Transcript

Transcript of a Press Briefing on the International Monetary Fund's World Economic Outlook and Global Financial Stability Report Updates

January 29, 2009

MR. MURRAY: Hello. I am William Murray, Chief of Media Relations at the IMF. This is the press conference on the latest World Economic Outlook update and the latest update of the Global Financial Stability Report. This press conference is live. I would like to welcome people watching via our website and via our Media Briefing Center. On the Media Briefing Center, I would recommend people start submitting their questions as soon as possible. We will try to get to as many of them as we can during this briefing. I am going to first introduce our participants, and then there will be some brief opening remarks and then we'll take your questions: Olivier Blanchard, our Economic Counsellor and Director of Research, Jaime Caruana, our Financial Counsellor, Jan Brockmeijer, Deputy Director of the Monetary and Capital Markets Department, and Charles Collyns immediately to my right is the Deputy Director of the Research Department. Olivier will open with his remarks and then Jaime will have some as well. Olivier?

MR. BLANCHARD: Good morning. This is the second time I do this presentation and I hope it doesn't become a habit, but I am again the bearer of rather bad news. I suspect however that what I am going to say will not come as a complete surprise, namely, that in the last 3 months the global economy has taken a turn for the worse and financial markets have remained under extreme stress, and global output and trade have sharply decreased.

My purpose in my introductory remarks is really to make two points. The first one is to present the growth forecasts which as you will see have been revised substantially downward since last time, namely, since November. And more importantly I think, to talk about the policies which are needed for restoring the global economy to health. So let me start with an assessment of the outlook.

One way of summarizing our forecast is that we expect the global economy to come to a virtual standstill in 2009. There are important differences across countries. In the advanced economies, we basically forecast the sharpest contraction in the postwar period. To give you the basic numbers, we expect real activity to contract to about minus 1.5 percent for the U.S., 2 percent for the Eurozone, and 2-1/2 percent for Japan. If you look at the rest of the world, the numbers are better, but indeed the emerging and the developing economies are going to do better than in previous downturns, but relative to their underlying growth rate they are still going to do quite poorly. For example, we now forecast growth in China to be around 6.5 percent, and we forecast growth in India to be around 5 percent. You can aggregate these numbers using weights for national production. When you do this and you use what we call PPP weights, then you get global growth to basically be about half a percent in 2009, and this is the lowest rate since World War II.

First, the revisions are very large. If you go back to what we had announced in November, the downward revision for the world as a whole is 1-3/4 percentage points which is very large. It is actually roughly of the same size for the advanced economies and for the rest of the world. But behind this similarity, there are actually substantial differences in the factors which are affecting the different parts of the world.

So let me turn to the second point which is why we have revised our forecast so much. Quite simply because the global financial crisis has taken an increasingly heavy toll operating through different channels across countries and here it is important to distinguish between the advanced economies and the emerging and low-income countries.

So let me start with the advanced countries. There the impact and the bad news has come mostly through domestic channels as the financial crisis has weakened consumer and business confidence, raised uncertainty and destroyed wealth leading to much lower consumption and much lower investment. The crisis at the same time has made it much more difficult and costly for consumers and for firms to borrow, dragging down activity and trade. At the margin however what we have seen in the last 3 months is more the effect of collapsing confidence than the direct effect of the credit crunch, although the effect of the credit crunch is there and is likely to get worse rather than better in the near future.

In emerging economies, the story is a bit different. The impact of the financial crisis has worked mostly through external channels. There are basically three of them. The first one, weaker external demand from the advanced countries has led to a collapse in exports, and the numbers are dramatic. Second, the global credit crunch has reduced the availability and raised the cost of foreign borrowing to many, many emerging countries, and this is likely to actually get worse rather than better. And then for the commodity exporters, the decline in commodity prices has also affected their growth very directly, and here I think of the oil producers. In this case, different countries have suffered differently from each of these three shocks, but basically these three shocks have been relevant in general for that set of countries.

Let me now turn to the second half of my presentation which is the policies needed to resolve the crisis and get a lasting turnaround in global activity. First, we need stronger policy on the financial front to basically restore financial sector health. Jaime Caruana will talk more about the diagnosis and the remedies that we think are needed to get the financial sector back to health. Let me emphasize here that restoring financial health is a necessary condition for a durable economic recovery. A strong fiscal impulse which will come can push the economy for while but basically can now get back the economy to health, and so that part, the financial part, is extremely important. Here what we see is that the building blocks of what needs to be done have been assembled to varying degrees in many countries, but the comprehensive framework for restoring financial health in dealing with bad assets remains to be built and we think that the fact that this hasn't happened quite fast enough is one of the reasons why the financial crisis has lingered.

We think that at this stage more aggressive actions are needed for a unified approach involving liquidity provisions, capital injections, and disposal of foreign assets, and all these three components are essential. You cannot do it with just two or them or one of them.

