Transcript

International Monetary Fund
Washington, D.C.
October 15, 2007

MR. AHMED: Good morning to you. I'd like to welcome you all to this breakfast. I'm Masood Ahmed, and today's breakfast, we're going to have an opportunity for you to have the occasion to listen to the Managing Director, who is going to make some opening remarks in a few minutes, and also then take questions.

But before we do that, I'd suggest that we take just a couple of minute for people to sit down and get their breakfast. And once you've all settled down, we'll ask the Managing Director at that point to come up and make his opening remarks and then to take questions from each of you. And when you do ask questions, as usual, please, if you could, identify yourselves and your affiliation.

MR. DE RATO: Thank you, Masood. Jaime Caruana and Simon Johnson are here with us today, so I think that they all will be able to help me if you find me in something that I cannot answer.

As you know, very well in a few days on Saturday we will start our annual meetings with a meeting of the IMFC. That will be preceded on Friday by meetings of different groups, of the G-7 and others, and we will be working with all of them. Certainly, these annual meetings have its own agenda, like any, but it's very clear that from the macroeconomic international point of view of the world economy, things have changed.

We are all aware of the credit crisis that started this summer, and that, of course, will take an important part of our work. It has already made us anticipate our Global Financial Stability Report by Jaime at the end of September, and Simon will be presenting the WEO on Wednesday, and that will be, I think, a very important moment to give us specific numbers. I think that for all of us, not only IMF, but I think the world economy, the key question is, well, we all know things have changed. This change is a turning point. Are we heading for substantially slower growth in the world economy or not?

Well, our initial view -- and I want to underline the word 'initial,' because I think we all recognize that things are still evolving and that we will take some time to have the full analysis of the impact -- but for us right now it's clear that growth would decelerate, but not in a dramatic way, and probably the world economy will grow a little less in 2006 and 2007, but nevertheless at an important rate. But as I said, Simon will have a very detailed analysis when he presents you the WEO on Wednesday.

What is clear also today, even if we have to still take some time to analyze the final conclusions, it's clear that the downside risks of the world economy have increased and they are bigger than when we met here in April. The turbulence in credit markets, it's not only a warning but is also a reality that has taken some impact on the real economy. We will see that probably with more emphasis in the U.S., but we will see that also in Europe and Japan and, at the same time if this disruption in international markets will continue, and there are further falls in asset prices, this, of course, could lead to a higher downturn. So in that respect, although we see a moderate impact on growth, we'll still that, as I said, downside risk on the growth side have increased.

At the same time, other risks that were already present in our scenario have increased, too. The risk of a disorderly unwinding of global imbalances, a stronger push toward protectionism, and emergence of national problems in some vulnerable emerging economies that have to finance large current account deficits with capital inflows.

We can also anticipate right now that the effects of this turbulence in credit markets would be transmitted to the real economy, as I said, and will be felt by governments as well as the private sector, and also emerging economies -- some emerging economies, as well by advanced economies. So in that respect, we have been advising bilaterally, and also with our multilateral surveillance, governments and central banks to be extremely aware of this increase in the balance of risk.

We think that the reaction of most central banks, not only in advanced but also in emerging economies, have been up a bit. We have seen a very quick reaction to provide liquidity in many parts of the world that has proven to be effective, and also we've seen in some especially advanced economies a reassessment of monetary policy and at the same time in the emerging economies we've seen a reaction to what could be major risk, or increased risk -- increased risk in inflationary pressures.

Of course, it is not only the consequences of this market turbulence but is also the lessons. I mean, what will be the impact in our every-day life and in the every-day life of citizens of all our member countries, but also what went wrong, and how can we avoid it?

Let me start by saying what we see clearly that we should not be doing. We should not try to regulate crises out of existence. I think that overreaction can be a reaction -- a typical reaction to this type of issues. But I think that we should be aware that, as John (Lipsky) has said it more than once, this is a test in which some very new and sophisticated instruments have gone through for the first time, is not that it's a test that we wanted to have but is a test that we all knew was coming sooner or later and that shows that we have to be ready for not so benign financial circumstances.

At the same time, the Fund has been warning the world leaders and policymakers that there was too much complacency and there was maybe not sufficient risk pricing.

