Transcript of Managing Director Press Breakfast
November 2, 2007November 2, 2007
International Monetary Fund
IMF Managing Director Dominique Strauss-Kahn
IMF Deputy Managing Director John Lipsky
External Relations Department Director Masood Ahmed
MASOOD AHMED: Let me welcome you all to this press breakfast with the Managing Director, Dominique Strauss-Kahn, who has, as you know, taken over as the 10th Managing Director of the IMF yesterday, and this press breakfast is on the record. The way we would like to proceed is that the Managing Director will make a few introductory comments, and then we will just open it up to all of you to raise any questions that you have, and, of course, both the Managing Director and the First Deputy Managing Director, John Lipsky, who all of you know, sitting to his right, will be happy to pick up on those questions. So with that, and having given in that process all of you the chance to sit down, let me turn it over to the Managing Director.
DOMINIQUE STRAUSS-KAHN: Good morning to all of you. I am pleased to meet you this morning. It is the first meeting we have in this definition. Probably there are more French journalists than there used to be, and I am not quite sure that they will stay here for such a long time that at the next meeting like this we will have as many French journalists as we have today, but I want to welcome them and to welcome all of you personally.
I have read the stories in the papers you wrote on the IMF these last weeks, and I realize that you know much more than I do about the institution, so I think the good thing to do would be for me to ask you questions than the contrary.
The few words I want to say are very traditional. You have seen what the IMF has said about the financial turmoil and the downside risks which obviously are higher than they were six months ago, but the view we have is a view that the consequences as far as we are able to appraise them today are real on growth, but not more than expected a few weeks ago.
On the different news that you may ask questions about I will answer after, the part I would like to make is that I defined myself during the last few months as a candidate for reform, and so now I need to deliver. Of course, it will not come out in a few days only, but there are definite questions which are at stake for the institution, namely the relevance question, what are we going to do in a changing world and how can we do that, which is a question more of legitimacy and governance, are questions I have now to address.
Since yesterday morning I had a lot of meetings with the Board, with the head of departments, with the staff trying to explain in a few words how I see the coming weeks, and I will go on during the week meeting everybody, receiving from each and every head of department the way they see the most important question, the question, of course, of the budget of the institution, the size of the institution, and the way we are trying to implement the reform which has been launched by Rodrigo de Rato. I just want to pay tribute in front of you to what Rodrigo did. I think he launched a lot of important reforms in the institution, including surveillance reform, the quota reform, the income model reform, and now we have to build on these points, even if I think the time is running very rapidly, and so we need to do that with a faster pace.
The IMFC during the Annual Meetings gave us a deadline at the April meetings to solve different questions including the budget question and the quotas question. So it is less than a six-month period, and it is not too much to be able to solve those questions.
By a hazard I cannot explain, the offices of the IMF are in Washington. They could be elsewhere, they are in Washington. So the relationship with the American administration is somewhat special, and I plan to meet very rapidly but on a monthly or two-month basis with Secretary Paulson and Ben Bernanke and will already plan the next meeting for the coming weeks just because, of course, the United States—not only because the offices are here in Washington, but because the United States of course are a major player for what we have to do and also a major player for the reforms we have to implement, but that does not mean that I am not going to engage with other members.
I sent a letter to Cristina Fernandez to congratulate her on the election, and I plan to go before the end of January to Latin America and to Africa. I will be in South Africa for the G-20 in the middle of November, and also to Asia before, probably before the G-7 meeting in February in Japan. So it is very difficult to be everywhere at the same time, and most of the members during the Annual Meetings asked me to pay a visit to their country, so I am just in between those members asking me to come and the staff and the management here asking me to stay, so I will try to manage. At the beginning, of course, it will be a bit difficult. To stay will be easier. For the first months I just do not know exactly how I am going to dispatch my time between traveling and being here, but we will see as long as the days are going on.
Maybe the best course to take is to open the floor and ask you the questions you may have. Again, thank you for coming.
QUESTIONER: Mr. Strauss-Kahn, you said there was very little time, and you have got a deadline, 2008 deadline on reforms of the quota system. What do you see as your biggest priority there? Where do you think will be quick movement and big movement as such?
MR. STRAUSS-KAHN: Well, it is amazing because the quota question is a very important question not only on the symbolic point of view, it is a real question, and on one hand it is important, on the other hand I think we have to see beyond the quota question because the question of voice, of representation is much more than only a question of quota, a direct question of quota.
