Transcript of a Press Conference by International Monetary Fund Managing Director, Dominique Strauss-Kahn
October 9, 2008With John Lipsky, IMF First Deputy Managing Director and Masood Ahmed, External Relations Director
Washington, D.C. October 09, 2008
Mr. AHMED: I would like to welcome you all to this press briefing with the Managing Director of the IMF, Mr. Dominique Strauss-Khan, and to his right, Mr. John Lipsky, the First Deputy Managing Director. The Managing Director is going to make some opening remarks, and then both he and Mr. Lipsky will take questions from you. This press briefing is on the record and it is live.
With that, I would like to turn now to the Managing Director.
MR. STRAUSS-KAHN: Thank you, Masood, and I thank all of you for being here this morning for this first press briefing of three busy days.
You have heard this week our views on the global markets and the global economy through the press conferences on the GFSR and the WEO. You know that our view is that the situation is very serious, but at the same time we can solve problems if we act quickly, forcefully, and cooperatively. Let me first talk about the extent of the financial problems themselves.
Our last estimate of the overall losses is US$1.4 trillion, and you remember that last spring this estimate, equivalent estimate was US$1 trillion. So, it increased, I will not say a lot, but it has significantly increased. At this time, in the spring, when the estimate was about US$1 trillion, the write-downs were around US$200 billion. So, it was obvious that there was more to come. We have not been surprised here that, over the months coming since the Spring Meetings, more and more losses have been disclosed in American banks, American financial companies, and also in European institutions.
Now, what I would like to show you in a smaller map, is what we call financial global warming, which is that over three years, 2006-2008, different parts of the world have slightly [heated up]. It was rather cool in 2006, no stress. The stress increased in 2007, and the stress became overwhelming in 2008.
[click on map to advance slideshow]
This global warming in the financial sector shows that now the crisis is really a globalized crisis and that has a lot of implications in terms of policies. So, the first priority today is obviously to restore confidence in financial markets, and I would like to give you four principles that have been discussed at the IMF Board and which are lessons we can draw from the IMF experience of such a situation. I should not say "from such a situation," since such a situation never happened, but at least from financial crises which look a little like this one and were more localized, the Asian crisis, the Latin American crisis, some others. The four principles are the following:
The first one is that state action needs to have clear objectives so that effective oversight of how public money is used is possible. So, the first principle is a clear objective, because it is the only way to have public oversight.
The second principle is that national plans need to be comprehensive. What does that mean, "comprehensive"? It means that one component obviously is to provide liquidity through the central banks. The second point is to contain guarantees to depositors and assurances to creditors. The third point is very well-known and has to do with distressed assets. The fourth point, which is for us the most important one and on which the IMF has been insisting for months, is recapitalization of financial institutions. There is no way to have a way out of the situation that we are in without enough recapitalization of the financial institutions.
The third principle is that action should be coordinated at the global level, but also at the regional level—and a good example of regional level, of course, is the European Union—as it has been done recently with the action on interest rates.
The fourth principle is that taxpayers should be able to share upside risks once the crisis passes.
The need for recapitalization—as I told you, the IMF has insisted for months on this—is now well understood on both sides of the Atlantic. Cooperation is less evident for interest rates. I urge European countries to work together. There is no domestic solution to a crisis like this one. I know, having myself served as a Minister of Finance of my country, how difficult it is in the European Union to make consensus and to make decisions. I do not underestimate the problems.
Nevertheless, cooperation and coordination in actions is the price of success. All kinds of cooperation have to be commended. All lonely acts have to be avoided, if not condemned, and that is IMF Message No. 1 for this morning.
Let me turn to growth. As you know, our view is that growth will be close to zero next year in advanced economies and about 3 percent in the global economy. So, we are on the cusp of a global recession. In the spring, the IMF has been criticized by you—but not only by you—because we were too pessimistic. Unfortunately, we were too optimistic. The severe downturn in the world economy is obvious for everybody, I think.
