Look to 2013 for Big Drop in US Stocks, Euro Defaults

Defaults in euro zone sovereign debt and a major fall in US stocks and are unlikely before 2013, according to a research report by Smithers &Co.

Sharon Lorimer

The recent agreement in the euro zone, according to which the European Financial Stability Facility (EFSF) will be allowed to buy sovereign bonds in primary markets, while maturities of loans to troubled countries were extended, is "further evidence that sovereign defaults will be postponed until 2013," Smithers analysts wrote.

"We see defaults as inevitable and requiring large increases in equity of the zone's banks," they wrote. "We doubt whether this is yet understood by politicians, particularly in France and Germany. The hope is clearly that postponement will provide a cure, which seems improbable."

European leaders continue to ignore the fact that, at the current levels of debt to gross domestic product, austerity is not a viable solution and default can be avoided only if sufficient subsidies are provided by solvent countries, but German voters will not agree to pay these subsidies, they added.

"The only effective discipline on borrowing is through losses to lenders arising from defaults (aka debt reconstructions) by member states," they wrote.

In the US, the main support for stock markets are corporate purchases, "which are continuing at a high level," Smithers analysts wrote.

"When the US fiscal deficit is seriously reined in, deteriorating corporate cash flow and falling profits are the most likely trigger for a major fall in equities," they added. "This seems unlikely before 2013 and although 'coming events cast their shadows before,' it seems too early for markets to be worried."