I am not saying that an increase for any country, especially the emerging countries, of 0.2/0.3 percent in the quota is insignificant, not at all, it is, but at the end of the day when around the table we have all the countries with their new quotas having increased sometime from 0.2/0.3 percent and others having a decrease from 0.1/0.2, it will not change the world. If we really want emerging countries and low-income countries to have more, to have a better sense of ownership of the institution, to feel that what they say is more listened to, it is more than only a question of quotas.
What I mean is that the change in the quota question has to be significant, a shift has to be significant from the developed and rich countries to the low-income countries and emerging market countries, that is clear, but it is not enough, and so on my agenda we cannot stop. We have to do that, but we cannot stop with only the quota question, and the legitimacy of the institution must go much further. That is why I launched this idea which has to be discussed now by the Board of having a practice of double majority on some questions, which means that in this case the management will have to take into account the number of chairs supporting an idea or fighting against a proposal. There are maybe other ideas like this, but I think we will not have finished the problem with only the quota, even if we have to do it in the coming months.
QUESTIONER: Mr. Strauss-Kahn, a lot of people are talking now about the changing structure of the global economy and particularly the emergence of new significant players in global markets, private equity funds, hedge funds, sovereign wealth funds. These new actors are becoming increasingly significant. What do you think the implications of the rising importance of these actors, both private sector, privately held entities and official sector wealth management funds, what is the implication of this for the work of the Fund?
MR. STRAUSS-KAHN: Well, I think it is a very important thing for the Fund. The Fund has been established 63 years ago to deal with current account imbalances, and even if it moved during the last decades from current account imbalances to capital account imbalances, the main topic was still external imbalances.
Now the world we are contemplating is a world in which financial crisis and financial instability may come from other causes, other sources than external imbalances, and what you were just quoting about hedge funds, sovereign wealth funds, all things like this are a part of this possible instability. So if the Fund has to fulfill its mandate, namely as it is enshrined in the Articles of Agreement: foster growth, fight against unemployment, and therefore provide financial stability, we have to take more and more into account than the different points you were mentioning.
So it means that the Fund as part of its reform has to be more able to make proposals, get forecasts, have analysis and then make proposals on the different questions you were quoting. So I am not surprised that some of the members are asking the Fund to have a deeper insight in the question of sovereign wealth funds, for instance, which is only one of the questions, but the rather new question, a very important question. It is some fun for a French Socialist like me to see the importance taken by sovereign wealth funds and the idea that it is a great return of public enterprise, but besides this, I think it is an important question.
We probably have to make a difference between the different kind of sovereign wealth funds because they are all sovereign wealth funds, but they are not financed, they do not find their resources in the same way, so probably not all put in the same box, but that is part of the analysis we have to carry on, and then to try to propose some kind of guidelines for these new kind of entities. But you are perfectly right in saying that the evolution of the financial world and of financial globalization implies that what the Fund is doing has also to move for change.
QUESTIONER: I am from Argentina. I note that you have been in my country, that you met Mr. Kirchner and Mrs. Kirchner and you met also our economics minister. As you know, Argentina has been growing 8 percent for the last three years, we have a fiscal surplus, we have also a trade surplus. So I was wondering, Argentina is one of the countries of course that repaid the Fund. I was wondering why Argentina needs now the Fund. We have also a lot of reserves. Why do they need the Fund and if we need also a formal program to initiate negotiations with the Paris Club?
MR. STRAUSS-KAHN: A perfect world is a world in which no individual country needs the Fund. Probably the world as a whole needs the Fund to provide this global public good which is financial stability. But if we succeed, then we must have a world without any individual country having a crisis, and so no individual country will need the Fund. Reality can be not that nice, and so sometimes from time to time, and it did not happen for the last five years, which is rather good news—even if it is a problem for the Fund itself, and the financing and income of the Fund, but there is another question for the last five years we did not experience any kind of a strong external crisis.
So when you say why would Argentina need the Fund, I am very happy if Argentina does not need the Fund. But there are still some problems in the external debt of Argentina, and Argentina needs for its own development as far as I understood when I talked with Governor Redrado, with Finance Minister Peirano and also the past president and the new elected president that one of the main points for development and growth in the future was for investment, and namely for investment in infrastructure, transportation, things like that, and to allow for investment to benefit from the different credit lines, the Paris Club needs to clear the Argentinean situation. So now I think it is time, because the amounts are not that big so really it makes sense to get rid of this problem, so it is time for Argentina to be able to forget the past or to make it possible to put all those questions, external debt and so on, in the history and have no problem in the future.
