Former US Federal Reserve chairman Alan Greenspan said Sunday he believes the financial markets will react negatively to the downgrade of the US credit rating, and will take “a while” to settle.
“Considering the momentum in which the market went down over the last week, it’s very unlikely — if history is any guide — that this isn’t going to take awhile to bottom out,” Greenspan said on NBC’s “Meet the Press” show.
“So the initial reaction, in my judgment, is going to be negative,” he said.
Standard and Poor’s lowered the US credit rating from a sterling AAA to a AA+ rating on Friday largely because of the failure of bitterly divided US leaders to reach a consensus on containing the country’s spiraling debt.
The credit downgrade “hit a nerve,” an indication “that there is something basically bad is going on. And it’s hit the self-esteem of the United States, the psyche. It’s having a much profounder effect that I conceive could happen.”
Greenspan said he does not expect a “double dip” recession but said: “With all of this bickering going on, the economy is slowing down — you can see it in all of the data.”
“This deficit problem that sits out there is much larger than we’ve been calculating, because the actual numbers employed by those who are calculating the deficits are based on a level of economic activity which we are not achieving.”
Greenspan, however, said that US Treasury bonds are still a solid investment.
“This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that. There is zero probability of default,” Greenspan said.
Any chance of a ‘double dip’ recession now depends on Europe, Greenspan said.
“The United States was actually doing relatively well, sluggish, but going forward until Italy ran into trouble, that destabilized the European system and the crisis reemerged,” he said.
“When Italy showed signs of weakness and selling its bonds — the yield is now over 6 percent, which is an unsustainable level — it created a massive problem in Europe because Italy is a very large country, cannot be easily bailed out and indeed cannot be bailed out.”
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