This is to take care of the financial system and to get it back to health. In the short run we have to face the fact that demand has collapsed and therefore we need to take measures to support demand, these are macroeconomic measures, and it is important because we need to break the toxic feedback loops between the financial sector and the real economy. Here let me talk about monetary policy and fiscal policy.

On monetary policy, many central banks have taken strong actions to cut policy rates and improve credit provisions. There is still some room to lower interest rates but the room is diminishing rapidly, and indeed in some countries it is just gone. Moreover, deflation is now a risk. We have a report coming out today which discusses the issue in more detail, that we think that it is now a risk. In the current circumstances, it is clear that we have to basically think beyond standard monetary policy and that central banks to rely increasingly on unconventional measures to unlock key credit markets, and by key credit markets I mean high-spread, low-liquidity markets. The evidence here is that intervention by central banks in those markets, in these illiquid markets, can make a lot of difference, decrease the spreads, get the credit going, and can help a lot in the short run.

On fiscal policy, many countries have announced and are already implementing sizable stimulus packages. The key here is to design packages which provide maximum boost to demand very soon. That tends to argue in the current context for measures focused on spending rather than taxes. Measures focused on taxes end to have less effect in the short run than measures which increase spending.

At the same time there is a challenge which is that fiscal deficits are widening sharply because of the cyclical downturn because of the impact of asset price declines on revenues and because of the measures which are being taken both in terms of the fiscal packages and the financial packages. So here to prevent an adverse market reaction, it is essential that policymakers strengthen fiscal frameworks and commit to credible longer-term policies that reverse the deficit buildup as economies recover. That is really an essential part of what fiscal policy must be about at this point.

A few more points on policy. The first is that there is no one-size-fits-all policy mix at this stage. Different countries have had different shocks and have different constraints and must adopt different mixes. Some countries have more fiscal monetary space than others. In this respect, it is good that some emerging economies now have more space for policy easing than they had in the previous downturns and are making use of it. But in a number of emerging and developing countries, there is still the need given that capital has gone out, is going out, and will not come back any time soon, to basically adjust to this shock and basically this has to be done through movements in the adjustments in the exchange rates. While the use of reserves and fund financing can help smooth this transition, these countries also need to rein in spending and improve external competitiveness.

Let me turn to the forecast we make for 2010 based on the discussion that we just heard. Assuming that these polices that I have described will be put in place, then we expect the recovery to start by the end of 2009, and this is based on a number of assumptions or either direct or derived from underlying assumptions about policy. The first one is financial conditions will slowly improved, that spreads will slowly decrease. The fiscal stimulus will come into play and this will come later this year given the usual delays. And the U.S. housing market will stabilize. Under these assumptions, we basically forecast growth for 2010, so the numbers for advanced economies are growth in 2010 of 1 percent, still far below normal growth but at least positive growth, and for emerging and developing countries, we put it at 5 percent. If this were to happen, the global growth would return to a number of around 3 percent. Again let me emphasize that these forecasts depend very much on the timing and the pace of the implementation of the policies that I have mentioned earlier.

Let me end with risks with the forecasts, and there are obviously plenty of risks to the forecasts, and they are still probably mostly on the downside. The main risk is that the adverse feedback loop between the financial and the real sectors intensifies especially if policy implementation at the fiscal margin or the financial margin falls short of what we hope will be done. The other risk is one that I have already mentioned which is that the large fiscal deficits basically lead to worries in financial markets about sustainability of debt in the long run, and that is not only an issue for the long run, but doubts of that kind arise, then loan rates increase today and offset some of the effect of the fiscal stimulus and therefore make the policy less useful. So again let me insist that the fiscal stimulus must be strong. We are not advocating for a small stimulus. It really has to be very large. But it has to be presented in the context of a coherent long-run fiscal strategy, otherwise it may backfire.

Let me end going over risks on the upside. I think there is indeed a chance that things turn out better than we forecast. The point is that it is true that many of the factors behind the crisis require painful adjustments to the financial sector. Mistakes were made and they need to be addressed, and that is going to be painful. But at the margin the current crisis is largely a crisis of confidence. Basically the decrease in spending on the part of firms and consumers is largely based on the loss of confidence and on what you could call a wait-and-see attitude which is that in the present context of enormous uncertainty, it makes sense basically for firms and consumers to wait to see how things go before actually taking decisions. When they do this is makes sense for them, but at theme time depend drops and that is what we have seen. So in that context, when confidence is a key factor and the wait-and-see attitudes are so central, then you can think that if the right policy measures are implemented, confidence can actually build up faster, demand can start faster, and this starts the virtuous cycle in which basically the fact that the economy is doing better reassures consumers, leads them no longer to wait and see, and start spending.

To conclude, with the right policies and bit of luck, the recovery could come sooner and be stronger than we currently forecast.

MR. MURRAY: Thanks, Olivier. Jaime?