To go to the Paris Club and so the question needs an approval by the Fund, and so we are just waiting for that. What I am expecting is to see what the new government, which will be nominated by the new president, will say on the economic side and economic policy they want to implement, and I think everybody would be very happy if the Paris Club question can be solved as rapidly as possible because it is one condition for Argentina to receive foreign investment, which in turn is a very important thing for growth.
QUESTIONER: Can it be done without a formal program of the IMF? Is there any flexibility there?
MR. STRAUSS-KAHN: That is a question for the Paris Club. Being a Frenchman, I am interested in Paris, but I have no influence on the Paris Club. So what will be decided by the Paris Club will be proposed to the Fund, and at this time we will be able to answer. So it is not time today to say, to make any statement as if the Fund was expecting something. It comes first to the Paris Club, and then after it will come to us.
QUESTIONER: You have been mentioning the need for the Fund to reduce the size of its operations and I guess employees also. I was wondering if you could give us a range of how many people you would like to see leaving the Fund or at least the head count being reduced?
MR. STRAUSS-KAHN: Well, we are working on that in the coming days, a lot of investigation on what had been done before my arrival, but nothing is decided yet. You know what the G-7 wrote to my predecessor and to myself, too, asking for 10 percent more than the previous plan in decrease of expenditures, having a total amount of decrease in expenditures around 16 percent. We have to look what it means. The question is that of course it implies a review of the priorities of the Fund, what the Fund is doing. If we go back to the question of relevance on which I was elaborating a bit at the beginning, I cannot answer your question now. It is a question which will be discussed in the Fund and with the Board in the coming weeks.
QUESTIONER: Good morning. My question is kind of India specific in that there seems to be a lot of financial turbulence as a result of the declining U.S. dollar. I am wondering what your perceptions are for a major emerging country like India as to what the medium and the short-term implications of this is?
MR. STRAUSS-KAHN: Well, India is a very brilliant economy, and the consequences on India of what is going on financial turbulence are not only consequences on India itself. There is no specificity of the consequences on India, but the question of the appreciation of the rupee, and it is probably the question you were talking about. The appreciation of the rupee is driven by a lot of international capital flow to India, and that is the good news. A lot of countries want to invest in India, a lot of companies want to have not only their back office now but much more than that, research labs and so on in India, and that reflects the way the Indian economy has grown and developed during the last years. So an inevitable consequence of that, an unavoidable consequence of that, you have an important inflow of capital to India with a consequence on the rupee.
One point is the transparency, and to try to enhance the transparency of those capital inflows, and we may have some concern about the distinction between investment inflows and speculative inflows, so that is a question of transparency. It has been said or asked or it has been written that India should implement in one way or another some limits to the capital inflow. The problem of this kind of thing is it may undermine the confidence on the Indian economy. It will have an influence certainly on capital inflows but not always a good influence. I think the Indian authorities should think over several times before implementing this kind of an instrument because at the end of the day and for the long run what happens to the Indian economy is a good thing, good news. Even if it is not always easy to deal with an appreciation of your currency, as a European I can tell you, sorry about that, nevertheless, it reflects good fundamentals. You do not have to do anything which will in one way or another undermine this good luck or the good appreciation, good forecast on your national economy.
QUESTIONER: Congratulations, Mr. Managing Director.
MR. STRAUSS-KAHN: Thank you.
QUESTIONER: My question is about the world economy, especially about the U.S. economy and the Japanese economy. In the third quarter, the U.S. economy has grown 3.9 percent, and according to the latest information released by the Labor Department, the October non-fund payrolls increased 166,000. That is over, extremely excessive, over the expectation, but yesterday the New York stock market has fallen drastically. So what is the latest view on the U.S. economy? I would also appreciate if you can comment on the Japanese economy, too.
MR. STRAUSS-KAHN: I will make some comments, and maybe John would like to make some comments also. As you say, the figure, the 166-figure is much more than expected, and that is rather good news, even if we had this move which is now well known, when you have good news on the drop side you have bad news on the stock market. Nevertheless, as far as we know today, the Fund did not change its view on the forecast for the American economy for the next quarters or the next year.
As you know, in the WEO we decreased our forecast on the growth for the American economy because we considered that the downside risks of the turmoil are not totally ruled out. Nevertheless, we have to take into account new information as soon as it comes out, and we will see in the coming weeks if these figures about the job market are comforted by some other information. Maybe you want to comment?
MR. LIPSKY: Sure, thanks. The logic of our forecast for the U.S. economy seems to be in line with the latest data, although the third quarter figures were themselves quite strong in terms of the top line growth. The logic is that we have had a sustained downward pressure on GDP growth from the housing sector simultaneously with moderate growth in consumption, with moderate growth in business investment, and an incipient turnaround in real net exports.
