With David Lipton, First Deputy Managing Director and
Gerry Rice, Acting External Relations Director
September 22, 2011
Webcast of the Press Conference
MR RICE: Thank you and good morning everyone. Welcome to this IMF press conference on the 2011 Annual Meetings. It is my pleasure to introduce this morning the Managing Director of the IMF, Christine Lagarde. We also have with us this morning Mr. David Lipton, the First Deputy Managing Director of the IMF.
Could I ask, please, that you keep the questions as succinct as you can. That will allow as much opportunity as possible to get as many questions as possible. Of course, also to identify yourselves.
So, Managing Director.
MS LAGARDE: Thank you very much and good morning to all of you. Welcome to the Annual Meetings. I hope it was not too difficult for you to access and you were able to channel through the security gates and all the appropriate devices we put in place at the time of the Annual Meetings. It is a big event and one that both David and I are very pleased to actually chair, organize, and develop for the first time.
I have attended previous Annual Meetings of the IMF, indeed, but in another capacity, as a beneficiary, so to speak, as a shareholder of the institution, and it is certainly my great pleasure to have my first Annual Meetings as the Managing Director.
Now, it is an important moment in the year because our 187 members get together. And while some of you have on their mind particular issues relating to the advanced economies—and I'll come to that in a moment—you have to appreciate that for us it is important that the entire constituency of the IMF gets together. It is 187 members. There are some advanced economies. There are some emerging markets. There are some low-income countries. And each and any one of them is a member entitled to the same attention, to the same level of service from the institution.
We value them all and we regard them all as extremely important. I'm saying that because of two reasons. One, there is a huge focus on what is happening in the advanced economies, and it is perfectly legitimate. But we have to appreciate that we are an institution that is available for 187 members. And, what is more, particularly based on the findings from recent work that has been conducted by the IMF—and I'm thinking in particular of the spillover reports, of the multisurveillance work that has been conducted. We are all extremely interconnected, and interconnected via the financial systems and the financial structures.
With that in mind, I would like to take you through three specific themes. One is the general outlook. The second one is what we see as possible policies going forward. And three, what degree and kind of leadership is actually required. In that context, what the Fund can do.
Concerning the outlook, some of you may have attended the World Economic Outlook press conference that took place a couple of days ago, and you will have certainly understood and concluded that our view is that the current economic situation is entering a dangerous phase. I have said that. We repeated it. There is a situation where the growth has slowed down. You will have seen that we have reduced our forecast on a global basis, by regions as well, and we see downside risks on the horizon.
The recovery that one was expecting has weakened, and it is clearly a risk that we see from an economic perspective, from a social perspective as well because with less growth we see also fewer jobs.
If we turn to the various categories of economies, and if we look first of all at the advanced economies, we know that there is this heavy debt of sovereigns, households, and bank risks that could actually suffocate the recovery. This could have serious repercussions from an economic perspective. From a social perspective as well.
If we turn now to the emerging markets, they are still not doing enough to boost their domestic markets with a view to rebalancing, as was advocated and has been advocated by the Fund for a long time. We expect a dual rebalancing to take place, one that goes from public to private demand, and one that goes from the deficit countries to the surplus countries, or the other way around. And that is not moving fast enough in the emerging markets.
Now, if we turn now to what can be done in terms of policies, because you have been writing a lot about the state of the world. We have presented our WEO about the state of the world economy, and it is not good enough to only comment about the downside risks that we see and the difficulties in the various categories of countries, with the degree of interconnectedness that I mentioned right from the start. In other words, it is not just a problem that concerns the advanced economies, or the emerging markets to a lower degree, but it is a problem that concerns just each and every country, each and every member of our institutions. We are in this together and we can pull out of this together, because from the Fund's perspective our analysis says that there is a path for recovery. There is a path for recovery. It is narrower than it was three years ago when we first were hit by the financial crisis, but there is a path for recovery.
I would like to go into the policies as we see them. I see them around four different categories of actions. They all start with an “R”, to make it easier.
The first thing that needs to happen is repair. The advanced countries need fiscal consolidation, and that is a matter of priority. Fiscal consolidation is a matter of priority. Equally, consolidating too fast, too heavy for some countries is going to be harmful for the potential growth that we see.