MR. CARUANA: Thanks. Good morning. You have a copy of our written update, so I can be brief and go to the main points about the situation and also about the policy measures.

Despite the implementation of unprecedented policies and programs to stabilize the financial markets, we all know that systemic risk in the financial system remains elevated. Financial markets have continued to experience the pressures of deleveraging against the deepening of the economic downturn that Olivier has just described. And confidence among financial counterparties also remains strained. Let me go to the three main points.

First, in terms of credit risk, the worsening in credit risk and credit quality affecting a broader range of markets and assets has raised our estimate of potential deterioration in the U.S.-originated credit assets held by banks and by others from the figure that you are familiar with which is the $1.4 trillion in our October GFSR, to $2.2 trillion now. Thanks to the massive public sector injections of capital that occurred in the fourth quarter, banks have managed to maintain sufficient capital to offset the existing write-downs, but looking forward, banks will need more capital as expected loss will continue to materialize. Estimates are quite difficult to construct and it is not easy to move from the previous figure to the data of how much capital is needed, but we have tried to make a rough calculation, and for European and U.S. banks if we include not only the U.S. exposures but global exposures too, our rough estimates indicate that at least half a trillion dollars is necessary to prevent the capital position from deteriorating further. We also emphasize in the update that it is important to clean up banks' balance sheets to raise the level of confidence in the banking system.

The second point is funding gaps. With the various government guarantee programs, banks have begun to raise substantial amounts of term funding, but markets are opening slowly. Central banks continue to supply generous amounts of liquidity, but little of that is lent out to term and much is being recycled in the overnight market that is then redeposited with central banks, and this pattern reflects continuing worries about counterparties as well as uncertainty about future funding needs.

The third point is about emerging markets. Emerging market countries and corporate borrowers remain vulnerable to continued deleveraging and credit retrenchment. Capital markets are risk averse so flows to emerging markets are likely to remain low, and at the same time emerging market corporates face large rollover needs in some countries, as well as facing the additional challenges of falling revenues as the global economy slows.

An important risk for emerging markets especially in emerging Europe is also whether parent banks can continue to support their subsidiaries in emerging markets in the face of these funding constraints that I have described. I think this rollover issue is important for emerging markets, but not only for emerging markets.

In terms of policy, I would like to start emphasizing with what Olivier said, the importance of restoring financial health as a kind of necessary condition for a viable recovery of the economy. We think that more decisive action is needed now by policymakers and also by market participants, and also more, but also with greater emphasis on balance sheet cleansing. A comprehensive and coordinated approach needs to be framed around a strategy that incorporates several elements in our view. The first is the three elements that we have always mentioned, the liquidity, the recapitalization, and the cleansing of balance sheets, but I would emphasize today the recapitalization and dealing with distressed assets, and this in our view requires a rigorous examination by supervisors of individual banks' balance sheets or individual plans of the banks vis-à-vis the crisis in order to determine which viable financial institutions may require public support in the form of public capital or asset restructuring. This may involve the use of different approaches including the use of a publicly owned bad bank to remove these distressed assets. Again, the important thing is cleansing balance sheets of financial institutions.

The second element, we think that short-run policies and actions need to take into consideration the long-run view of a viable financial system. It is important to recognize that the adjustment process will need to continue for some time and that to get at the end a viable financial system, and this viable financial system will be less leveraged and therefore it will probably be smaller in relation to the size of the economy and the important thing is that we have to make this process orderly.

We also emphasize that attaining higher capital ratios needs to be done in a gradual manner in order to avoid aggravating the adverse feedback loop to the real economy and to avoid more procyclical effects of the regulatory action. The third element is clarity and consistency of the rules. We think that to restore confidence, transparency and clarity are essential in both the private sector, but we are talking now more on the public sector, and this element of clarity along with the other three elements that I am mentioning should contain some of the risks of the measures that are being taken such as distorting the credit allocation decisions, or crowding out markets that do not receive special treatment, or disfavoring more efficient financial institutions that do not require public support.

Finally, it is important to emphasize international cooperation. Applying substantially different approaches or parameters in treating financial institutions and systems should be avoided in order to prevent unintended consequences that may arise from competitive distortions. International coordination is also needed to avoid excessive national bias whereby domestic institutions are favored or local credit provision is encouraged to the detriment of other countries.

Let me conclude by saying that the commitment by country authorities that is demonstrated through the wide range of policies and measures that have been taken is unprecedented and very welcome. It is unusual in these updates to talk about the measures for the long run, but I think it is important to emphasize that looking to the medium-term initiatives that that are already underway to improve the regulatory and supervisory framework will also be crucial to build a safe and resilient and innovative financial system and I think they will also help to restore confidence in the short run. Thank you.

MR. MURRAY: Thank you, Jaime, and thank you, Olivier. We are going to start taking questions. We'll try to work in as many from the room and take some from the media center. Can you identify your name and affiliation when I call on you?