What I want to say is that, even if we see year 2009 around zero for advanced economies and 3 percent, as I just said, for the global economy, we see a beginning of the recovery in the second part of 2009. So, it is a message of hope, and that is probably Message No. 2 of the IMF today that the crisis is serious, the crisis is protracted; but, nevertheless, we see that the end of 2009 will be the beginning of the recovery, slow recovery. It will not go fast, but growth will come back, in our view, at this time.
That is why opposite to global warming we have global cooling. Global cooling is that 2006 was a year where growth was rather high. Red countries are countries where you are above growth trends and blue countries are countries where you are below trend growth. If you go to 2007, you see that the red diminishes and the blue increases. In terms of 2008, it is even worse.
That is why, ironically, you can see that the only part of the world in 2009 where we expect growth to be above trend is Africa, and especially Western Africa. The rest of the world will have growth below trend, but, as I just told you, the end of 2009, in our view, is the time when recovery will appear.
In 2009, growth will come mostly from emerging market economies. At the same time, emerging market economies have started to be affected by the situation, affected by the decreasing growth in advanced economies and the consequences on trade—which is more news and has happened only in the last weeks—affected by cuts in credit lines and especially in trade credit.
That is why I have yesterday activated emergency procedures of the IMF to respond quickly with high-access financial programs based on streamlined conditionality which is focused on the crisis response priority. So, I have activated this emergency procedure yesterday to be able to answer problems that may happen in some of the emerging countries, and that is probably IMF Message No. 3. We are ready to answer any demand by countries facing problems.
Now, the question is, of course, what kind of economic policy advice are we likely to give. For major economies, the counterpart of action to restore confidence in financial markets should be action to rejuvenate economic growth. Obviously, we welcome monetary easing in the advanced economies, which just took place and it is still going on. Obviously, all countries that have scope for fiscal stimulus should use it. I already said that more than six months ago in February, and it is still true even if there are less countries today having scope for a fiscal stimulus.
But even if we welcome everything which can be done on the fiscal side and also on the monetary side, I want to insist on one point that, in the current circumstances, macroeconomic policies have to be used in combination with action on the financial front. That will be useful and effective only if we are able to solve the financial crisis.
While confidence is not back, while the money markets are not working together, what you do in traditional policies, monetary policy, fiscal policy, will be not be very effective. That is probably today our Message No. 4, meaning that confidence is the first thing which has to be restored before we can use our traditional tools in economic policy.
Now, I would like to address two other issues before concluding. The first one is that we should not forget the other crisis, and that is my Message No. 5. What is the other crisis? The other crisis is the crisis we were talking about a lot in the Spring Meetings, which is the food and fuel surge in prices.
What did the Fund do during the last six months? We gave advice to countries. We provided technical assistance and we also provided financing when needed. Our concern today is about inflation, not only inflation per se because inflation means unsustainable situations for the countries—and you know that in most developing countries and emerging countries, inflation rates are now much higher than the targets which could have been proposed before—not only inflation per se which would be reason enough to be worried about inflation, but also because, as we all know, inflation hurts the poor first. So, a long period with high inflation is a long period with increasing inequalities, and a long period with possible unrest in the democratic behavior of many of those countries.
So, we give advice, we provide technical assistance, but we also provide financing. We support the 15 countries that are in the pipeline. We reformed our Exogenous Shocks Facility to more likely answer quickly with less conditionality and with a rapid access facility to the needs of the countries.
The main problem in all the crisis is that a lot of aid has been pledged by donors, but it is not really available. I understand that in advanced countries budgets are under the most strain and so it is difficult to deliver even when commitment has been made in the past. But we should not respond, those advanced countries should not respond to the crisis by cutting aid to the poorest and the more vulnerable countries.