At the same time that I say that we should not try to regulate crises out of existence, it's clear the events we have gone through and still we're going through, have exposed weakness in the regulatory infrastructure, and they also have probably made us think twice about some, how to make that regulatory infrastructure stronger and at the same time simpler to react to, with more efficiency, to future crises of this type.

For us -- and we believe data proved that very clearly -- financial globalization has been very useful for the world economy and for citizens of all countries. The access to credit that we have witnessed in the last 10 years has no precedent and is being very useful for families, for companies, and for governments. But at the same time there are some new rules of the game and some risk, some old, some new, but that came along with globalization and certainly the spillovers are of bigger dimension and larger -- and larger speed than before.

So we believe that discussions at the national -- those where the multilateral level are needed, and certainly we are pushing for that. We have been, as I said we anticipated, in our GSFR presentation. We are having a number of important seminars here this week with other partners like the BIS and the Financial Stability Forum. And we will, of course, keep up our study and our analysis of financial market implications both at the bilateral level via Article IV, but also at the multilateral level with our different multilateral surveillance initiatives.

We believe that governments, as I said, are going to be facing a newer scenario, not necessarily a scenario that they cannot cope with but, certainly, they have to adapt their policies and be aware of an increase in balance and risk.

These meetings will also be, as is probably common, about the agenda of the institution. As you all know, in September of 2005 [meetings] the institution was started on a road to change, what we call the Medium-Term Strategy. And we have kept improving and increasing our reform.

In the last six months, we have been working on quotas and voice, and I think the IMFC will have an opportunity to reflect on that discussion and to give us a clear mandate so that the Fund can complete its quota and reform objectives by the Annual Meeting in 2008. I think there is a clear convergence and a greater convergence that quota reform should not only increase the voice of dynamic economies that aren't represented but also of the emerging economies as a whole. I think the idea that low-income countries need have a stronger voice here, if anything, has strengthened, and has gathered more momentum. And I think that some things, the questions of how to measure GDP and others have been the center of our work in recent weeks, and we think that we will have -- we will be able to present a good progress report to our governors.

Other issues regarding our reform, like the updating of our surveillance framework by the approval by a very large majority of the new decision last June, has given us a new framework after 30 years of working with the old one and is the first ever comprehensive policy statement on surveillance. It certainly reaffirms that surveillance should be focused on our core mandate, which is is promoting countries' external stability, and it also reaffirms the centrality of exchange rate analysis, an area where we have been stepping up our work.

We also finished last year the first Multilateral Consultation on global imbalances. We were able to report that to the IMFC in the spring, and we have been working with the Board to draw the best lessons of that multilateral experience that I think are very important not only for global imbalances but also could be useful for other issues.

We have been increasing our focus on the work on low-income countries and are stepping up our collaboration with the World Bank. And we also have been putting into place a medium-term budget structure with an objective of 6 percent real reduction in three years. And we have also increased the discussion of a new income model for the institution. Those are issues, all of them, that will be presented to our shareholders and the IMFC governors,

And before I finish, I want to say that to all of you, thank you very much. I have worked with you in the last three and a half years. I'm sure I will be able to see you in the next six or seven days, but if I don't have that chance, thank you very much for your cooperation and for your help, and for the information you have provided to the world about the institution and myself. It is a privilege for me to be Managing Director of the IMF. And I look forward to, if there is any chance to see you in future lives.

Thank you, and I'll take your questions. And, of course, my colleagues can jump in if they feel so inclined.

Yes, please?

QUESTION: It has been quite a long time since the IMF made public high-level remarks about the Turkish economy, and in the meantime there's a new government in Turkey now. In the summer there was a turmoil in developing markets, mainly because of the subprime markets situation here. And now Turkey's involved in a major tensions with the United States.

I know you don't like about -- like to talk about political matters, but given all these, do you think the Turkish economy after the crisis in 2001 is much more healthy? A brief evaluation, please, and could Turkey, for example, lower the primary surplus target from 6.5 percents and, finally, at the present stand-by expires next year, what's your preferred format of work with Turkey? Thank you.

