June 13 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said that financial markets, roiled by the collapse of the subprime-mortgage market, have shown a ``pronounced turnaround'' since March.

The worst is over for the credit crisis, or will be soon, and there's now a ``reduced possibility'' of a deep recession, the former Fed chairman said in remarks via satellite today to a conference in Mexico City. He added that he has a ``sense'' that tax rebates have helped retailers.

Greenspan's remarks echo the assessment of Fed Chairman Ben S. Bernanke this 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.

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 to 50 basis points, he said. ``And more significantly when it narrows to 25 basis points, near what it was Aug. 8.''

A basis point is 0.01 percentage point.

Crisis Measure

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 today, down from a high for the year of 90 basis points in April. It averaged about 19 basis points over the past five years.

A government report yesterday showed that retail sales in May rose 1 percent, twice as much as economists had forecast, as consumers spent the federal tax rebates from a fiscal stimulus plan. U.S. gross domestic product grew at a 0.9 percent annualized pace in the first quarter, capping off the weakest six months in five years.

The persistent slump in the housing market is putting ``major downward pressure'' on the economy, said Greenspan, who served as Fed chairman from August 1987 to January 2006.

He said housing remains a ``critical problem'' and financial markets may not recover fully until home prices stabilize, ``perhaps by the end of the year.''

The former chairman reiterated his view that there will be a test of the Fed's independence in the next few years as inflation accelerates.

Fed policy makers will have to put ``increasing pressure'' on money supply to combat inflation, and ``as a result you will see interest rates rising,'' he said.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

Last Updated: June 13, 2008 15:18 EDT