MercoPress. South Atlantic News Agency

Greenspan warns about US current account deficit.

United Stated Federal Reserve chairman Alan Greenspan warned in Berlin about the unsustainability of the US current account deficit. The recurrent US deficit in international trade currently stands at over 500 billion US dollars per annum which is above 5% of GDP.

"Cumulative deficits which result in a marked decline of a country's net international investment position as is occurring in the United States raise more complex issues", said Mr. Greenspan addressing the meeting of G 20 leading world economies Finance ministers and Central Bank governors.

Financing a trade deficit needs support from foreigners investing in the US, but if they suddenly become reluctant to do so, the result could either be a sharp surge in interest rates or a fall in the US dollar.

Mr. Greenspan gave a broad hint he expected the dollar to bear much of the brunt of adjusting the current account deficit and made it clear US interest rates were on a clear upward trend.

"International investors would eventually adjust their accumulation of dollars assets or alternatively seek higher dollar returns to offset concentration risk, elevating the cost of financing the US current account deficit and rendering it increasingly less tenable".

This week also Director General of the IMF Rodrigo de Rato called on the US to take action to correct its current account deficit, insisting a change of policy was needed "to avoid getting involved in a traumatic situation".

Mr. Greenspan favoured reducing the large US federal budget deficit to help boost domestic savings.

"Alternative approaches to reducing our current account imbalance by reducing domestic investment or inducing recession to suppress consumption obviously are not constructive long term solutions".

The US Fed chairman further on said that "interest rates have been advertised for so long that anyone who has not hedged his position by now is desirous of losing money".

President George Bush has said his administration plans to halve the federal budget in his coming four years and Secretary of the Treasury has insisted that "a strong dollar is the official policy" of the US government.