MR. DE RATO: Well, first of all, let me tell you something that we've said more than once in the last three years at least, is that Turkey is certainly a success story; that we feel that the improvement of the Turkish economy and the resilience of the Turkish economy has been significant and is, as I said, a big success, although, of course, it's the Turkish people and Turkish government who deserves the praise. And we are proud and happy to have been instrumental in working with Turkey to face what were only a few years ago very big reliabilities.

And if there is any doubt about that, the resilience of the Turkish economy in the recent credit crisis shows clearly that things have improved tremendously, and I think in that respect we owe our -- are not only happy, but, as I said, we even are proud of that.

Right now, as you very well mentioned, there is a new government, and that is, well, a new opportunity in any country, even if it's the same majority that continues to be in power but there's a new legislative term. We are, of course, working with the government of Turkey, and, as will not be a surprise, we are working on the budget of 2008. We believe that a healthy primary surplus have served Turkey very well. It has reduced vulnerabilities and we believe it will help Turkey in 2008, too, because some vulnerabilities remained current around deficit, and some inflationary pressures. And we believe it

-- and is still a degree of some vulnerability regarding the level of public debt.

So we believe that policy should be continued. The details of that, of course, are right now in our conversations with the Turkish government. That, of course, also has an important reform agenda, and financial markets in Turkey are buoyant. But as I said, the external financial environment has weakened, and I think that has to be taken into account by Turkey and by others.

And some fiscal slippages that have occurred before the preparation of 2008, we believe that should be corrected, but also overall, I have to give, certainly, a very clear congratulatory message to the Turkish people. I think the efforts have paid well, and the future of Turkey looks today much brighter than only a few years ago. But we should learn not only from mistakes but in this case we should learn from success. A good fiscal policy has served Turkey very well, and we are convinced it will serve Turkey very well in 2008.

Yes?

QUESTION: Good morning. On Argentina, could you make a comment on the status of your dealings with Argentina, but also focus on the future, given that Argentina will try to set an arrangement with Paris Club, with or without [a Fund] arrangement? Thanks.

MR. DE RATO: Well, I think that the Argentina case is also a case of normalization. Argentina in 2004 was coming out of a very deep and protracted crisis, and I think the Fund at that time stood ready to help Argentina. Then, as you know very well, Argentina put forward a restructuring of its debt and later financial conditions allowed Argentina to cancel its program with the Fund.

We've been working with the Argentinean authorities on a normal basis of the Article IV. We have expressed what we see as a strength which have been the fiscal performance. But also we have expressed our views that inflation was a danger and that also the normalization of the Argentinean economy require to allow monetary policy to be more concentrated on prices, on stability, than on exchange rate, and at the same time we believe that structural reforms are needed in Argentina to really normalize the situation of the country after the crisis.

Looking forward, Argentina is also moving into an election, a new government. That would be a very good opportunity to discuss the plans for the next few years. Our Article IV will visit -- our Article IV mission will be visiting Argentina at the end of the year, and that would be, I think, a good occasion to put into place our views for the future that are very much the ones I have described to you.

As for the dealings of Argentina with the Paris Club, you know that those are been made public by both the Paris Club and Argentinean authorities, and I have nothing to add to that.

Yes? Please, yes?

QUESTION: Thank you. You mentioned briefly in your remarks that you thought the risk of a disorderly adjustment to global imbalances has increased in recent months. Could you just elaborate a little bit on that comment and explain to us why you think that these long-identified risks have actually become perhaps more dangerous or more pressing recently?

MR. DE RATO: Thank you for the question. It is not so much that the risk, the evolution of global imbalances, has got worst. In fact, if you look at some of the players and some of the recommendations that we draw from the first Multilateral Consultation, simply that the U.S. is slowing its external deficit, although not to the extent that we would like to see, and is also -- we see also an increase in investment in the oil-producing countries that we believe will be helpful not only for them but also for the rebalancing of world demand.

But we still see that the rebalancing of demand in China has not occurred as we expected, and we insist on the need of the Chinese authorities to use fully monetary policy in terms of focusing on prices stability so as to allow the forces of the market to really influence the Chinese economy to increase its domestic consumption. And we also -- well, as you know very well, in our view of the evolution of global imbalances, stronger growth in Europe and in Japan was necessary. And, as I said before, some impact of recent credit turbulence will impact growth in those cases.

