Transcript of a Teleconference Call on the International Monetary Fund’s 2011 Article IV Review of France

July 27, 2011

Washington, DC
Wednesday, July 27, 2011

MS. BECKMAN: Good morning. Welcome to the conference call on the France Article IV Staff Report and PIN. This morning, you'll be hearing from Anne-Marie Gulde-Wolf, who is the mission chief for France. And from Erik de Vrijer, who is the assistant director in the European Department.

I know the French Ministry of Finance put out a statement earlier this morning to give you a flavor of the report, as is their prerogative, and it's not a breach in confidentiality.

And with that, I will turn it over to Anne-Marie who is going to make some opening remarks before we take questions.

MS. GULDE-WOLF: Thank you, Jennifer. Good morning. I would like to briefly summarize the IMF's main messages on France. How is France doing now? The French economy started to expand in mid-2009, and its robust growth in early 2011 was somewhat of an upside surprise thanks to strong consumption and inventory-building. Unemployment remains a concern but has started to come down.

The IMF projects the French economy will grow about 2 percent this year and next, even as the country undertakes the ambitious consolidation policies to reduce the deficit and the public debt. Private consumption is expected to remain the engine of growth, and will be aided as it was in the first quarter by recovering investment spending.

But economic prospects remain somewhat clouded by the challenging external environment. In particular, the sovereign debt crisis in some Europe periphery countrieposes risk and there is uncertainty about energy and commodity prices.

Let me turn to the medium-term challenges. The near-term has been reasonably encouraging. Over the medium-term, France like all the other European countries faces important problems, including potential growth. While the population in France is not aging as fast as in many other advanced economies, France does face a number of structural issues with which it must deal, such as the declining export market share, a high level of structural unemployment, especially among the young and unskilled.

Furthermore, to protect macroeconomic stability, France needs to achieve checks and spending levels that can be sustained over the long-run and make the financial system more resilient.

Now, against this backdrop what are the key policy priorities that we highlight in our report? I'd say we highlight three particular areas. First, given that the crisis has brought France's public debt to above 80 percent of GDP, measures are needed to limit the deficit and to bring down the public debt in a sustainable manner.

The consolidation targets that are set out in France's stability program and in the 2011/2014 multi-year budget framework do strike a right balance between the speed and sustainability.

Implementation of a fiscal rule that's already passed Parliament and the Senate would help to signal the authorities' commitment to the adjustment path. We would also underline that given the uncertainties, policymakers should prepare specific contingency measures to ensure that the 2012/2014 fiscal targets are reached, even if growth were to turn out lower than projected.

Second priority is the financial sector. To improve the resilience of the financial sector, regulatory reform needs to continue. Earlier last year, France has put in place a unified supervisory agency which better covers the risk that comes from the overlap between banks and insurances. But the importance now is to increase the French banks’ resilience by increasing their capital following the augmentation plans they have already agreed upon, with the aim to meet Basel 3 capital requirements already by 2013-14, which is ahead of the official implementation period. This will increase the banks’ ability to withstand shocks, and given their exposure to the rest of Europe, will make them more stable and resilient. In view of the high house prices, vigilance on macroprudential policies is also recommended.

And finally, as a third priority going forward, France needs to press ahead with the structural policies to enhance competitiveness and boost inclusive growth. Measures that we would underline in particular would be those that address the high structural level of unemployment and measures to introduce growth and the tax reform. Measures that would increase labor market participation and support productivity growth.

MS. BECKMAN: And with that, we can take the first question.

QUESTIONER: Hello. I just was wondering when you talk about specific contingency measures for the budget, are you thinking mainly of tax increases? Or is -- do you have anything else in mind?

MR. DE VRIJER: No, in the Staff Report we have indicated a number of possible measures that the government could take. That includes reducing tax expenditures, and it also includes reducing the growth of spending on certain social entities.

For next year -- for 2012, if you look at the numbers in the Staff Report, we think that the measures that will be needed will be about 0.2 percent of GDP. And we understand that the authorities are preparing measures, mainly in the area of reduction of tax expenditures.

By the way, it is in paragraph 19 of the Staff Report, the possible measures we can think of.

QUESTIONER: I just thought I'd ask how concerned are you about the situation with the trade balance?

MR. DE VRIJER: You know, it is a gradual process, with still a current account surplus at the beginning of this decade. But now we have a deficit in the trade balance following in part from a decline in exports.

