No double-dip recession but Europe a worry: Greenspan

WASHINGTON Sun Aug 7, 2011 1:50pm EDT

Alan Greenspan, former chairman of the Federal Reserve, testifies before the Financial Crisis Inquiry Commission hearing on Capitol Hill in Washington in this file image from April 7, 2010. REUTERS/Kevin Lamarque

Alan Greenspan, former chairman of the Federal Reserve, testifies before the Financial Crisis Inquiry Commission hearing on Capitol Hill in Washington in this file image from April 7, 2010.

Credit: Reuters/Kevin Lamarque

WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan on Sunday downplayed the risk of a double-dip recession in the United States, saying its domestic economy was in better shape compared to its European peers.

A double-dip recession "depends on Europe, not the United States," Greenspan told NBC television's "Meet the Press." "The United States was actually doing relatively well -- sluggish, but going forward -- until Italy ran into trouble."

The U.S. economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising fears that the economy was sliding back into recession.

Those fears were calmed somewhat last week when a debt deal was agreed before the August 2 deadline as well as data showing that employers added 117,000 jobs in July. But Standard & Poor's downgrade of the country's top-notch "AAA" credit rating late on Friday to "AA+" could hurt the recovery.

"With all of this bickering going on, the economy is slowing down," Greenspan said. "You can see it in all the data. I don't see a double-dip, but I do see it slowing down."

Europe, which buys a quarter of U.S. exports and houses the operations of many American companies, would determine the course of the U.S. economy's recovery, Greenspan said.

European leaders are struggling to contain a sovereign debt crisis, which has spread to Italy, the euro zone's third-largest economy, and is causing turmoil in global financial markets.

Greenspan said Italy's troubles could contribute to destabilizing the European and U.S. economies.

"When Italy showed signs of significant weakness in selling its bonds ... it created a massive problem within Europe because Italy is a very large country that ... indeed cannot be bailed out," he said. "And that's what's causing our problem."

Greenspan said despite the S&P downgrade, U.S. Treasury bonds, unlike Italian bonds, were still a safe investment.

"This is not an issue of credit rating. The United States can pay any debt it has because it can always print money to do that. There's zero probability of default," he said. "What I think the S&P (downgrade) did was to hit a nerve. ... It's hit the self-esteem of the United States, the psyche. And it's having a much profounder effect than I conceived could happen."

Markets in the Gulf region and in Israel, among the first to trade since the U.S. credit downgrading, tumbled on Sunday amid worries the U.S. downgrade and European debt woes may trigger another global downturn.

Greenspan said the same was likely to happen worldwide when global markets open on Monday.