Greenspan says euro breaking down, not hopeful of quick US recovery

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Dr. Alan Greenspan (L), former chairman of the Federal Reserve, and Austan Goolsbee, former chair of the White House Council of Economic Advisers, right, are interviewed on NBC's "Meet the Press" in Washington. Photo - William B. Plowman/NBC News/AP

Former Federal Reserve ChairmanAlan Greenspansaid fissures in Europes common currency may lead to slowing down of theUS economy.

The main factor holding back the US economy is the uncertainty created by the Europes sovereign debt crisis which is restraining consumers from spending and companies from hiring, former Federal Reserve Chairman Alan Greenspan said in an interview.

The euro zone crisis matter because the world economy is extremely integrated and about 20% of US exports go to Europe, Greenspan added. Though the odds of a new recession in the US have risen, he said he doesnt expect that to happen soon at least for now.

The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system, Greenspan said in Washington.

Emergency steps such as unlimited loans from theEuropean Central Bankare keeping many banks inGreece,Portugal, Italy andSpain solvent and easing lending by other Europe institutions. Greenspan said a contraction in Europe would hurt profitability and stock values of American companies since Europe is the target market for about 20 percent of US exports and about 20 percent of foreign-affiliate earnings.

A lack of confidence in euro-denominated debt is straining the regions banks, Greenspan insisted. That stuff has always been thought of as the ideal collateral and now its getting highly questionable, he said in a question-and-answer session at the Innovation Nation Forum in Washington.

The problem is that there is a growing cleavage in the economic and analytical and banking circles as to whether the Euro, which is the crucial issue here, should be 17 countries with very significantly different cultures regarding the role of government,consumer spendingand inflation, Greenspan added while speaking at the think tank’s conference.

Asked if the breakup of the euro was one possibility, he replied, obviously.

CONCERNS

Greenspan also said he is less worried about a double-dip than most people are but “will certainly grant that the odds are rising. The reason we are so sluggish is the level of uncertainty, he elaborated.

The economy grew at a 1.3 percent in the second quarter of 2011, according to the US Commerce Department. That followed growth of 0.4 percent in the first quarter, the slowest since the second quarter of 2009, when the economy was still mired in recession.

Chicago Fed National Activity Index, another measure to guage the US economys momentum, improved to minus 0.06 in July from minus 0.38 a month earlier, the regional bank announced Tuesday. The index is a weighted average of 85 economic indicators, with readings less than zero indicating below-trend growth and average readings below minus 0.7 percent over three months signaling an increasing risk that a recession has begun, according to the Chicago Fed.

Greenspan said Aug. 7 on NBCs Meet the Press that the chance of a return to recession depends on Europe, not theUnited States. “The United States was actually doing relatively sluggish but still going forward untilItalyran into trouble. That destabilized the European system and the crisis reemerged, he opined on the popular US news show.

ASSET PURCHASES

Concern about the government debt of Italy and Spain prompted the European Central Bank on Aug. 8 to start buying Italian and Spanish assets to lower their borrowing costs, as Europes sovereign-debt crisis nears its third year.

A four-week global equity rout has wiped about $8 trillion from companies market value as Europes sovereign debt-crisis and worsening economic reports in the U.S. raised concern the global economic recovery is faltering.

TheS&P 500fell 16 percent from July 22 through the end of last week and its members trade at an average 11.3 times estimated earnings, near the lowest level since March 2009.

The Standard & Poors 500 Index advanced 0.9 percent to 1,134.34 at 10:23 a.m. inNew York on Wednesday.

What has been the greatest thrust coming out of the recession has been the extraordinary rise of stock prices in the US, Greenspan, 85, the former chairman of the Federal Reserve from 1987 to 2006, said during the programme.

NO GOLD BUBBLE

Greenspan also declared that gold, which soared above $1,900 an ounce this week, was in a bubble.

Gold, unlike all other commodities, is a currency, he said. And the major thrust in the demand for gold is not for jewelry. Its not for anything other than an escape from what is perceived to be a fiat money system,paper money, that seems to be deteriorating.

After leaving the Fed, Greenspan founded a consulting firm named Greenspan Associates. He works as a consultant to Deutsche Bank AG, Pacific Investment Management Co. and hedge fund Paulson & Co and other financial institutions.

GROWTH SLOWING DOWN

Economic growth is slowing around the globe. TheFederal Reservethis month pledged to keepinterest ratesnear zero for another two years to bolster a recovery that is moving considerably slower than expected. European policy makers are struggling to contain a debt crisis, whileJapanhas cut its annual growth forecast on weaker export prospects.

A tumultuous time for the global economy means a volatile currency market, which has made managing finances difficult for exporters.

The eurozone debt crisis has been on investors’ minds for many weeks now. The problem spread like a virus across Europe with Greece first catching the debt flu some 18 months ago. The response from the EU and the International Monetary Fund (IMF) has been to bailout these countries in the form of cash loans in tranches in order to buy them time to cure their economic illnesses.

Ireland and Portugal also received similar bailout packages from international financial institutions. Analysts believe Spain and Italy are next on the list facing a tumultuous economic situation.

As the crisis re-emerged earlier this year the euro currency was hit hard. However, the market consensus now is that the US, as well as the EU, is dangerously close to recession.

MENA IMPACT

The euro’s appreciation against the dollar aided in reducing the losses of GCC domestic funds to less than one per cent in the first six months of 2011.

However, most funds experienced increased money outflows, which are expected to stabilise in the last quarter.

“It is clear that even faced with a deep crisis in the Eurozone, the euro showed strong resistance,” he said. “GCC investors gained from the 7 per cent decline of the US dollar against the euro over the first half, reflected mainly in bond funds as the European equity markets were mainly in negative territory.

“When currency appreciation is disregarded, stock investments have been in the red in most regions and sectors.”

With the ongoing global economic turmoil, Moonesawmy expects money outflows in the third quarter to be “bad”. “But end of the year should be better as the situation stabilises,” he said.

The dollar fell 0.6 percent to $1.4433 per euro at 4:26 p.m. in New York. It touched $1.45 before former Greenspan talked about the euro breaking down. Crude touched an intraday low of $83.40 a barrel on his remarks.

Greenspan is talking up the dollar, said Carl Larry, director of energy derivatives and research with Blue Ocean LLC in New York. The markets are jittery right now. Libya is still in flux and everybody is unsure about whats going to happen Friday.

Sources: Bloomberg, WSJ, Belfasttelegraph, Businessweek, Gulfnews

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