MS. GULDE-WOLF: Maybe I could just add on this point. Our concern is truly more of a longer-term structural nature. All -- or most-- advanced countries are slowly losing market share. For France, this has been somewhat faster. And the emphasis of the authorities on enhancing research and innovation to foster export competitiveness is addressing this particular issue.

QUESTIONER: I just wanted to ask about -- you made a reference to the triple-A rating -- France's triple-A rating in your report. I wanted to ask you if you really considered that that was at risk if France didn't take steps to address its deficit situation.

And also on the golden rule; the constitutional reform which you make reference to in the report. My understanding of that is that the opposition socialists have said they're not willing to support it, and without their support it won't be approved, it won't be written into France's constitution. So, I wanted to ask, do you think that would be a very negative sign if the constitutional reform doesn't go through?

MS. GULDE-WOLF: On the triple-A rating, I think the importance of sustainable fiscal path has been stressed by all market analysts, and this is very well-understood also by policymakers. So, we have not taken a view on how much the rating was at risk. But we have taken a view that we have very clearly understood from markets that the measures that have been put in place are consistent with maintaining the triple-A rating.

MR. DE VRIJER: Maybe let me clarify one thing. The golden rule applies in France already for the local government. And it means that you can only borrow to finance investment expenditures.

The broader fiscal rule has been voted in Parliament. It is more of a of structural deficit rule whereby you establish a path -- Parliament and the government establish a path to achieve structural equilibrium, structural balance over time.

QUESTIONER: My question, you say that France should have contingency measures to -- in order to meet its -- guarantee meeting its fiscal targets.

Would you say that an absence of these contingency measures would immediately put in question the triple-A rating of France? Thank you.

MS. GULDE-WOLF: I don’t think we would make this one-to-one link here. However, if you have looked at the recent official discussions, the authorities have themselves emphasized the need for contingency measures. And certainly there is a need for a package of measures to support the credibility of the fiscal path. And contingency measures are an important element in it, but certainly not the only one.

MR. DE VRIJER: And maybe to clarify how we put this -- how we see these contingency measures. It is pretty clear that there is a broad and growing consensus within the government, but also with the opposition in France that the fiscal objectives that were put in the medium term program should be met.

So, the issue is how much is needed to meet them? And if growth is a bit less than currently projected by the government by definition needs a bit more measures. For next year, however the difference is fairly small.

And so the government has made clear that they will take the measures needed in order to reach those targets.

MS. BECKMAN: Anne-Marie, did you want to make a point about the financial sector while we're waiting for the next question?

MS. GULDE-WOLF: Yes. I could emphasize, as I said before, that the French banks have come through the crisis relatively well. They have been quite profitable again this year.

The important issue is now to strengthen their credibility in the context of their exposures to the rest of Europe. And in this context, the key measures will be to increase capital and to make their liquidity arrangements more resilient.

In those areas, measures are already undertaken. But I think on the capital side, the really important issue is to follow through with these capital augmentation plans, and to meet Basel 3 swiftly, which we think is at the latest, 2013/2014.

On the liquidity front, it's important to reduce the reliance on wholesale funding, including from U.S. money market funds. And again, these are well understood priorities and shared by the authorities.

QUESTIONER: Hi, there. I just wanted to ask a quick follow up question on the financial sector as you mentioned it. When you say that the sector is becoming stronger, do you in your analysis of this financial sector consider the possibility of suffering defaults in Europe? And if so, which countries have you considered in that scenario?

MS. GULDE-WOLF: I'm sure you are aware of the recent EBA stress tests that have a much broader disclosure of sovereign holdings than last year’s test. And beyond what was included in the test, the transparency of the test has been improved and the set-up also allows market participants to evaluate their own scenarios and to see what the implications for the French banking system will be.

You will understand that we will not be able in this call to elaborate on particular scenarios for particular countries; we all know the relative vulnerabilities. But I think more transparency that has been achieved through the stress tests – and our confidence also builds on domestic stress tests that the French authorities have undertaken and which we have seen. And we make a reference to those in our Staff Report.

We have confidence that the sovereign risks are manageable because the exposures of the French financial system are quite diversified. And the exposures to the peripheral countries do include a broad set of assets, including but not limited to sovereign paper.

MS. BECKMAN: Okay, thank you. And with that we will conclude the conference call on the France Article IV Staff Report and PIN. The material is still embargoed until 11 o'clock this morning. And as you know, everything in the conference call is on the record. And that's 11 Eastern, 1500 GMT that the embargo lifts.



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