Our original forecast had been that the downdraft from housing was going to come to an end about the end of this year when we revised downwards the change we made, it was essentially to assume that the downward pressure from housing was going to extend into 2008. So the rest of the picture of the U.S. economy is moderate growth and consumption, moderate growth in business investment and improvement in real net exports, and that seems to be what is happening. So we are comfortable with the evolution of the data, we are comfortable with our outlook, and we think that that is a picture that will be in line with our global picture.
You asked also about Japan. Our expectation for the Japanese economy in 2008 is growth somewhat on the order of a growth rate more or less in line with potential, which is just slightly below 2 percent, 1 and 3/4 percent, so our expectation again globally is a continuation of solid growth, somewhat slower than in 2006 and 2007, and so far the data seem in line with our expectations. Thanks.
QUESTIONER: I have a question about the euro. You were talking with the colleague from India about the appreciation of currency, and I was wondering what is your view at this point with our keep growing euro is still in the context of what the IMF would like to see or do you see problems from growth?
MR. STRAUSS-KWHN: While the euro is obviously much higher than its historic average, we see the value of the euro today in line with the mid-term equilibrium of mid-term balance on the external side. So the forecasts we have on the current account of the euro zone for the coming time are in line with the value of the euro today, so I will not say that we expect either an increase or a decrease in the value of the euro.
QUESTIONER: Also on exchange rates, can you say what your view is on how the staff will be implementing the new exchange rate decision and what role that will play in the surveillance, especially the global imbalances?
MR. STRAUSS-KAHN: The decision which has been made in last June on the surveillance is a very important one. A very large majority of countries—even if not all countries—approved this move, and it is a very important change, evolution in the way we are going to carry on the surveillance. Of course, it has some implications in the current work being done on the Article IV on different countries because we have to just in the day-to-day business implement a new practice, and we need to see how from a technical point of view we are going to do that. But I think that what has been decided a few months ago is a very significant change or improvement, a very significant improvement in the way we are able to fulfill our mandate on surveillance.
QUESTIONER: Could you just be more specific on what the changes, what is going to be different and how they are going to implement that surveillance?
MR. STRAUSS-KAHN: As far as I see it, what is very important for the Fund is to be able to have a look on all elements of economic policy which may have an influence on external balances or imbalances, which is different from the previous definition of what we were supposed to do. It gives the Fund the possibility—and that is why it takes time to implement and to be effective—it gives the Fund the possibility to go on, investigate, I do not know if in English investigate is too strong a word, analyze—we would say investigate in French, but my English is so bad I am not quite sure if I am making a mistake. So let's say to collect some information, have an appraisal and some proposals on a question which at the beginning can be seen as rather far from the question of external balance, but at the end of the day has an influence on external balance or imbalances. So it is a much more broader way to have an appraisal of the external imbalances, and that is why it is very important. John?
MR. LIPSKY: I think that is fine. I will just add one quick remark. I assume everybody understands the importance of the decision and its role. In essence, the consultations are mandated by the Articles of Agreement. They are basically the way in which the membership assures itself that everyone is living up to the obligations and standards of the Articles of Agreement.
The surveillance decision was the Board, which is the membership, telling us in concrete terms what are the standards that they expect of their membership and what is the staff supposed to do when it conducts surveillance, what are the minimum standards. So this has been a very excellent and important exercise of laying down in concrete terms a consensus view on what is expected, and what they have told us is exactly as the Managing Director has stated. In that context we are expected to address in a forthright and frank way our assessment of the exchange system in the context of the considerations that the Managing Director described.
QUESTIONER: I understand you are happy to see that countries do not need the IMF anymore, and Russia is one of those countries. Turning around that question, I would like to ask you, in what way does the Fund need a country such as Russia at this point?
And also, if I may, building up on what my colleagues have asked you about the exchange rate, when the White House and the Commerce Department were touting their economic successes, I asked them specifically to comment on the IMF opinion about the dollar and the room for downward revision. They wouldn't because they said it was a matter for the Treasury to comment on. I do not understand their reasoning, though. They say the dollar reflects the fundamentals. The fundamentals are strong, but we all know that the dollar is falling. That is a contradiction. Either the fundamentals are not strong or the dollar should not be falling.
MR. STRAUSS-KAHN: On the two points, I did not say countries like Argentina or Russia do not need the Fund. I said they do not individually need the Fund for the time being. Nobody knows what is going to happen in one year, two years, three years, and as we all know, a financial crisis and especially exchange rate crisis does not give you a phone call to tell you we are going to have a crisis in six months. So nobody knows what is going to happen.
