A disorderly Greek sovereign default would be far more damaging to corporate credit ratings if it results in Greece leaving the European monetary union as a result, says Fitch Ratings.

In a new report, Fitch says that while a default would certainly weaken Greek corporates’ credit profiles, the severity of the outcome would depend greatly on whether or not Greece remained within the euro. It believes that a scenario that involves leaving the euro would do much more damage than a disorderly default within the monetary union.

The rating agency says that Greece’s planned referendum to approve the economic and financial conditions associated with the new EU-IMF programme has reawakened market concerns about a disorderly default, and it believes rejection of the EU-IMF programme would increase the risk of a forced and disorderly sovereign default, potentially leading to a Greek exit from the euro.

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It has run two hypothetical scenarios about the potential effect of a disorderly default on corporate ratings. In the scenario where a country defaults on its debts but stays in the euro, it says that many previously strong credit profiles would drop below investment grade due to a worsening macroeconomic climate, a temporary lack of access to funding, and potential stress on utilities’ regulatory remuneration mechanisms. “However, we would generally expect companies to struggle on, with limited numbers of low-impact defaults driven by liquidity problems,” it says.

In the scenario where it exits the euro, there are added challenges of redenominating local currency cash balances and earnings, capital controls, and hyperinflation. “Combined, these make it very hard for companies to cover what would now be foreign currency euro debt owed to non-domestic bondholders and banks,” it says.

Fitch predicts the highly rated utilities sector would be hardest hit due to its domestic focus, high debt load, and the likely disruption to regulatory tariff frameworks. Industrials and telecoms would fare better as they have greater geographical diversification to shield them from a struggling domestic economy and give them access to foreign currency, it says.