So we will have a mixed view of how things are moving. It would be unfair to say that things have not moved. We have seen some movement in the United States, some movement in the oil-producing countries, but still a lot of what you could describe as the plan that was outlined in the Multilateral Consultation needs to be implemented.

But what is no question is that if financial risks have increased and the pricing of risks has also increased, well, the financing of global imbalances could -- and I want to underline `could' -- could become tighter if things evolved in a special way.

So in that respect, we believe that the implementation of the cooperative approach that we designed in the first Multilateral Consulation is, if anything, more needed now. And we would like very much and we're using the opportunity of the Article IV discussion with the different agents of that -- of the different partners of that Consultation to stress the need for those countries to step up their strategies.

And as we said then, and I want to repeat now, the strong points of our approach to address imbalances is that we are not asking countries to do things that will not be at the top of their agenda for their own domestic reasons. We believe that is in the interest of the United States to increase its savings and reduce its external deficit, and to do that, well, the news about the fiscal budget was welcome, but still we need to see in the United States bigger reform on the expenditure side of the budget.

But as I said, we also need to see in other partners, like China, the EU, and Japan, some implementation of the agenda that we discussed last April.

Yes?

QUESTION: Speaking about new lives, do you have a (off mike) for November 1st, and are you going to participate in the electoral campaign in Spain? And a final thing, what are you going to miss from life in Washington and the IMF? Thank you.

MR. DE RATO: As I said very clearly more than once, I'm not going back to political life in Europe or in Spain. And as for missing Washington, well, I'm still in Washington, so it's very difficult to anticipate where one will miss, so one should give himself some time. But I'm sure I will miss Washington. This has been a very exciting and good time in my life. I have a lot of good friends; many of them are inside this room, but many of them outside in this building and in the city I have enjoyed very much. And I leave Washington with a good after taste.

Yes?

QUESTION: You mentioned that the downside risk is increasing compared with last April, this April, so -- and the former Fed Chairman Alan Greenspan and former Secretary of Treasury Larry Summers, mentioned that the probability of recession is increasing compared with before, so do you think their assessments are fair or not?

MR. DE RATO: Well, when I came to the IMF, I didn't know many things, but I knew one, which is not to comment on other people's comments, and I'm not going to give up that learning just when I'm leaving. So I'm not going to make comments on somebody else's comments.

But if you ask me a straight question, what is our view of the chances of a recession in the United States, as I said, our central scenario is that the U.S. will absorb the actual impact. We will see a certain deceleration of growth that probably we will have already seen before the August credit crisis, but that has -- well, has become more clear and probably is stronger after that. Certainly, we're seeing in the United States a strong deceleration of the real estate and the housing business, but at the same time you see strong employment, you see strong business confidence and balance sheets. You see reasonably increasing wages. So there are a lot of elements that can support the U.S. economy.

So that's why we believe that, although the downside risk has increased for the U.S. and for others, but certainly for the U.S. Still the underlying scenario is that a lot of strength is in this economy, and we believe that that's why our central scenario is of a deceleration of the U.S. economy but not of a recession.

Yes? Yeah, both the lady and then the gentleman.

MR. DE RATO: I just wanted to ask you from the technical point of view if there is any kind of agreement that Argentina could have with IMF that does not imply a formal agreement or a Stand-By Agreement that could pave the way to the Paris Club negotiations.

MR. DE RATO: Well, first of all, we will be more than glad, and I think we'll have a chance in the next few days to talk with the Argentinean authorities. And, of course, I will not react to anything that has not been proposed by the Argentina authorities before they do. So you have to understand that.

QUESTION: I'd like to ask you your impression of the $100 billion, more or less, fund that has been established by some U.S. banks. Is there a risk of moral hazard, and did the IMF play any role? And if I may on a more parochial note, can you tell us something about the Italian economy. There is a the fiscal plan that is being discussed, and growth seems to be slowing down, and the budget deficit is going to increase from 2.2 to 2.4. Thank you.

MR. DE RATO: Well, let me first say something you haven't asked me, which is that I want to say that we will have a new head of the IMFC, which is an Italian, Tomasso Padoa-Schioppa, and I'm very happy to say that. He's a good friend and a great candidate, and I look forward to working with him this weekend. And he's a very experienced person known by many people in this room and outside this room, and I think he will be a great asset for the IMFC.

