Today's Coming Crisis Movie

Thursday, July 28, 2011

If US defaults, stock markets will plunge 30%: Credit Suisse

In the very unlikely event that the United States defaults on its debt obligations, the country's economy would contract by 5 percent and stocks would fall by nearly a third, according to Credit Suisse.

While Andrew Garthwaite and the global strategy team at the Swiss bank see a 50-50 chance of a ratings downgrade of U.S. debt by the major ratings agencies, they remain confident such an outcome would not lead to disaster.

“We think there is a 50 percent chance of a ratings downgrade on U.S. sovereign debt.

This could happen even if the debt ceiling [cnbc explains] is raised,” Garthwaite, the head of global strategy at Credit Suisse, said in research note.

“We doubt it will have much effect," he continued. "Japan has a 1.1 percent yield and an AA- rating, many U.S. Treasury funds do not have credit-rating limitations and national bank regulators would probably keep risk weightings for U.S. sovereign debt at zero.”

If no budget deal is struck, but the U.S. does not default, Garthwaite predicts a bad time for stocks and the economy.

“As our economists point out, each month of no rise in the ceiling could easily take 0.5-1 percent off GDP.

In this case, equity markets would drop by 10-15 percent, prompting Congress to find a solution, and bond yields would fall to 2.75 percent.” If that proved to be the case, investors would in Garthwaite’s opinion need to get into defensive stocks and out of the dollar. (more)