By the way, talking about low-income countries, I would like to draw your attention to a major event. It is something which is a bit aside from this conference, but it is just information for you. The IMF, together with President Kikwete of Tanzania, will organize in March 2009 a big conference to discuss how Africa can build on its recent economic successes. The theme of the conference is "Changes: Successful Partnerships for Africa's Growth Challenge" and it will convene together senior policymakers, private sector people, and also official partners like the IMF and other IFIs. More details are available in a press release which will be issued shortly.
The second issue I would like to comment on is that we are still in the midst of the crisis. It is not too early to talk about the lessons from the financial crisis, because a better understanding of the reasons why we have this crisis is part of the solution. Obviously, the crisis comes from an important regulatory and supervisory failure in advanced economies. Obviously, there is also an important failure in risk management in the private financial institutions. Obviously, again, there is also an important failure in market discipline mechanisms.
The IMF and the FSF have started to work on improvements very early this year, but we need to go further. What has been done yet is not enough, and that is IMF Message No. 6. We need to look further at fair value accounting; we need to look further to change ratings agency behavior; we need to look further to close loopholes in regulations; and we need to look further to fill gaps in information.
More broadly, we need to come up with practical advice on how governments and central banks can use macroeconomic policies to puncture asset bubbles in good time. It means we need to look more than in the past at the linkages between the real sector and the financial economy. That is the added-value of the Fund.
There are a lot of institutions working on the real economy, the OECD, the forecast divisions in all the Finance Ministries. On the other hand, there are also a lot of institutions working on the financial sector, namely the central banks, the FSF, the BIS.
But the Fund is a unique institution with linkages between the two, and the crisis we are in is typically a crisis where we have to understand better those kinds of linkages. Maybe because we are in this unique position it is one of the explanations, the possible explanations why our forecasts were more accurate six months ago.
Now, we need to go on with this work and it is something which has to start now. We cannot wait for the end of the crisis to say, okay, now that the financial crisis is behind us, it is time to think about that. It is time now. Even more broadly, we have to draw lessons on the architecture, financial architecture, which clearly failed to adapt to globalized financial markets. It is a question of legitimacy of this architecture and it is a question of effectiveness of this architecture.
Legitimacy means that all countries have to be involved in the solution, because they are all involved in the problems, and not only advanced countries. Effectiveness means that we need to use the experience which has been accumulated in IFIs and also that we need them to follow-up.
What will be the worst situation would be that, after the crisis, when it will be behind us, we just say, okay, we can go back to business as usual. The IMF's last message for this morning, the seventh message is to say that the lessons of the crisis have to be drawn and we are ready to do that.
So, I told you at the beginning and I will end with reminding you of my first sentence that we are really in a difficult situation as far as the financial crisis is concerned because it is not over, as far as economic forecasts are concerned because they are not good for year 2009, but we can solve the problems we are facing. We need to act quickly, to act forcefully. All this has been done now, but also to act in a more cooperative way. That is the point on which certainly some progress can still be made and that is the point on which the IMF is ready to help.
QUESTIONER: Sir, I have been listening to you and your colleagues over the past few days. I have been listening to other people such as Secretary Paulson, such as Mr. Medvedev of Russia speaking in France yesterday. I hear mixed signals. Everybody is talking about international cooperation and coordination. At the same time, people admit and you just told us that cooperation is lacking in many respects. Secretary Paulson yesterday also said that basically every country should act on its own due to its own specific circumstances.
My question to you, sir, is what forms of this international cooperation do you see as the most effective, as the most realistic at this point, and if you could throw a few words about Russia, I would be grateful, too. Thank you.
MR. STRAUSS-KAHN: Well, there are two kinds of cooperation which have to be submitted or developed. The first one is cooperation behind the scenes. Decisions which have been made sometimes had been discussed with partners and sometimes had been taken alone.
I just want to draw your attention to the difference between cooperation and national action. Cooperation can end in national action. You may cooperate in defining what you are going to do, discuss it with your partners and different members of the financial community, and then act differently in the different countries because the situations are different.