Second, on the fund, well, I think that that's a decision taken by private banks in the United States. It's up to them. There is no -- for what it looks, it doesn't seem that public money will be involved, and, of course, we should expect reactions by the market participants to strengthen a situation that has not yet recovered full normality. So I think that there is nothing that -- and I have to say that we have not been involved. I mean, I don't think it is our role, and this is a private initiative, and, well, we will judge it once we know the details.

And for the Italian economy, well, we see that this deceleration of growth in 2008 continuing the growth weakening of the first half of this year. The fiscal balance is strengthened, but we don't see that that is happening because of expenditure initiatives but because of a strong overperformance on the revenue side. And that overperformance of the revenue side has not been totally safe, but part of it has fueled additional spending.

So overall, we would like to see a tighter fiscal policy in Italy, especially because Italy is a very clear example of some medium-term challenges regarding, for instance, aging population pressures

on the fiscal side and, as we all know, Italy has a very high level of debt in relationship to GDP.

So all that shows, clearly, that fiscal policy is central to Italy's medium-term stability. And at the same time I think that the fact that growth is slowing shows the need for stepping up the reform agenda. Some of the recent agreements on labor issues, for instance, we see that could have the danger of going back on prior reforms, and in that respect we will stress a need for Italy to become more flexible to really benefit from the opportunities of the global economy.

Yes?

QUESTION: I would like to ask you a question on India in terms of its rather impressive economic growth. What are some of the challenges that you see down the line? And, secondly, sir, do you believe that the economy could perhaps overheat?

MR. DE RATO: Well, first of all, I want to say...certainly India is a good example, that since India started its reform and liberalization process at the beginning of the decade of the '90s, it has been in the interest of India and it has improved its capacity to integrate itself into the global economy. Growth has been impressive, 9.6 in 2006, 8.9 in 2007, and we are [projecting it] at 8.4 in 2008. So that's really an impressive growth pattern.

With inflation coming up a little bit in 2007, but we think that monetary responses by the Bank of India have been up a bit. And in that respect I want to sanction that the credibility of monetary policy in India is becoming better and stronger, and the steps of liberalizing the financial market in India are probably the steps in the right direction.

We've seen also a flexible movement of its currency, and that has been good for India, and I think it would be a good example for other countries in the region to see that flexible exchange rates can be very useful to manage a booming economy, as is the case of India.

There has been, certainly, a very important step-up of inflows, of capital inflows, which shows that the confidence of investors in India is increasing.

We see the priority continuing with this drive to liberalizing the Indian economy. Certainly, to bridge the major gaps in infrastructure, including power and transportation, the need to strengthen Indian capacity to introduce a labor force into the global market by increasing and stepping up the vocational reforms, and certainly to try to address the very strong certitudes on unskilled labor.

We also see, as I said, that the need to keep increasing the openness of Indian economy to foreign competition and to foreign investment is in the interest of the Indian society.

QUESTION: So do you see any dangers of the economy overheating, sir?

MR. DE RATO: Well, we don't see -- we don't see that if monetary policy continues to behave as it's been behaving right now. And independence is a strength in monetary policy.

Yes?

QUESTION: I'd like to ask you what's your assessment of the latest movements in the exchange rate between the U.S. dollar and the Euro, and if you think that this exchange rate is -- should be taking into account by the central banks when they decide the monetary policy?

MR. DE RATO: Well, we believe that monetary policy should be targeted to price stability, and that has proven very useful around the world. We have examples recently -- the last one about India and others, too -- and we also see that in, of course, in industrial countries.

As for the evolution of currencies, let me tell you that is true that we've seen a depreciation of the dollar in some measures like trade weighted averages or in nominal rates, quite substantial in the last two or three years. But our overall view is that we, as the IMF looks to a medium-term stability of currencies, we still see that the dollar is appreciated -- or the dollar is overvalued, sorry.

So in that respect, we have seen a strong depreciation in some measures in recent -- the last two to three years -- but still if we analyze, as we do here, the medium-term equilibrium of the currency, we're still seeing room for farther depreciation. And if you look at the futures markets, you will see that the markets are also seeing more or less the same.