QUESTION: (inaudible) you discussed the nature to recapitalize the solvent banks and perhaps take over those that are not viable, but when we've had some much difficulty valuing the assets on banks' books, how can supervisors determine which are solvent, and is it going to require some sort of government intervention to force banks to write down the value of loans?

MR. CARUANA: It is much more easier said than done, that's for sure, and we recognize the difficulties in doing this assessment. But I think this has been a clear message to come from many crises. This crisis is more complex. This is much more difficult. We recognize that especially in structured products. But at the end this assessment needs to be done. The losses need to be recognized. And I think that it is necessary to do it bank by bank and with the support and the cooperation and perhaps the interaction between the bank and the supervisors. I think it can be done. It will not be perfect. It needs to be done because if the balance sheets are not clean, the confidence in the balance sheets of the banks is not restored and this is what we think we are seeing. The figures that we have published on how the credit is deteriorating just because of the downturn on the economy indicates that this is a kind of moving thing. Unless banks' balance sheets are clean, it will be always a continuous calculation and there will be always continuous uncertainty about that. So I recognize I am not providing you with a full solution. I think in any case that the past crises demonstrate that this is extremely important. And this is perhaps the piece where among in the toolkit that perhaps has not been utilized that much and in part is for your question. It is not easy and we recognize that. Still it needs to be done.

QUESTION: My question is about China. You are telling us that China will remain in 2009 the world champion for economic growth, but when you listen to the facts that are reported from China you hear that capital expenditure has virtually stopped in the country, that many manufacturers are sharply reducing their production, and that the financial sector is in really bad shape. So where does this growth come from?

MR. COLLYNS: Shall I answer that question? I think the data in China need to be looked at very carefully. You are certainly right that if you look at the supply-side data, the data for industrial production and exports, the numbers coming in for the fourth quarter have been very weak, and that was reflected in a relatively weak GDP number for the fourth quarter. However, we see demand-side indicators remaining relatively strong, certainly slowing but not collapsing. It seems that in part what happened in the fourth quarter was a rundown of inventories by the industrial sector in the face of slowing local demand and some buildup earlier in the year.

Going into 2009 we see quite strong support coming from policies both on the fiscal front and also monetary policy. In combination with quite resilient demand, we do see China being able to weather this global storm somewhat better than others, but even China's growth will be very much below what it was 2 years ago. Growth was around 13 percent, so we're having growth coming down by half in 2 years and that's a pretty dramatic deceleration. So China is being impacted as much as other economies around the world, but given its stronger base and substantial room for policy response, we do still have China growing at a fairly robust pace.

QUESTION: I just want to ask something from your update, some more clarification. You say that developing countries in Africa and elsewhere are also better prepared this time to face policy challenges because of improved macroeconomic policy implementation. But the continent is in a weaker position than most other regions because of its poverty levels and reliance on commodity exports. I just want to know is it perhaps most of these countries in Africa, these emerging markets in Africa, part of the reason is that they can't afford a stimulus, for instance, or there are other elements related to this that -- their weaker position, if you can just expand on this.

And, secondly, when Mr. Olivier Blanchard started to say the economy will come to a standstill in 2009, and I was just wondering. Couple this with the high food prices, does this mean that we're looking even at higher poverty levels than we have right now?

Thank you.

MR. COLLYNS: Maybe I should respond to that one as well.

Indeed, as you say, we do see Africa as being vulnerable to this global crisis in part because although fiscal frameworks have been strengthened in recent years there is less room for countries in Africa to take the quite bold stimulus measures that are being introduced in advanced economies and a number of emerging economies. Given the less developed character of capital markets, given the less strong fiscal frameworks that would allow tax revenues to be increased in the future, we think African countries do need to remain fairly cautious rather than introduce large fiscal stimulus packages.

Also, I think the impact on poverty is increased by the fact that these countries do not have the capacity for the large-scale and effective income support measures that a number of emerging economies, for example, in Latin America and Asia, have introduced. So I think low income people in African countries are at particular risk which is why we are concerned that policies be prudent but also that aid flows be maintained to Africa over the years ahead.

MR. MURRAY: Let me turn to the Media Briefing Center here. This is a question about the differentials between the Euro Zone and the U.S.

Why will 2009 GDP contraction in the Euro Zone be greater than that in the United States?

MR. BLANCHARD: This one, I'll take.

The two elements to take into account here is that the underlying growth rate of the United States is higher than that of the Euro Area and that of Japan. So when you start from a smaller base and you go down by the same amount, then the numbers look worse.

In addition, we think that fiscal and monetary policy have been a bit more aggressive in the U.S. than in the Euro and in Japan, and that explains also some of the difference.

QUESTION: I have two questions if I may, one for Mr. Caruana.