It does not mean it is not a cooperative action, if it has been discussed all together. What we have to avoid is decisions made by some countries without making the other countries aware of what they are going to do or not, listening to the spillover effects from one country to another country. That is one part of the cooperation which has to be improved, which is what I just called cooperation behind the screen.
The other part is cooperation in drawing the lessons of what is going on; what kind of economic policies should be developed and what kind of institutions we should rebuild. For this kind of cooperation, my point, as you probably noticed, is that it cannot be done; even if it is initiated by a group of countries which are the most advanced economies and the biggest economies in the world, it can be originated by the G-7 or the G-8, but it has to be carried out by all the countries.
The feeling of ownership of those measures is very important if we want implementation of a new framework in the financial sector all over the world. There is no way to say that we are in a globalized world, that a crisis in one part of the world has an effect on another part of the world, and then try to develop solutions which we will implement only in one part of this world.
So, it means that the role of institutions having universal membership and likely to convene all the countries in the world around the same table to discuss the implementation of this new framework is certainly a role we have to take into consideration in the coming weeks.
QUESTIONER: I have two questions. The first is you talk about the emergency plan by the IMF. Could you talk to us a little bit about its mechanism and how it works? My second question is the G-7 will have a meeting tomorrow. Do you think the G-7 will develop a joint proposal to combat the financial crisis? Thanks.
MR. STRAUSS-KAHN: Well, the emergency process in the Fund has been developed in 1995. It allows the Board and management of the Board to act much more quickly than in the traditional procedure. It allows up-front payments, high access, and also streamlined conditionality even if sometimes prior actions may be expected, which means that it is a situation in which we are not going to discuss with countries over weeks, sometimes months to define a program. The program has to exist. There is no way to finance the situation without a program defining the macroeconomic policy to be followed, but that has to be done very quickly. Very quickly means two weeks at most. That is the emergency procedure.
Now, on the question of G-7, well, I think the G-7 already did a lot. The consultation discussions which took place in the G-7 have been very useful during the last year. My point was that even if the discussions at the G-7 are very important, we need to go beyond the G-7, including in the G-7 some other countries which obviously today are major players in the world economy, and that is the extension of the G-7 to G-11 or G-12. There are many proposals from this point of view. That is one thing.
But another thing is that, even in this case, you have 160 countries which will remain outside, and most of them, if not all of them, have a role to play. So, the G-7 has to show one possible track, but all this is now a crisis which concerns everybody on earth, and in this case we need to have the cooperation, the discussion, the opinion, and take into account what other countries may say.
QUESTIONER: Some economists in an article cited by The Financial Times seemed to think that Brazil will be relatively immune to the crisis. I would like to ask you if you believe in that or not. And I would like to ask you if you think that, at the end of this crisis, we will see a shift in the economic balance in the world, seeing as though many developing nations are now performing well or at least better than others, and could come out of this much strengthened.
MR. STRAUSS-KAHN: I am not going, if you would allow me, to spend all this press conference talking about one country and another one and third one, because you are all coming from different countries. I have a membership of 185 countries, so I am afraid it will be a bit boring for the other ones. Nonetheless, I am going to answer your question on Brazil.
No country is immune. Maybe you remember six months ago some people were writing papers on the so-called decoupling theory. The idea was that emerging countries will be immune from the financial crisis for a lot of arguments which we did not believe here, and since the beginning we were explaining that no part of the world was immune. There may be some delay or some decrease in the strength of the waves which hurt the emerging countries, but there will be some consequences.
Now, Brazil has very strong fundamentals. The economic policy which has been managed during the last years in Brazil was the right policy. A lot of reserves have been accumulated, and Brazil is an economy in good shape. But even in good shape, the effect of the downturn in global growth will have consequences on Brazil.
As far as I remember, we expect growth of 3.5 percent for 2009 in Brazil. For some countries, like mine, for instance, France, 3.5 will be a big success. The last time we had 3.5 was ten years ago. I do not remember who was the Finance Minister at this time.