Of course, that is an overall view of the dollar, not so much looking currency-by-currency at the relationship. At the same time, as we all know, the dollar is a free-floating currency. Its price is fixed by the markets, and, as I said, futures markets are also pricing right now still farther depreciation, as you are all aware of that.

The impact of currencies on current accounts is limited. That's why, as I said, speaking about the U.S. economy and global imbalances, we do see a reduction of the U.S. current account deficit, but it's not going to be a substantial reduction; it will be a significant but not substantial reduction. And to address that, we believe that domestic policies are needed, not only currency movements.

We believe that the U.S. has to strengthen its public sector and private sector savings, and in that respect, the reduction of the deficit is a welcome one, of the public deficit. But we still see the need for addressing subtle changes in entitlement in the U.S., in health and in pensions. But also, we have been of the opinion for some time that the U.S. should also be facing some changes in revenue policy. And, for instance, the recommendations of the -- I think it was two years ago -- committee, the committee that the president put forward for tax reform, had many suggestions that we believe that they were useful, and we've encouraged the U.S. authority to recommend them.

Yes?

QUESTION: I want to ask, you did mention during your speech that developing countries or low-income countries need to have a stronger voice. I would like you to explain for the how you would achieve that objective. Secondly, some of the countries like Nigeria have been on the Policy Support Instrument. I would like you to assess the progress on that program and, as the country -- and start work later this month -- what other assistance can the institution give? Thank you.

MR. DE RATO: Well, on governance issues, it's clear that -- certainly in my opinion and I would say most people's opinions in the Fund -- one of the strongest elements of the Singapore reform was not only that we start moving into the direction that emerging economies will increase their voice in this institution -- and, I think, as a very important reform and a crucial one -- but also at the same level of importance, the governance would the need for low-income countries to strengthen their voice. And I think this is a very important change of the governance, of the view of the governance of the Fund.

You have to realize that the Fund is a financial institution, it's not a development institution, and that in that respect this, I believe very welcome, view of governors that low-income countries need to have a stronger voice here, independently of the strength in the world economy is a very important element of the new view of governance that countries and governments have regarding this Institution.

As you know, also, the Singapore package is a package in the sense that everything has to be decided together. So the quota reform, the second ad hoc increase, and the low-income countries increase in basic votes, should happen and has to happen at the same time.

In that respect we have already had two, I believe two, two formal discussions of the Board regarding basic votes. Also, the possibility of an increase in the political strength of the chairs that represent low-income countries-- that is clearly, certainly, the case of the African Chairs -- is also part of this reform. So I think there is a clear awareness on the part of the governors and, certainly, that is being not only backed but pushed by the staff, that low-income countries need to have a stronger voice and a bigger visibility in the discussions about macroeconomic international stability in the world.

As for Nigeria, certainly, we are seeing low debt, high reserves, and improving macroeconomic indicators. All of that brings us to have higher confidence in the Nigerian economy. We see some growth of the nonoil economy, nonoil economy in the next year, but, of course, there are some important reform issues.

We see that the commitment of the new government who took office in May to continue and to strengthen macroeconomic stability. And we see as a center, a cornerstone of that discussion, the need to outline -- the need to outline a clear revenue-sharing of oil wells between the different states.

As in other emerging economies, the infrastructure gap is certainly a challenge for the future: Roads, railways, and certainly a better and more targeted social policy to benefit the poor.

As for the PSI, the fourth and final review was to be completed today. The new administration is committed to continue the reform agenda. The president has set out essential policy goals in a seven-point agenda, and the authorities aim to put in place a new medium-term strategy for 2008-to-'11.

I think the authorities value our support through the PSI, and they have indicated their intention to maintain a close, ongoing dialogue. They are still thinking of the modalities of how that dialogue will be maintained, and, of course, that is a possibility of continuing to work through PSI, but it might not -- it is up to the authorities to decide that. We are certainly ready to continue our engagement to support the right policies Nigeria and also to provide as much technical assistance and capacity-building that we think could be very useful for Nigeria.

Yes?

QUESTION: You said that the dollar was overvalued. What do you think the value is of the Euro? Is that fairly valued compared to, you know --

MR. DE RATO: I'm sorry. In the analysis of the Fund thus -- I mean, you have many measures to measure currencies -- and, as you know very well, then the markets do otherwise. So I think everybody should be very reluctant to put a special value to any currency.