So what is the option? It is not a dilemma. It is a question of timing. It is a question of confidence. What needs to happen is that medium-term, long-term, solid, well-anchored measures that will actually aim at restoring good public finances, by reducing deficits, by stabilizing debt and gradually reducing it, has to be first and at the forefront of any agenda in those economies.
But having said that, as long as in the medium term and long term this is well-anchored, some countries can accommodate growth in the short term. If you are asking me which countries? Clearly, the United States is one that comes to mind right away. But it is a balancing act once again and there has to be a parallel track of what can accommodate growth in the short term by slowing down the pace of consolidation, and how strongly and definitely and well-anchored are the measures that will deliver deficit reduction in the longer term.
Repair, again, is not just about the sovereign debt and the public finances situation, although that is the first that comes. The second is the repair of the household balance sheets, and repair, also, of the banks' balance sheets. Not all of them, but clearly quite a few of them.
In the U.S., it is mainly about household debt issues, and in Europe, it is this twin problem of sovereign debt and the need to strengthen bank capital buffers. Now, why do I say that? Not just because of this loop-the-loop between sovereign debt potential exposure and the bank balance sheets, but because it is critical that to fuel growth, banks be in a position to finance the economy, to finance enterprises, to finance households, to finance local governments. To do that they need to have the balance sheet that will actually support credit to the economy. That is really with a view to stimulating, encouraging, comforting, financing growth that we recommend that there be capital buffers in quite a few of the banks, notably some European banks.
My second “R” is about reform, and here the priority is clearly reform of the financial sector. Three years down the road we are still not as advanced as we should be in terms of financial reform. And it is also that degree of uncertainty and work in progress that is fueling this anxiety and lack of confidence of some of the investors. So, financial reform has to be pursued, has to be pursued to its term. There has been huge progress, no doubt about it. But, more needs to be done.
The second area where progress needs to be made is in relation to the social dimension. In other words, finding the sources of growth that will be sufficiently inclusive in order to actually address social issues that are right below the surface. And that applies not only to the advanced economies.
The third “R” after my repair, reform, is rebalancing. I touched on that very briefly. It is the rebalancing between the public sector, to the private sector, that has begun to happen. It has stalled a bit, and that has to clearly be pursued and continued. And the other rebalancing is that which is this rebalancing from the deficit account countries to the surplus account countries, the latter having to expand their domestic markets in order to fuel growth, not just by an export-driven economy, but by a strong domestic base at home.
My final “R” is about rebuilding. It applies more specifically to the low-income countries, because the low-income countries traveled through the last three years ever since the financial crisis, and despite the high commodity and high oil prices, they have navigated the crisis rather well and better than other economies. But in doing so they have absorbed and they have used and extinguished for some of them the buffers that they had developed. Those low-income countries need to rebuild their buffers and they need to strengthen again. And we need to help them in helping themselves. That is a matter for the donor community, a matter for the international institutions, and certainly the IMF will stand ready to do that.
The final issue before I turn the floor over to you is an issue of leadership. Many of you have written it. The technical solutions, the economic comprehensive approach exists. It has been identified. There are disagreements as to whether the deficit should be reduced by more spending cuts or more revenue generating. But the set of solutions and methods to address the situation is quite well known.
What is needed, and what certainly we hope to be able to help generate on the occasion of the Annual Meetings is the political leadership and the degree of synchronization that needs to happen for that path to recovery to be made possible. So, collective leadership is definitely needed. It is not going to be a matter for one or two countries to lead the show. As I said, each and every country is engaged in that process and is at risk in the current situation, but can also participate in the solution.
So I think it is for that reason that an institution like the International Monetary Fund makes sense, not just because we provide very good analysis, very good surveillance work, and we will continue doing that, we will continue refining, fine-tuning our analysis and our reports, we'll be happy to take any questions you have in that regard, both David and I.
So we provide that. We obviously provide technical assistance, and we have been receiving more and more requests for technical assistance lately, in particular, for instance, from the Middle East and north African countries that are going through this unbelievable, historical transformation of their economies. So we will continue doing that. And we will shortly be opening yet another, I think the fifth technical assistance center in Africa.
