Greenspan: Greek Default “Almost Certain,” Could Cause Double-Dip

(June 17, 2011) — With the country rejecting further austerity measures mandated by the European Union, a Greek default is “almost certain” said former Federal Reserve Chairman Alan Greenspan, who also warned of the accompanying possibility of a double-dip recession.

“The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan said in June 16 interview with Charlie Rose. “The chances of Greece not defaulting are very small.”

Greenspan’s comments came on the eve of Greek Prime Minister George Papandreou’s decision to sack the country’s finance minister in an effort to shore up flagging support for his government’s unpopular economic reforms. Investors have fled Greek bonds, causing the yield on the two-year note to rise above 30% for the first time.

A Greek default could have grave repercussions in the United States, said Greenspan, who ran the central bank from 1987 to 2006. Some U.S. banks would be “up against the wall” if Greece defaults, and a double-dip recession would likely result.

Greenspan cautioned, however, that without the Greek debt crisis “the probability is quite low” of another U.S. recession. “There’s no momentum in the system that suggests to me that we are about to go into a double-dip.”

Earlier warnings had underscored the seriousness of the threat that a Greek default posed for the global economy. In May, the International Monetary Fund (IMF) warned that Greece’s debt crisis could spread to core euro zone countries and the emerging economies of Eastern Europe.