Regarding our analyses -- and I think our role determines how we do out analyses -- we look at a medium-term equilibrium of currencies. This is a very challenging technical job, but that's the one we do. There are other ways you can measure currencies, to weighted averages or nominal rates, but the Fund looks at the medium-term equilibrium. In that respect --

-- the dollar still is overvalued, and we see the Euro at a very near equilibrium situation. So that's our view, and the view that I think Simon will be explaining to you in detail on Wednesday. I think it's a useful tool, but once again, as we all realize, especially when you're talking about currencies which value is fixed by the markets, the markets are taken into account, not only medium-term views or economic realities, but are taking into account many other issues. And that's why -- well, also it has to be taken into --

QUESTION: Well, I have a follow-up on that because, as you know, the G-7 was meeting on the sidelines of the IMF meetings, or before, and the focus is going to be on currencies. If you were in the room sitting in on a conversation, what would be the IMF's advice to these countries, as the dollar declines, the Euro, you know, seems to be strengthening, the issue of the Chinese yuan. What would you say to them right then?

MR. DE RATO: Well, what I have said to you.

I don't think there is any secret message that I will -- unless Simon gives me a small envelope to give to them, I don't see -- okay, I think that from the point of view of each country, and the countries like the Euro area, or economic areas like the Euro area or countries like Japan and the United States, their currencies are determined by market forces, so there's no much discussion we can held regarding that.

Of course, market forces are looking at different issues, and in the case of the U.S. a strengthening of savings, domestic savings situation and rebalancing of the domestic demand, it is important. So that will -- probably will have impact on how markets view the currency, but at the end of the day there is no currency policy in the United States because it's a free-floating currency. And that's the same case for the Euro area and for Japan.

The stronger in growth in Europe with -- we have talked about some European countries here in which we see the need for stepping up their growth potential -- is still certainly and element in Europe. And, as I said before, our analysis of global imbalances saw, and we still see, that Europe needs to strengthen it's growth potential, and that will have impact of how markets see the European economy going forward. And the same I could say for Japan.

On the case on China, we have been saying for certainly the three and a half years I've been here, that -- and before, that we see more and more the need for China to rebalance its growth pattern and relying more on domestic consumption, and to do that a lot of things have to be done. They have to strengthen their safety nets; they have to liberalize and strengthen their financial sector; but certainly, they have to use monetary policy is a more efficient way to focus on prices and let market forces determine the right incentives to the Chinese economy. And one way that happens is through the value of currency.

We see it is in the interest of China to do all those things. That implies that the (inaudible) should have the more flexible movement that will reflect the view, not only -- that will reflect the realities of the Chinese economy. And we believe that will be crucial for more -- for what I would believe is a higher goal, which is to rebalance Chinese growth pattern to allow for strong growth and at the same time a strong domestic consumption that will have, we believe, high benefits for the Chinese population.

And I have to say that that view has not been challenged. I would say we share the view of the Chinese economy. The question here is implementation, as is also the case in the United States regarding budget expenditures. Well, implementation I know by experience is a very challenging thing for governments, but governments are to implement. So, if not, that's what they should be doing.

Yes? One more question? Okay. This one and another one.

QUESTION: Good morning. I want to ask you, how do you see Mexico with our reform agenda?

MR. DE RATO: First of all, Mexico has strengthened its economy and also its political functioning in recent years, and I think it's very welcome. Mexico is clearly a country that is moving into an opening itself but at the same time being more flexible and more reactive to the social needs of the population. Growth in Mexico is a key question, and the translation of growth into employment, formal employment is a key question.

Tax reform has been at the top of the agenda of our recommendations to Mexico, and we welcome the recent tax reform that has been put forward by the government with a high degree of consensus in parliament. And, of course, Mexico would be affected like many other countries, but will be affected by the softening of the U.S. economy. And we see the growth for this year to be a slightly below 3 percent.

As I said, the recent approved tax reform certainly will allow the government to expand public investment spending, a very important thing in Mexico. And also it will offset the decline in government's all revenue next year. So I think it's a very important reform that, as you know very well, has taken a lot of political capital, is one very difficult to carry in past years, and we are very happy that it's happening right now.