MR. LIPSKY: It was you.
MR. STRAUSS-KAHN: But for Brazil, obviously 3.5 percent is not that good. We are used to rates of growth between 5 and 6 percent, and even more. So, the situation of Brazil is a strong situation, but not immune from the crisis.
Now, I just forgot the second part of your question—oh, yes, obviously. We do not have the figures, of course, for 2008, but in 2007 emerging market growth accounted for two thirds, 60 percent to two thirds of global growth. If, as I told you, for 2009 we are right in saying that advanced economies will be around zero, it means that a hundred percent of growth will come from emerging and low-income economies.
Does it imply a shift in power? Well, shift in power takes time, but the crisis lasts now for more than one year. As I told you, we see recoveries starting at the end of 2009, so it is one year from now. So, over time, of course, the different rates of growth in the different countries have consequences on the relative weight of the different countries. There were already a lot of good reasons why advanced economies had to take more into account the opinion of emerging economies. The crisis gives one more reason to go in this direction.
QUESTIONER: When you were in Jeddah on September 17th, you said we may be seeing the end of this financial sector crisis. I was just wondering there have not been many people through this event who have really managed to forecast things very well. Why have things been so hard to foresee?
MR. STRAUSS-KAHN: Well, I think it is fair to say that all of us have underestimated the strength of the financial crisis. Probably the IMF—I am not proud in saying that; I would have preferred that we were wrong—probably the IMF was the institution all around the world with the more accurate forecasts and the more pessimistic forecasts.
So, even here, the idea was that, well, after a while, we will be able to overcome the crisis rather rapidly, quote-unquote, rather rapidly solve the financial crisis. What appears is that the roots of this crisis are deeper than expected, that the disclosure in financial institutions takes more time than expected, and that finally the crisis obviously protracted on the financial sector and, of course, following that on the real economy.
Nevertheless, I believe in what I told you just before, namely that there is some message of hope. The IMF has been the more pessimistic institution six months ago. We have today very gloomy forecasts. Despite this, we are probably the institution seeing more hope at the end of 2009.
QUESTIONR: My question is how will this financial crisis affect China's economic growth in the coming years? Could you possibly comment on China's participation in the world action against this financial turmoil? Thank you.
MR. STRAUSS-KAHN: As I just told you, there is no part of the world being immune and it will be very surprising that a power like China will be just looking at the crisis from the balcony without being in any way concerned about what is happening. Growth in China is also going to decrease compared to the trend.
Of course, when growth in China decreases from 11 percent to 9 percent, it is a two-point decrease. It is a lot. On the other hand, 9 percent of growth is also a lot. So, the effect of the crisis on China will exist. Nevertheless, the rate of growth in China will remain very high.
I think that is a good opportunity for the Chinese government, and I think policymakers in China are quite aware of that, to rebalance growth from trade-led growth to a more domestic consumption-led growth, which is what we expect. It will also have good consequences on the exchange rate which, as you know, is one of our concerns here in the IMF.
So, I think that the contribution of China to the resolution of the crisis, at least as growth is concerned, is mainly linked to its capacity to shift the main driver for growth from external demand to domestic demand.
QUESTIONER: You said in different interviews in French newspapers that the IMF has to play a role very important and quickly. You are ready to play this role in solving this financial crisis. You just talked about emergency procedures for poor countries, but for the financial crisis now, what are you going to do?
(THROUGH INTERPRETER): If you could please answer this in French, I would be very grateful, even if you speak only a few minutes in French.
MR. STRAUSS-KHAN: And I am supposed to say the same thing? Well, as I told you, the IMF is an advisor to governments. The reason why it is an advisor for governments is because it has accumulated a lot of experience even if crises are never the same and the crisis of today is not the same as the crisis of ten years ago. For instance, we provided to the U.S. government but also to other governments a lot of technical advice, especially concerning what I underlined before, which is the need for a comprehensive plan with recapitalization of the institutions. I am happy to say that finally, today, all governments around the world have clearly endorsed this idea that recapitalization was an absolute need to get out of the crisis.