We obviously participate in the process with our lending policies. In that regard we will also continue working on the facilities that are available to make sure that they are actually adequate for the needs of our constituencies, for the need of groups of countries, that are different. Our instruments have evolved over time. The flexible credit lines, the precautionary credit lines, the less strings attached to instruments we make available to low-income countries, we will continue in that regard.
What I think the Fund can also do, and help with, is try to facilitate comprehensive solutions that are so much needed. As I said, it is going to require political determination, will, the ability to look at the longer term, and an institution like the IMF can help in that regard. Not with a view to having the spotlight on us. Not with a view to claiming credit. But, with a view to encouraging the leaders to actually take action, and take bold and collective action now.
With that, I see many hands being raised here and there, so I will leave it to Gerry to take questions, and we will try to give you the answers.
MR RICE: May I ask again that you identify yourself, and if we can keep the questions very short, then we can have more questions and we'll try and go around the room. I will start with the front here. Thank you.
QUESTIONER: There's clearly a sense of panic in the markets around the world right now given the doubts of the political will to deal with this problem. Do you think markets are wrong in that sense? And also, can you give us a sense of how you think this current situation is different from the crisis in 2008?
MS LAGARDE: Number one, our action, our analysis and our proposed policy mix is not dictated by the day-to-day variation of the Dow Jones, the NASDAQ, the CAC or the DAX, and we really try to look at the fundamentals of economies. We try to look at the policies that have been decided, and more importantly the implementation of those policies.
I will give you an example. There are European countries, for instance in the euro zone, that have taken already very bold measures to address their deficit situation, to restore the public finances of their countries, and that goes very much below and under the radar screen. We at the Fund have a duty to our members and our duty to our honest analysis of the situation, to evaluate those measures. There are several European countries, for instance, that have taken those very necessary measures, and that are in the process of implementing them.
So, there is obviously a gap between the day-to-day anxiety and trepidation of markets, which have their own modus operandi. And what we at the Fund do in terms of what is the commitment, what is the implementation, is the policy rightly adjusted to the needs of the country, and we are seeing very good things coming out of that zone of the world in particular, and are not very much recognized by the markets.
If I look at the comparison between 2008 and now, in 2008 there was a much wider path for recovery, because the sovereigns had more room to maneuver. They could engage more in supporting the financial system, and they did at the time. And, they incredibly, ably managed to avoid protectionism, to kick start growth, to make sure that the financial pipes that fuel the economy were working again.
They don't have as much maneuvering room now. They don't have as much ammunition. I don't think that is the most important part, because if they pull their strength together, they have enough. I think what is lacking today, and I hope will be rejuvenated, is the collective momentum and the spirit that I saw, for instance, at the London G-20 meeting. That was a moment when all leaders came together. I hope that can happen again.
QUESTIONER: Recently we heard a lot of negative news about the job crisis, debt crisis, confidence crisis, political crisis. The IMF is designed as a crisis fighter and you once said you are good at managing the evils. I wonder, at this moment what bright spot do you see and how will you manage the evils compared as chairman of the world forum?
MS LAGARDE: As I tried to say, if the IMF can be a good facilitator, I can assure you that all of us will be able to set our egos aside because they are vastly irrelevant compared to the challenge ahead of us. When we go to work every day at the moment we think of the 40 million people that could be put back into poverty if we don't succeed, or the 20 million jobs that could be created if we succeed. Those are the challenges we have at the moment.
Reasons for hope? Well, I was at the G-8 meeting in Marseilles ten days ago for the Deauville Partnership. And I tell you, to see all the donors around the table putting together 38 billion dollars to actually support what is happening in the Middle East and north Africa. When I see us being able to put together a package of loans in the region of 35 billion dollars for the same purpose, when I see countries in the vicinity saying, "Look, we have gone through that, we can provide the technical assistance to our neighbors, and we'll be happy to do that and join hands and join efforts," those are signs of hope.