You have mentioned that some banks will need half a trillion dollars to keep on going as they are. I guess you don't include that amount what will be needed to dispose of these bad assets, and I wonder if you have an idea how much that will cost. As you know, there is also talk of nationalization as a possibility that would provide taxpayers with the possibility to recoup more of the money than just buying the bad assets.

And my second question is on Latin America. I mean there has been a drastic decrease in the forecast there. In the past, you have said that the main channel of contention was trade, and I was wondering if the financial sector is now another channel especially in light of what Mr. Blanchard said regarding prior income, prior bank companies and, you know, taking capital out of emerging markets.

Thank you.

MR. CARUANA: Thanks. We have, on this occasion, made an update on the capital that we think, and it is a very rough figure. From that amount, you can make calculations on how much would be the amount that would be needed for taking out assets, but we have not done these calculations in this update. So, in the next GFSR, we will provide a more elaborate, a full assessment of the whole thing, but there could be some kind of equivalence.

In any case, yes, I think it would be both the capital and the asset cleaning are part of the solution of the present, to the present situation of the banks.

There was another discussion, and you mentioned to what extent is nationalization. I would like to say that what we have said when we talk about supervisors taking a view, a full assessment of the situation of the bank, it may be that in some cases some full-blown intervention is needed on the part of the authorities. In this case, the asset valuation perhaps has less importance in the sense that the authorities having both sides of the situation, and it may be necessary. I think we are calling for this kind of assessment to be done. We are not prejudging how much or how many times that would be necessary.

In terms of Latin America, I think the channel, the financial channel, is another important channel in the transmission of this crisis, and I was mentioning that the drop in flows to emerging markets has been important. The risk aversion on capital markets is explaining part of it, but there is a rollover need that is coming in part, mainly on the corporates, that needs to be taken into account. So, yes, I think this is an important element that needs to be followed.

And in the policy measures, we were talking about coordination. We think that to the extent that the measures will be coordinated, at least some of the unintended consequences that these measures may have in terms of crowding out some of these flows would be, could be diminished or could be mitigated.

MR. MURRAY: Okay. Thanks.

Do you want to add?

MR. COLLYNS: Just to add on Latin America, Olivier mentioned three channels by which emerging economies were being affected, financial, trade and lower commodity prices. Latin America is being hit quite hard by all three of those channels, including as Jaime says, the financial channel. But also, there's been a dramatic drop in prices of exports and a dramatic drop in commodities exported by Latin America, and that is having a very negative impact on the region. We've already seen that in the data for the fourth quarter, and we expect weakness to continue.

But I would emphasize that Latin America has much more policy resilience than in the past, room to provide fiscal support to the economies, room to let exchange rates move more flexibly, room to use international reserves to address liquidity problems. So, while we expect a sharply weaker performance in terms of growth, we don't expect a return to the crises that we saw in Latin America in previous downturns.

QUESTION: I have two questions, one parochial perhaps and one not so parochial.

The first question has to do with Australian growth. Last week, the Australian newspaper reported, based on an interview with one of your colleagues, that Australian growth would go to zero this year. I don't see specific reference in this chart to that projection. Do you have estimates for Australian growth in `09 and `10 specifically?

And the second question has to do with Mr. Obama's stimulus package. Have you formed a view about the package and does it fit into the pattern of remedies that you're recommending?

MR. COLLYNS: We're not at this point in a position to provide GDP projections for countries other than those included in Table 1.1. We'll provide a full detail when it comes to our Spring WEO in April but not at this point.

MR. BLANCHARD: And on the fiscal stimulus, again, I'm going to stay away from specifics, but if you read the fiscal paper that we produced a few weeks back in which we tried to think about what an optimal package should have, we basically emphasized on some of the elements I've talked about, which is it has to be strong but one has to see how the added deficit will go away when things return to normal.

And in terms of composition, we emphasized the fact that at this stage the purpose of a package like this one—it's not always the case, but here it is—is to basically have a maximum impact on demand. And, therefore, in the current context, it probably is better, if spending projects are ready soon, to actually use spending measures because at least in the first round you get an effect of one and then after this you may get more. Where, if you give it to consumers who are, say, in a frozen state of mind—they may well save most of it in which case the tax out will not be tremendously useful.

So our recommendations were that there should be as much as possible on spending, with limits there that you don't want to waste it on totally useless projects, but you want to go as far as you can. And then if you're going to do tax cuts, you should try to aim them at the people who are most likely to spend them, people who are currently constrained, the people who have problems in the housing market, the unemployed. This would be, from an economic point of view, I think the ideal package.

Political realities imply that you actually need buy-in, and so it may be that some of these packages that we're seeing will have a larger element of general tax cuts. These may well be needed politically, and they'll do good things for the people who receive them, but in terms of multipliers they're going to be less useful than some of the other measures.

