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Greenspan: U.S. deficit could spark crisis

Alan Greenspan, former chairman of the Federal Reserve, the U.S. central bank, issued a sharp warning on Sunday. The United States must move to rein in its massive budget deficits or it faces the risk of a crisis in the financial markets.

Greenspan pointed out in an interview with U.S. network NBC that the deficit, which hit $1.3 trillion (949 billion euros) this year, may begin to frighten the bond market, which could undermine the recovery and push the economy back into recession.

This could happen if investors lose confidence that the U.S. government will meet its payment obligations. The higher interest rates that such a crisis would entail, would directly affect the economy, Greenspan said.

In this scenario, U.S. consumers and businesses will see their mortgage rates suddenly increase, resulting in less spending and investment and a new recession.

A commission set up by Barack Obama published in early December a draft report reduce the deficit and to stabilize the state debt.