When I see European partners at their July 21st meeting, which I attended, being prepared to improve the governance, put in place a crisis mechanism, strengthen the discipline within the group, and significantly change the architecture of the euro zone, there is a sign of hope. I know it comes with a timing tag attached to it. And that is very annoying for the markets, to have to wait for parliament approval, to have to wait for yet another round of discussions. But our job here, as I said earlier, is to evaluate the policies, the implementation, their relevance relative to the set of economics of the countries concerned, and we have to take a medium- and long-term view. I think that there are signs of hope. It’s just a question of being prepared to see them, and having a little bit of patience, while pushing the leaders into the direction where they have to take much needed action, more action, than what has already been done.
QUESTIONER: [In French.]
MS LAGARDE: [In French.]
QUESTIONER: A couple of weeks ago Joseph Stieglitz mentioned the example of Argentina as a good example for European countries in trouble like Greece, that they should follow the example of making a default and then they would have a strong recovery. I would like to know if you share that view. And regarding what you said about an increasing technical assistance with countries, now the country has a technical assistance for the official data, I would like to know the status of the relationship between the country and the IMF, given what you have said a couple of months ago about the quality of the GDP and the CPI figures?
MS LAGARDE: Thank you for your question. One area which I will not compromise on—and David and I are exactly on the same page on that—is the quality of our work product, and the quality of our work product is obviously based on the quality of the data that we canvass from all over the world. So it might be sometimes regarded as a constraint. It might be slightly demanding. But, it is critical that we can rely on solid, consistent, data from across the world. That is helping us provide quality work. Otherwise, it is very difficult to reconcile or make assumptions. So that is an area where we will not compromise. Equally, it is an area where I want to engage in a constructive dialogue with Argentina. I don't see any reason why we could not have that dialogue. President Kirchner assured me that we should continue to have that dialogue, and I look forward to it.
On your question about Joseph Stieglitz's comments, Joe is a good friend and he has very thought-provoking analysis, and I always value his thinking. But I believe that comparisons are odious, and you cannot necessarily compare what has happened in one country with what is happening in another one. The pegging to the dollar is vastly different from being in a seriously integrated monetary zone. More importantly, the latest that we have heard is the very solid commitment of the euro partners to stand by any member of the zone, and I think that is a critical point, both in terms of collective destiny, but also in terms of economic analysis, as far as financing is concerned.
QUESTIONER: Managing Director, you mentioned the resolution of the European countries July 21st, given what we have seen then, not just debates in parliament, but continued discord between countries and within countries, do you not think the euro zone is fundamentally flawed as an institution to be running a currency? Is it not possible, if you look at things like Italian bond yields, that the markets will drive these countries into default by the time that the governments have made up their minds?
MS LAGARDE: I think it will be in the best interest of all if we were to look at the positive side of things rather than the negative side of things. There is obviously a gap between very solid, very strong, governmental commitments at the highest level of those states, and the implementation time that is inherent to parliamentary life. As I said a couple of days ago at the Woodrow Wilson Center, we are no longer in the Napoleonic times when a leader could just snap his fingers and make it happen. We are in democracies, and it takes time.
I would like to observe that in their July 21st agreement there was indeed financial commitment. There was a political collective determination to be in it together. There was an open-ended financial support provided that countries were delivering under their commitment for those countries that are under program. There was also a collective drive to reinforce the governance and the discipline amongst the group.
Now, if you wait, that it happens just overnight because there is a publication the following day, of course it is not going to happen. But equally, I think, that we must collectively insist on implementation. I think the message is getting through. It will be critical in the case of Greece, in particular, that there is implementation by the Greek authorities, and implementation by the euro area partners. You have to also appreciate, and I know you do, Alan, because you are familiar with those issues, that it is not only about economics. It is not only about finance. It is also about a political, collective destiny amongst countries that have spent centuries fighting with each other, and which are determined to stay together.
It may have been flawed, it may have included deficiency in the architecture. But what the governments are now saying is: We are addressing that. We are strengthening the governance rules. We are strengthening the discipline. We are putting in place the right majority rules that will actually keep everybody on track, as was predicated in the growth and stability pact which has not delivered what it should have delivered, because it was not associated with the appropriate degree of discipline and rules.
