sovereign jurisdictions can exceed the rating of the country in which their assets or cash flow are domiciled, though the degree varies materially. The extent by which entity or transaction ratings can exceed those of the 'host' sovereign ranges from close linkage to sovereign ratings for banks, public finance and domestic corporates to greater de-linkage possible for structured finance and international corporates.
On the one hand, transfer & convertibility (T&C) risk within the eurozone is extremely low as capital controls would be difficult to operate, costly and contrary to the law. Furthermore, the euro is a global reserve currency and the union's membership includes a number of 'AAA' economies.
On the other, residual risks of operational challenges in a defaulting eurozone country and the tail-risk of a country leaving the euro do present real credit risks. A Greek exit has been actively discussed by policy makers and is a material risk. In Fitch's view, the risk is still low for other countries.
INDIVIDUAL SECTOR CONSIDERATIONS -- Banks
Bank ratings operate with tight constraints relative to the sovereign ratings assigned to their host countries. In general, bank ratings will be capped by the sovereign; exceptions are rare and limited to ratings one or two notches above the sovereign in the eurozone.
As with banks, insurance ratings operate with tight constraints relative to local sovereign ratings. In general, insurance ratings will be constrained by the sovereign with exceptions limited to one or two notches above the sovereign in the eurozone.
Despite flexibility in the context of sovereign constraint within a currency union, even globally diversified corporates would face a degree of tail-risk from a redenomination event. This risk may constrain corporates to a maximum gap to their host sovereign of six notches, subject to the corporate's individual profile. The practical impact of this on ratings is extremely low, however, given the concentration of peripheral eurozone corporate issuers at the 'BBB' and below levels.
-- Structured Finance and Covered Bonds
Structured finance transactions and covered bond programmes within the eurozone can achieve ratings with a maximum uplift of six notches from the sovereign rating. Additional stresses may be applied for ratings up to the maximum to reflect worsening macroeconomic considerations in sovereign jurisdictions that have been downgraded. A tighter cap usually applies for covered bonds when the sovereign is lower-rated due to links with financial institution Issuer Default Ratings (IDRs).
-- Public Finance
Public finance entities typically are directly constrained by their respective sovereign's foreign and local currency IDR. Exceptions for fiscally autonomous regions (e.g. in Italy and Spain) are rare (17 Fitch-rated entities currently), and limited to a maximum of three notches above the sovereign's rating.
More information on each sub-sector's approach, and a graphic summary of approaches across sectors, are available from the cross-sector report: "How Sovereign Ratings Relate to Other Asset Class Ratings in the Eurozone", available from .
Link to Fitch Ratings' Report: How Sovereign Ratings Relate to Other Asset Class Ratings in the Eurozone