Trichet and Greenspan say global economy will take time to recover

The president of the European Central Bank, Jean-Claude Trichet, and the former chairman of the US Federal Reserve, Alan Greenspan, both warned yesterday that the global economy may take considerable time to recover from the international credit crisis.

M. Trichet warned that the eurozone was "currently witnessing a significant market correction with a reappraisal of risk," though he said the EU had "successfully weathered several common shocks", including the dotcom bust and the 11 September terrorist attacks.

M. Trichet said he was proud the ECB had acted quickly and decisively to address money markets' needs for extra funds, "episodes of high volatility and turbulences on various markets having threatened in particular the normal functioning of the money market".

Before the ECB's crucial interest rate decision on Thursday – coinciding with the next announcement by the Bank of England's Monetary Policy Committee – M. Trichet's remarks indicate a certain amount of confidence and an awareness that the instincts of central banks during past crises, and of the Fed today, is to cut rates.

The ECB president is also extremely keen to demonstrate his political independence in the context of remarks by the French President, Nicolas Sarkozy. He has suggested that interest rates ought to be cut to reduce the value of the euro against the US dollar, which is making life tough for continental exporters. The euro has hit record highs against the dollar and major trading currencies in recent days.

Mr Greenspan warned yesterday that the US housing market has a long way to go before stabilising after the sub-prime crisis, spell-ing bad news for American consumers. He added that more house-price declines were likely, given a surfeit of supply, but also pointed to signs that the lending crisis could be coming to an end as demand for more risky assets grows.

Mr Greenspan said the current housing crisis was the worst he had seen in his career. He expected the absorption of excess inventories of unsold homes to be a prolonged process, which had barely got going. This would involve further falls in house prices, and further cuts in construction.

Mr Greenspan also warned he expected there to be further volatility ahead, which he indicated was a euphemism for recession.

The sub-prime crisis was, he said, merely the "catalyst" for an "accident waiting to happen" in asset prices of all kinds, not just housing. The former Fed chairman indicated that about the best that could be hoped for was a slowdown in the growth of total stock returns.

He foresaw the need for a good deal more monetary stringency in future to keep inflation below 2 per cent.

Mr Greenspan, who is continuing to promote his memoirs on an extensive book tour, also added to the growing criticism of credit ratings agencies, which have been attacked for failing to issue warnings about the credit crisis. Asked about the role of such agencies, he said he thought their ratings were irrelevant.

Pushed on the probability he gave to a global recession developing, Mr Greenspan, who this weekend held talks with the Prime Minister, Gordon Brown, repeated his line that it lay between a third and 50 per cent.