QUESTION: Mr. Caruana, I'm not sure I understand the $2.2 trillion. When you say here that potential deterioration in U.S.-originated credit assets, that presumably means just bad loans here in the United States. If so, what percentage of those are in real estate and what about the losses in Europe on real estate and also what's the breakdown in terms of what percentage of United States-based banks hold those bad loans and European?

MR. CARUANA: Okay. We think that this figure that we are providing, that we started one year ago to provide, is a kind of good indicator of how the credit deterioration is moving, and what we are putting to that letter there is just the assets that are originated in the United States. We are not providing with the whole disclosure the split of the different items in this update. We will provide more generality on all these calculations in the GFSR.

But still, I think the important message there is, first, that the amount of the deterioration is significant, and I would like to say that also that the uncertainty about the figures in terms of sensitivity to assumptions is quite significant. The figure that we are providing is a figure where we are trying, we tried to be consistent with the macro scenario that we, that the IMF is foreseeing for the closer horizon.

And, basically, you want to disclose grossly what are banks and non-banks. We can take approximately the same ratios that were used in the previous GFSR where you have a more complete take. You will get, for banks, a figure that is around 1.3 out of this 2.2.

But again, I would caution not to try to move from there to what is the capital required. We have done this rough estimate, but it implies many other assumptions of what would be the revenues, what would be the recapitalization that has already occurred. It is not a straightforward calculation. We are not providing this detail. This is not the purpose of the update. There will be more detail in the future.

But the message is it's significant, what we are talking about, important figures, and we are talking about deterioration that requires that, looking forward, more capital will be needed for the banks. But I would like to emphasize that these are really gross estimates and not precise estimates.

MR. BROCKMEIJER: Can I maybe just add one small point?

Your question on the extent to which mortgages were the cause of the losses. Of the 2.2, you can say that more than half were related to either mortgage securities or other direct mortgages outstanding at the banks. So it's more than half of the total amount.

MR. MURRAY: Thanks. Thanks, Jan, for that clarification.

I'm going to turn to the Media Briefing Center. This is a question that applies to both Olivier and Jaime, I believe.

What is missing in order to achieve what you call a comprehensive policy approach to the financial crisis? What, specifically, do the advanced economies in particular need to implement?

MR. CARUANA: That was basically what we tried to address in the update, in the four points that I mentioned in my presentation. Basically, what we are saying is, yes, there are three. The so-called three-prong approach needs to be continued, but perhaps more emphasis needs to be done on, of course, continued capitalization but dealing with distressed assets. So we think that this is one of the key elements there, and, again, more rigorous assessment on a bank-by-bank basis is needed to be able to move this forward.

The other element that I mentioned is to be consistent with the long run, and the long run means that there will be more deleveraging, and we have to be consistent with that. We need to understand that there will be more deleverage, that it will be difficult for and not soon that credit could start to grow because the banking system is deleveraging, and this is the basis for a viable financial system in the future.

We think that consistency of the rules and clarity of the rules is essential. We need to know what are the rules, and we need to have a level playing field that does not disfavor some efficient financial institutions that perhaps do not need the public support.

And we need international cooperation, and the international cooperation is, I mean can be defended from many points of view, but it's a very, very important element because, if not, we risk crowding out some of the flows that are needed at this very moment to support the global economy, especially to emerging markets, and this avoiding this national bias is part of it.

So we think that these four elements constitute a comprehensive package. So more is needed, but this more should be framed into these perhaps four elements that provide some cohesion and international coherence to this kind of packages.

I mean, again, it's more. It's much more easy to say than to do it. But at least this analysis needs to be done, and I think authorities need to be conscious that these elements have to be in the package.

MR. MURRAY: Olivier, anything to elaborate on in terms of comprehensive policy approaches?

MR. BLANCHARD: No. Obviously, I agree with Jaime.

I think the dimension in which there has been the least progress is in putting a price on the troubled assets, and I would say that nearly no matter what price you put will be an improvement in terms of reducing the uncertainty associated with balance sheets. This is really, I think, of the four margins that Jaime has mentioned, the one where I think the most urgent progress is needed.

QUESTION: This is the second time you've revised the normal WEO for the fall. A two-part question: One is until late summer or early fall the American and the world economies seemed to be stumbling along, not doing great, but not doing terribly. Then something happened. What happened? Was it just Lehman Brothers or was it something else?

The economies, basically, both the world and the American economies seem to have fallen off a cliff.

The second part of the question is your forecast did not anticipate the severity and nature of this crisis. I think it's fair to say that that is reflective of most economists with a few notable exceptions. What happened? How come?

MR. BLANCHARD: Okay. What happened between summer of last year and now, I think there were two events which I think none of us had fully anticipated, or, if they had they had, had not anticipated the full implications.

The first one is what we refer to as the Lehman event. Whether it was that particular event and otherwise things would have been fine or something like this would have happened around that time, a bit before, a bit after, we can discuss. But at least I think it put on the scene the notion of counterparty risk in a way which just had not been there before, leading to a dramatic change in behavior of financial actors and all the consequences. I think this, we missed. Again, was it Lehman or was it coming anyway and just took the form of Lehman, we can discuss.

