Former US Federal Reserve chairman Alan Greenspan has claimed a default by Greece is "almost certain" and could cause a double-dip recession in the US.
“The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan, 85, said in an interview. “The chances of Greece not defaulting are very small.”
Greek Government bonds slumped, pushing the yield on the two-year note above 30pc for the first time, amidst a Government reshuffle and fears the country will fail to meet its obligations under the EU/IMF loan agreements.
His comments came as The International Monetary Fund is preparing to pump more money into Greece’s stricken economy in an attempt to calm turmoil on the financial markets.
The IMF said it stood “ready to continue its support” for the country providing the government introduced far-reaching economic reforms. It was threatening to withhold support for Greece, which was due to be paid next month, but this is now thought unlikely.
A new bail-out package, the second in 13 months, is expected to be agreed over the next few weeks.
Greek Prime Minister George Papandreou today named a new cabinet to muster support for painful economic reforms, despite public unrest and a split in his party that could push the country closer to debt default.
The defence minister Evangelos Venizelos has been appointed finance minister. And finance minister George Papaconstantinou becomes the environment minister in the reshuffle.
More than 20,000 people protested in Athens this week against wage reductions and tax increases, with police using tear gas on crowds and strikes paralyzing ports, banks, hospitals and state-run companies.
The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” said Mr Greenspan, who ran the central bank from 1987 to 2006.
That may leave some U.S. banks “up against the wall.”
Greece’s debt crisis has the potential to push the U.S. into another recession, Greenspan said. Without the Greek issue, “the probability is quite low” of a US recession, he said.
“There’s no momentum in the system that suggests to me that we are about to go into a double-dip,” Mr Greenspan said.
Mr Greenspan, appointed Fed chairman by Republican President Ronald Reagan, was once described as “the greatest central banker who ever lived” by economist Alan Blinder, the central bank’s former vice chairman.
He has since been blamed for contributing to the U.S. financial crisis by keeping interest rates low for too long and failing to regulate the mortgage market, according to critics including Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh, and members of the Financial Crisis Inquiry Commission.
Meanwhile, German Chancellor Angela Merkel has said she wants to work with the European Central Bank on resolving the Greek crisis.
"We would like to have a participation of private creditors on a voluntary basis," Ms Merkel told reporters in Berlin at a joint press conference with French president Nicolas Sarkozy.
"This should be worked out jointly with the ECB. There shouldn't be any dispute with the ECB on this."
The two leaders said the so-called Vienna initiative of 2009, which encouraged creditors to roll over expiring bonds, could be a model for helping Greece.
Ms Merkel and Mr Sarkozy are meeting ahead of a gathering of European Union finance ministers next week to try to reach an accord over how to get bondholders to share in bailout costs.