I think it is rather good news that for the last five years we did not experience such a big crisis, but nobody can say it will not happen in the coming years. It will be such a big change in the market economy that for a reason I do not know—maybe my arrival here—we will not have anymore any kind of exchange rate crisis, but I cannot believe this. So at one time or another, unfortunately, we will experience again this kind of thing, and then in this case individual countries, a set, maybe probably a set of individual countries will need the Fund again.
But even if we have periods in which individual countries do not need the Fund anymore, it does not mean that as a whole, the community, the society of countries does not need the Fund. What has been told before about the financial stability or instability coming from new sources like what is going on in hedge funds, sovereign wealth funds, the subprime crisis, and all these kinds of things, which are not directly related to exchange rate problems may affect financial stability, is a question for which all countries need the Fund, including Russia.
Now, on the second question. The value of the dollar is set every day in the market, and as far as I know, the value did not change dramatically yesterday, the fundamentals of the American economy did not change yesterday, and so the view of the Fund did not change yesterday. So the view of the Fund about the dollar is still the same; namely, that when you look at the mid-term external balances with a high level of deficit, even if it is stabilized today, the view the Fund has on the dollar is that the dollar is still overvaluated. So it is no surprise to see a declining dollar, it is in line with what the Fund is saying.
QUESTIONER: You have been talking about slimming down or there is pressure actually on the Fund to slim down the Fund and to cut expenditures. I was wondering what this is going to say to poverty reduction and to what extent you are going to speak to that or not. You know there is a huge discussion going on to what extent the IMF should do what exactly the World Bank can do better. I think I remember you had been saying earlier that you want to keep that. Is that still your take on that?
MR. STRAUSS-KAHN: Thank you for that question. It is a very important question. The real question will be what the Fund has to do in low-income countries. I disagree with the presentation, which was as you reported it, that poverty reduction is a question where the Bank could be more effective than the Fund. It is two different things. Of course, they have to cooperate, but it is two different things.
The Bank is concerned with long-term structural reforms, alleviating poverty, trying to foster growth and so on, and it is absolutely necessary. That is project financing, structural reform financing, it is something different from what the Fund has to do, which is concerned with a short-term balance as far as fiscal questions are concerned, budget deficit, and so on. So if somebody has in mind that short-term imbalances on budgets or exchange rate has no influence on poverty, then it is right to say that the Fund has nothing to do with poverty reduction.
But if, as I think most will say, we believe that dramatic imbalances in budget, dramatic financial crises have a lot of influence on inequalities and poverty because at the end of the day it is always the poor people or most of the poor people who pay what happens in those countries, then there is a role for the Fund, which is not the same than the role for the Bank. And as I say, we have to coordinate it. There may be, of course, some overlap, but it is two different shows. So the answer to your question is that we have probably to downsize the institution, we probably have some fat on which we can save some money, but I do not think that what the Fund is doing in low-income countries including the PRGF is something on which we should step back.
QUESTIONER: People in France are really worried this morning about the Wall Street situation and the oil price, your view is quite important to them. Do you believe in a recession?
MR. STRAUSS KAHN: In the United States?
QUESTIONER: Yes, globally; if you could comment also the importance of globalization.
MR. STRAUSS-KAHN: We just experienced a very high level of oil prices, even if it is volatile and going up and going down. Most expectations are that the long-term trend is rather an increase in the price of oil than something different, so there is no surprise to see today the price of a barrel at such a level. Our forecast is we do not see the reason for a recession in the U.S. economy even if it is possible, we cannot rule it out, but we do not see the forecast of a recession in the U.S. economy nor in other economies.
Emerging economies are going very well, and that has an influence on the other question, which is the role of those emerging economies in sustaining growth at the global level. So in those economies we do not see a very strong and deep influence of the high price of oil or other resources like that. On the contrary, it may help them to develop.
On the U.S. economy, as on the European economy of course, the high level of energy prices may have an influence on the downside of growth, but we do not expect that it could lead to a recession. Of course, the problem is what will in the coming months be the combination of the different downside effects—oil prices, consequences of financial turmoil or I do not know what can happen. But as far as we see on the consumption side, on the labor market figures we just saw a few minutes ago, which are significant in this point of view, there is no evident signal that it will go further than a slowdown in the rate of growth.
MR. AHMED: Thank you all very much. I am afraid we have run out of time today, but I am sure there will be other opportunities.