The other surprise, at least to me, but I think to most of us, is the total drop in confidence that basically took hold of the world as a whole within a few weeks. The indices of consumer and business confidence just collapsed around the world, and it seemed to be largely based on not actual facts but just the perception that something big was there that was hard to understand. This was very scary. This, in turn, led to the demand fall which, in turn, led to the worse position of the financial sector.

I think these are the two events that we did not understand, and something happened and forced us to revise.

Now, how guilty is the Fund? Well, very few of us predicted these two events. I think we can plead slightly less guilty maybe than others in the sense that, first, our forecasts have tended to be short of the actual curve but ahead of the other forecasts since the beginning of the crisis. We've been more pessimistic, not pessimistic enough, but we've been more pessimistic.

But, more importantly, given forecasting is such a complex activity, if you think about the messages, the policy messages that we have sent going back to the early fall, I think were very, very explicit early on and probably earlier on than most on the need for what Jaime calls a comprehensive solution to the financial system. It was not going to be just recapitalization or just liquidity provision or just asset purchases, but that any coherent plan had to have all three components.

I think we repeated that message. That message, I think, was not fully taken into account in some countries.

Then later when we saw the drop in confidence, I think that one of the advantages of being the IMF as opposed to being a national organization is that we get much more data. We see things coming from further afar. I think we saw the tsunami wave earlier than others, and we went out very aggressively pushing a fiscal stimulus package, saying that this was a really essential part of a policy package. And I think there we did a good job, and I think we had some effect on the perceptions by governments.

So, sure, we did not anticipate everything which happened. That's why we revised the forecast down twice. But, again, I think that we reacted quite well both in terms of taking this into account and, much more importantly, giving, policy advice which as of today looks like the right one.

QUESTION: So for emerging markets, your forecast on inflation in 2010 is even lower than 2009. What's the reason behind that and what do you imply from that?

My second question is back in China now many economists there are talking about deflation, and that's because our CPI dropping speed is very fast. How big do you think the chance is there?

And the last one is, sorry, Japan has injected some capital into the IMF. When you talk about the international cooperation, do you still expect China to inject capital to the IMF?

Thank you.

MR. MURRAY: The third question is kind of off topic, so we'll stick with the first two. How's that?

Thanks.

MR. COLLYNS: Let me respond to those questions.

First on inflation, I guess there's a substantive answer and a technical answer. The technical answer is that the numbers we provide are year over year rates of inflation rather than fourth quarter over fourth quarter. So inflation slows from 5.8 to 5 in a year over year basis. The slowdown is less pronounced looking on a fourth quarter or during the year basis. On that basis, it's down from 4.7 to 4.2, so around a half a percentage point slowdown.

And, substantively, the reason for that is that we expect that the global economy will be running substantially below capacity in 2010 as well as in 2009, putting downward pressure on inflation during that period. Although there's a modest recovery in activity, it would still leave the global economy operating well below capacity level. So the downward pressure on inflation will continue.

On inflation in China and deflationary risks, as we've discussed before, we see activity growth in China being quite well maintained. We don't see a collapse in activity.

We also see substantial policy room in China, both fiscal but also monetary policy space. There is considerable room to lower interest rates further in China were deflationary risks to intensify there. So we are highlighting greater concern with deflation on a global level and in a number of particular areas, and I draw your attention to a note we're going to publish today on deflation, but China would not be the center of our deflationary concerns at this point.

QUESTION: Thank you. I have a question about Russia.

Looking at the projections from November, 2008, and now in January, the biggest difference seems to be a number about Russia. Could you, please, explain why this is so?

MR. COLLYNS: Russia, as a number of these emerging economies, has been hit by multiple shocks. Obviously Russia is affected by the collapse in oil prices and the decline in oil revenues, but Russia has also been badly hit by financial turbulence. Prior to the intensification of the crisis, Russia had received very heavy capital inflows into the banking sector and a very rapid expansion of domestic credit. Particularly since September those flows have reversed, and there's been quite heavy, I want to say almost extreme, stress in the Russian financial system. That has had a very substantial economic impact.

So our downgrade in the Russian forecast represents the culmination of those two factors, to some extent cushioned by policy responses by the Russian authorities to provide liquidity to the banking system, to provide fiscal stimulus and to allow the ruble to depreciate. But nevertheless, even with that policy response, we are seeing a much weaker out-turn for Russia in the year ahead.

QUESTION: A couple of questions: Going back to the world economy and the crisis of the auto makers which is spreading, do you believe that different governments are going in the right direction, planning bailout and aids for the auto makers?