The other part is the possibility to provide financial help, but not only to emerging countries. Nobody knows if some developed economies, advanced economies will not also be in need of some help by the IMF. So, what is the most obvious is that some emerging countries are much under stress than developed economies, but it may also happen to developed economies.
Then the third point is that, to get out of the crisis, you need to reform the way the financial sector is working. If the financial sector goes on working as it did during the last years, there is no reason why the same causes will not have the same consequences. So, this kind of reform has to be implemented. Implementation has to be done and that is traditionally the work of the IMF.
So, you want it in French? Just half a minute.
(INTERPRETATION): There are indeed several roles that the IMF plays. The first is to advise governments the role that the IMF has continued to play over the last months, particularly with regard to the U.S. government, but also with regard to many other governments. This is a role of advice and counsel based on the IMF's vast experience.
That experience is of particular value today in this specific instance in which we have been insisting for sometime on the need for recapitalization, not only on better liquidity plans. This is not just a question of liquidity. It is a question of credit and creditworthiness.
The second role is to come to the assistance of countries that are traversing difficulties, not only emerging countries but others as well. That is where a number of facilities in the Fund can come in very handy and can be tapped quickly.
Thirdly, it is clear that unless we change our behavior, unless we change our practice, we will not emerge from this difficulty. We will not get a different result if we persist in the same causes. This is not only something that involves the advanced countries but every country, because, of course, we live in a globalized economy.
For this, of course, there is a need for an institution such as this one that works to buttress the supervisory capacity, and that, indeed, is also the role of the IMF.
QUESTIONER: I would like to know, are you comfortable or satisfied with the response of the authorities in Sub-Saharan Africa? Particularly in Nigeria, the stock market in Nigeria since the first quarter, somewhere around March. So far, the authorities say that maybe the market is immune to this global crisis. So, are you comfortable with the action taken by the government so far?
MR. STRAUSS-KAHN: Well, the role of the IMF is to give advice, but not to take action in place of the government. Sometimes we agree and sometimes we agree less. In the case you are quoting, our action has been most focused on the question of the impact of the increase in prices, oil prices, food prices, depending upon the countries, and the right answer to give in these cases concerning the decrease in taxes, the decrease in tariffs, subsidies, transfer programs, targeted programs to the poor, safety nets, this kind of thing.
It is true to say that in most of those countries the idea that they could be immune, as you say, from the crisis, especially on the financial side, was considered as common knowledge. I think that today everybody understands that it is not the case anymore, and practices are changing very rapidly in most of those countries.
Again, I am convinced that the kind of advice we give is the best we can. It does not mean that it is always followed by our membership.
QUESTIONER: You have implied that the Fund is going to be backing business as a lender. Do you have the resources to back your pledge to help any country that needs it, including possibly funds ? Do you think there is any utility at this point in an increase in SDRs?
MR. STRAUSS-KAHN: Well, that is a very traditional question so I am afraid I will give you a very traditional answer. In the situation we have today, because, as you know, the Fund did not lend a lot during the last five or six years, all resources are available. We have hundreds of billions of dollars which are likely to be used in one year, and even more if we go over this period of one year.
Now, if needed, the possibility to have more resources through the General Agreement of Borrowing or the New Agreement of Borrowing, or using a procedure like the mission of SDR is a possibility, but you remember that the last attempt to have this distribution of SDRs is 15 years old, or something like that, and has not been finally voted by the membership. So, I am not quite sure that if it took 15 years not to have a result, I am not quite sure it is the quickest to find resources, if needed.
The Fund has the resources to be able to support the needs of our membership. If these resources were all used and there was a need to increase resources, we have a different way, we know a different procedure to increase the resources of the Fund, but at the point where we are now, it is not necessary.
MR. AHMED: Thank you all for all attending. We are going to bring this press briefing to a close now. Thank you.