Credit Suisse: 50% chance of US debt rating downgrade

27th Jul 2011 14:16

Credit Suisse said there is a 50% possibility of a ratings downgrade of the US sovereign debt even if the debt ceiling is raised by the deadline on August 2 but expects the move to have low impact.The brokerage firm played out two alternative scenarios, saying an extended period of no rise in the debt ceiling could wipe off 0.5% to 1% from the gross domestic product (GDP) numbers and equities may tumble 10%-15%, whereas in an event of a default, GDP could fall 5% and equity markets plunge 30%. Also, Credit Suisse indicated that a default scenario is "very unlikely.""We agree with our US rate team that the likelihood of a US sovereign rating downgrade is around 50%. The lack of a long-term plan for improving the public finances in combination with either no agreement or a weak agreement on the debt ceiling clearly raises the probability that rating agencies will downgrade the US credit rating," Credit Suisse analyst Andrew Garthwaite said in the note.The note said government debt, at 99% of GDP, is worse than in Portugal - and the USA's cyclically adjusted primary budget deficit is the worst among major economies, at 6.4%, according to the IMF.However, the firm remained concerned over the International Monetary Fund (IMF) estimates that fiscal tightening in the US will be equivalent to nearly 2.5% of GDP next year as its economists predict that most of the tightening will not take place leading to a "relatively low 1% of GDP.""We believe that only a sharp rise in bond yields will prompt significant fiscal tightening (10-year real rates rising to 2%, compared to 0.6% now). This is unlikely to occur until there is either a strong recovery in private sector loan growth, limiting bank lending to the government, or banks are overweight government securities - both are unlikely before 2013," Credit Suisse said. In the meanwhile, investors worried about the US public finances will turn their focus on "ultra-safe equities" like Britain's Centrica, French drugs maker Sanofi, Swiss pharmaceuticals manufacturer Novartis, US's Pfizer and Philip Morris.AR