Connecting to my second question, only in Italy there is a risk for 60,000 work places if there are no interventions, and the forecasts for our GDP are pretty bad for the next couple of years. What do you think should be, in general, the measures taken to get out of this crisis, not related only to the auto maker industry?

MR. BLANCHARD: I'll take the first half of the question on auto makers and again make it more general than just specific companies.

I think that the two principles here should be that this can be a disguised way of giving an advantage to national companies, and I think there is a risk that if governments start protecting auto makers or helping auto makers this is, in effect, disguised protectionism.

Does this mean that there is no case for helping auto makers or any other firm? I think the answer is no.

We basically know that credit markets are dysfunctional, and therefore we think that to the extent that we can make them more functional the way, for example, the Fed is doing it in the commercial paper market, then that's desirable. So if a particular company needs credit and should get credit under normal conditions, normal macroeconomic conditions, and cannot get it, then there is surely a case for governments to help get credit to that company. But that should be very much across the board rather than a specific set of subsidies to a specific set of companies.

MR. COLLYNS: On Italy, certainly our outlook is quite grim. GDP already contracted last year, 2008, by half a percent. We're expecting further contraction this year and even a modest contraction in 2010.

I think the key point is that Italy came into this crisis in a very weak position. Its economy was already contracting from the middle of last year. Although it's not been at the center of the financial crisis, clearly, it has been affected by the global drop in demand for goods, hitting Italy's export sector.

Also, Italy has limited space to respond in terms of fiscal stimulus. It has allowed the automatic stabilizer to work. It's provided some measures of fiscal stimulus. But it just doesn't have the room, given the very high levels of public debt, to take the large responses that have been seen in some other countries.

We have been flagging concerns with Italy's economic performance for some time. I think in the end, even after the present storm is dealt with, there is a need for more fundamental structural reforms in Italy to improve competitiveness, to improve productivity growth. Those will be discussed in more detail when we release our Article IV report for Italy which is going to be early next month. So that will provide an opportunity to get into more detail on some of those issues.

QUESTION: Thank you. Can I have a clarification only, what Mr. Blanchard said about the auto makers, just to make sure I understood correctly?

You said that the different industries should get credit from normal conditions before in case the intervention of the government, is this correct? Otherwise, it would be disguised help in nationalization?

MR. BLANCHARD: Yes, we should make credit more easily available whenever the credit market in which a firm is operating is dysfunctional, and that should be the principle, not whether we're helping Industry X or Industry Y.

MR. MURRAY: Okay. We have a number of questions regarding China's foreign exchange policy from the Media Briefing Center. I'm going to take one of those questions and then conclude this with one question here from the audience.

From the Media Briefing Center: Is this the right time for China to reconsider its currency policy?

MR. BLANCHARD: It is probably not the right time to focus on the Chinese exchange rate, given that it is not a central element with the world crisis. There are many other things that we should be thinking about. It is an item on the list, but it should not be at the top of the list. That's the first point.

The second is I don't think that we should obsess about an exchange rate. The right question is whether China is following the right macroeconomic policy both for its own interest and in the interest of its trade partners and the rest of the world.

I think the answer there is a complex one. China has basically adopted the policy of export-led growth for a very long time. It has been amazingly successful in terms of growth, in terms of changing China, and that was very much for the best.

At some point, it makes sense for a country which has relied on export-led growth to actually shift a bit from external demand to internal demand and satisfy some of its internal needs. There has been a debate both in China and in the Fund as to when this shift away from external demand export growth to internal demand should take place and at what rate. The question is still there.

We think at the Fund that it would be in the interest of China, both for its own sake and probably for its trading partners, to actually slowly shift away from exports towards internal demand.

If there was no crisis, this would definitely require an appreciation of the RMB. In the context of this crisis, it may happen without this to the extent that export growth in China is falling like a stone. There will be very strong incentives for the Chinese government to prop up internal demand and therefore do some of the adjustment. But in the longer context, it seems to me that, yes, it's probably a good thing for China and for the world to have an appreciation of the RMB.

But, again, I do not think that this is a central element of the crisis. It's something we should be thinking about but not obsessing about at this point.

MR. MURRAY: Thanks, Olivier.

The last question is from the gentleman up there.

QUESTION: Could you please be more specific in the evolution of the current situation in Ukraine?

MR. MURRAY: I think that's getting into a level of detail for this briefing that we can't get into at this time. That's something that -

QUESTIONER: Maybe in general terms?

MR. COLLYNS: Ukraine, like Australia, is one of the countries we're not covering in this briefing.

MR. MURRAY: The Spring World Economic Outlook gets into the broad brush of individual country items.

I'm sorry to have to wrap up this briefing on that note, but I appreciate everyone joining us today, both our viewers on the Internet and the Media Briefing Center. Olivier Blanchard, Jaime Caruana, Jan Brockmeijer and Charles Collyns, thank you all.

Any follow-ups, media@imf.org. Email to media@imf.org.

Thank you.