Tags: Stocks | default | plunge | suisse

Credit Suisse: Default Could Send Stocks Plunging 30 Percent

Thursday, 28 Jul 2011 09:44 AM

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A default on government debt obligations could send stocks falling by 30 percent and the U.S. gross domestic product (GDP) contracting by 5 percent, according to global financial institution Credit Suisse.

The Obama administration has said unless Congress raises its $14.3 trillion debt ceiling by Aug. 2, it risks default, which has prompted ratings agencies to threaten downgrading the country's coveted AAA risk rating.

"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 is raised," Andrew Garthwaite, head of global strategy at Credit Suisse, says in research note, according to CNBC.

A downgrade would be bad but not the end of the world.

However, an outright default would be very bad under a worst-case scenario.

"This is very unlikely, but if it occurs, GDP could fall 5 percent plus, and equities by 30 percent," Garthwaite says.

Some Republicans argue they have offered more proposals to narrow deficits in exchange for their blessings to lift the ceiling, but don't see much in return from the Democratic White House.

Democrats say some Republican lawmakers in the House are calling for spending cuts alone to solve the problem and won't recognize the administration's plans for a balanced approach — a blend of spending cuts and tax hikes.

One plan proposed by Democratic Senator Harry Reid assumes $1 trillion in savings from winding down war efforts in Iraq and Afghanistan, which Republicans view with skepticism but may be acceptable in the spirit of compromise.

"We need to get an outcome. And to get an outcome, a Republican House, a Democratic Senate and a Democratic president would have to reach an agreement," says Republican Senate leader Mitch McConnell, according to the Associated Press.

"So I'm prepared to accept something less than perfect, because perfect is not achievable."

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