And to increase the employability of the population, Mexico needs a more flexible labor market to allow more competition in many sectors, but also at the same time to use social policy both in strengthening direct social spending but also in education to allow Mexico to really benefit for all its full potential. We see Mexico with a lot of potential for the future, and we're encouraged by the first months of the new administration.

Last question. Masood, why don't you choose the last question.

QUESTION: Thank you. I wonder if you could clarify your comments in your opening remarks about the weaknesses in regulatory structure affecting the current market situation. Does the IMF, or do you have a view about how to repair those weaknesses? And do you expect any progress to be made in the next week in the discussions here? When can the world expect such recommendations or reforms to be coming forward? Thanks again.

MR. DE RATO: Well, I don't think you're going to see in a week recommendations to become final, and probably that even will not be not only necessary but I don't think it would be wise to rush. I have said -- and I think Jaime (Caruana)_said it very clearly in September -- that we will -- we are not encouraging governments to over regulate. There are lessons to be learned, and probably those lessons need to be applied, but, as I said, we cannot regulate crises out of existence.

But as far as the future, we see the need to discuss the lessons. That is clear. I mean -- and I think that discussion will be held in many forma. We have just learned that the European Union is discussing it, and always they are discussing it, too, that will all sense. But certainly, the discussion also has to be -- take place at the multilateral level. We live in a world, global financial markets, and all countries are interested, and all investors are interested.

So in that respect we see a strong role for us. We are working on that already. It's part of our mandate, and we have a comparative approach to it, but at the same time we are working already. There is right now teams of our colleagues in some countries discussing financial sectors to themselves. We are working on our views of the recent credit turmoil, and part of those views are related to regulatory strengthening, and I will mention four areas.

But also I think governments and policymakers have to reflect as to what extent do they have the regulatory framework that they need. Sometimes you might have the right rules, but you might not have the right infrastructure to apply them, or vice versa, or both.

And I think this is a case-by-case question, and it needs that everybody looks clearly at the recent lessons, even if those lessons have not happened home. It would be, I think, very unwise that major economies believe that it will never happen to them. I think that they have to ask themselves as they become more integrated into the financial economy, they become more sophisticated, they will have more chances to benefit from a sophisticated financial market but they also will be facing the same challenges that we've seen in developed financial markets.

Let me mention, as I've said, the four areas that we have clearly specified in our analysis. Certainly, the first is the important role of information and transparency. Operate and timely information about risks and the way they are managed, both what type of risk and how they are managed and distributed is an area in which I think there is a need to think, how can we improve?

The second is while financial innovation, as I said, is a very welcome development, it has altered the incentive structure of originating and distributing structural products. And that can -- and we believe it has -- contributed to the relaxation of credit standards. So the question of check and balances through the supply chain of structural products has to be reexamined. And this is probably a need of today for the very advanced financial markets, but is a need for -- not for 10 years from now. We need for two years from now in emerging economies.

Third, how we measure risk. Certainly, the role of rated agencies is an important -- but there have been questions raised about methodology of complex products. We at the front have said in previous reports that ratings of structural products should be separately delineated from those of sovereign or corporate securities. And that is a view that we think has proven right and that should allow all of us to discuss these issues in the future.

At the same time, investors use of rating should not be seen as a substitute for due diligence, and certainly for abrogate risk management.

And the fourth area is the one that refers to the relevant perimeter of risk consolidation across products for banks. And that perimeter of risk has proved to be larger than perimeters defined by accountant and legal considerations, and we believe this is an area that has to be revalued.

Certainly, we put reputation on risk may force institutions to internalize losses of legally independent entities and may mask of balance sheet or contingent liabilities. And, in fact, some banks have had to step up to support affiliate entities such as conduits, special investment vehicles, and asset-managed subsidies.

Those are areas in which the Fund is already working. We believe those areas make sense for all those also to look into them. We are going to discuss with our colleagues in the BIS and financial stability from also with many regulators around the world on these issues, and I'm sure that our next year, (inaudible) will have more and more views on these questions.

Thank you very much again. Thank you for your presence and your work. And I want to again to tell all of you that I'm very grateful for your help all these years. Thank you.