Parmalat fails to spark Enron-style panic

The collapse of Parmalat has been dubbed Europe’s Enron by some. But managers doubt its decline will have a wide-ranging impact on the creditworthiness of firms on the continent.

Scottish Widows Strategic Income fund manager Gareth Quantrill says: “The way that people talk about US companies is generic. You cannot do that for European companies. There is a huge difference in terms of corporate standards, how firms are structured and what is acceptable.”

And Quantrill notes that the direct impact on Italian financial markets has been limited: “There has been a little bit of weakness in Italian bank stocks but that is more to do with their direct exposure to Parmalat rather than Italian companies themselves.”

The bond fund manager, who holds high-yield Italian paper issued by aerospace company Avio and Teksid Aluminium, says yields widened on the bonds as well as on credit issued by Fiat after Parmalat defaulted. But prices have since recovered, he adds. He says present market sentiment is limiting the impact: “Markets are relatively buoyant. With low interest rates in the US, risk appetite is very high. That is preventing the normal reaction, which would be a flight to quality.”

Comparing Parmalat to the demise of WorldCom – which heralded a period of collapsing bond prices for telecom firms – Quantrill says: “In that case a lot of the fraud was covering up poor operational performance, so it had a particular impact on other long-distance data companies like Cable & Wireless.”

Axa Global High Income joint fund manager Stuart Stanley says: “The underlying market Parmalat operates in is solid. Food production is a safe and stable business.”

The limited impact on markets came as a shock to Aegon Optimum Income fund manager Philip Milburn: “I have been surprised at how the market has shrugged it off as an isolated event. With Enron and WorldCom, the market panicked.”

But there is one fly in the ointment, says Quantrill. While he has not reduced exposure to either Avio or Teksid Aluminium, he says there are fears that Italian banks could get preferential treatment to foreign financials when compensation is handed out. If this transpired, he would reconsider these stakes: “From an international borrower’s point of view it would increase the return you would want for lending money. That would cause a big issue for lending to other Italian companies.”