QUESTIONER: Congratulations on your first Annual Meeting as MD and I'm sure we all here wish you great success. I want to ask a question. I'm from Russia, but in the spirit of the interconnectedness that you described and the need for leadership I wanted to ask about the United States.
I mostly cover political life here, and when I look at the political life here and see how the White House and the Congress are debating all these issues, I have a feeling that they want to turn this debate about deficits and debts and taxes into a political debate rather than an economic debate. My question to you, Madame, can they really afford this? How dangerous is this? What happens if they do not agree, say, until the next election? Do they have the time?
MS LAGARDE: You know, it sounds like legalese, but time is of the essence. In our mind, there is no doubt. It is not just for the United States, it is for all advanced economies, and I would say, more generally, all our members. I would really like to impress on the 187 members of the IMF that we need to address the current crisis together. To a point, it is taking politics to its highest level. Politics, if you look at the etymology of the word, it is about organizing the life and well-being of the citizens in the city. That is what it is about.
You know, when I was a member of government I was often told that I was not enough of a politician. Well, I regard politics as being exactly that, trying to work in the best interest of the citizens in the city. The Greeks used to say that, and we take it from there.
It will probably require that partisan spirit, short-term personal agendas be set aside. As I said, I'm not pointing my comments to a particular country. I think it applies generally. The situation is sufficiently serious to justify that.
QUESTIONER: Yesterday the IMF issued a Global Financial Stability Report and in that the IMF identified 200 billion euros for potential loss for the European banking sector. And, it clearly is not the number that requires recapitalization, but at the same time you touched on the importance to have capital buffers to lend money to the private sector. Are you calling for a significant amount of recapitalization will be required to avert the crisis in Europe right now? What is your recommendation to contain the crisis in Europe?
MS LAGARDE: First of all, I would like to compliment you, because you really picked up the message that I wanted to convey. It is not a stress test analysis that we conducted. It is not the identification of the volume and number of added capital that we would recommend. We have not conducted those studies. It would require looking at the income and much larger picture as far as those banks are concerned.
Equally, and again you have really picked up my message, it is about making sure that banks can actually finance the economy, and therefore have a balance sheet that can afford it. Therefore, that balance sheet needs to be improved by capital buffers that we would strongly recommend. I would observe that some of those banks are actually doing exactly that, which is very commendable, and will enable them to continue financing the economy.
So, there is no price tag or number attached to this strengthening of the balance sheet. But the principle is that balance sheets must be strengthened, and that capital buffers must be increased, and that the Basle III commitments that have been identified must be met. But I observe that this is happening.
QUESTIONER: You spoke before about hope. Do you see any sign of hope for Greece? And, do you really believe that Greece can make it? And as you know, yesterday, Greece announced new measures. What is your opinion about these measures?
MS LAGARDE: There are a few components that are necessary for things to work. One is this collective destiny that was reaffirmed by the euro area members, and as a result their determination to stand by each other and to make those open-ended commitments, if the country performs. That is one.
Two, there is implementation, implementation, implementation, and that goes as far as the Greek authorities are concerned, and it goes for the euro area members as well. The program is difficult. It was negotiated with the Greek authorities. It requires efforts, sacrifices. I think it is tailored to try to avoid that the less privileged suffer more, and we will continue to build and to work on those programs with that approach.
Then, the third thing which will be needed and which is a result of the first two is obviously the appropriate financing of the program so that the debt is sustainable.
You have the concluding word, madam?
QUESTIONER: The question that I have is, with the "Haves" having to pay for the "Have Nots," is there any chance for a country like Greece or any other countries of the European Union, that some of the "Haves" members are going to leave the European Union and perhaps the euro?
MS LAGARDE: Thank you very much. I think I have addressed part of your questions in previous answers, particularly in relation to the fact that the programs have to be designed in such a way that the less privileged are not hurt as a result of the implementation. But more generally, your question is well pointed, because what we are seeing more and more, and not just from the Middle East and north African countries, but also in quite a few emerging markets, and in advanced economies, is the expectations of an inclusive growth. That is really a direction that we need to work on, and focus on, not only when we design our programs, but when we recommend policies. I think it has to do with the comprehensive approach that we want to take. Thank you very much.
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