Markets show ‘pronounced turnaround’: Greenspan Business Times - 16 Jun 2008
June 17th, 2008 by ALVIN SOONG
(NEW YORK) Former Federal Reserve chairman Alan Greenspan said that financial markets, roiled by the collapse of the sub-prime mortgage market, have shown a ‘pronounced turnaround’ since March. ‘The worst is over in the financial crisis or will be very soon,’ the former Fedchairman said in remarks via satellite on Friday to a conference in Mexico City. ‘There is a reduced possibility of a large, intense recession.’ He added that he has a ’sense’ that tax rebates have helped retailers.
Mr Greenspan’s remarks echo the assessment of Fed chairman Ben S Bernanke last week, who said that the danger of a ’substantial downturn’ in the economy had receded. Economists surveyed by Bloomberg News this month indicated a smaller likelihood of a recession compared with May.
Mr Greenspan also offered a measure for telling when the markets have returned to normal.
‘We will learn that this crisis has come to an end’ once the gap between the London Interbank Offered Rate and the overnight index swap rate narrows past 25 basis points, near where it was on Aug 8, he said. A basis point is a 0.01 percentage point.
Libor is a benchmark rate for loans between banks, while the so-called OIS rate is a measure of what traders expect for the Fed’s benchmark rate. The spread between three-month Libor and the equivalent maturity OIS rate was about 69 basis points on Friday, down from a high for the year of 90 basis points in April. It averaged about 19 basis points over the past five years.
The spread is ‘unlikely’ to reach the lows of Aug 8 and earlier because ‘risk was very heavily underpriced’ at the time, Mr Greenspan said in a subsequent telephone interview. The financial crisis deepened in August when European banks acknowledged
their vulnerability to rising delinquencies on American sub-prime mortgages and some funding markets seized up, forcing Countrywide Financial Corp, the biggest US mortgage lender, to tap credit lines with banks.
Mr Greenspan added that rebate checks that are intended to stimulate consumption are bringing about increased sales. ‘There is a sense it is buoying the retail market,’ adding that the US economy has shown a ‘remarkable resilience’. A government report
on Thursday showed that retail sales in May rose one per cent, twice as much as economists had forecast, as consumers spent the federal tax rebates from a fiscal stimulus plan. US gross domestic product grew at a 0.9 per cent annualized pace in
the first quarter, capping off the weakest six months in five years.
At the same time, Mr Greenspan said that rising food prices have had a ‘devastating’ effect on Mexico and globally. He said that he believes speculation has contributed to the rise in oil and food prices, while declining to forecast oil prices. Mr Greenspan’s comments compare to his view in February that the odds of a recession were ‘50 percent or better’ and that the slump could be deeper than the previous two contractions. — extracted from Bloomberg in conjuction with SPH.
