Transcript

Christine Lagarde, Managing Director, IMF
Gerry Rice, Director, External Relations, IMF
Washington, D.C.
Tuesday, July 3, 2012

MR. RICE: Well, good morning, everyone. I’m Gerry Rice of the External Relations Department at the IMF. Welcome to this press briefing, which, as you know, is on the 2012 U.S. Article IV Consultation.

Today we’ll be hearing from the Managing Director, Christine Lagarde; Nicolas Eyzaguirre, who is the director of our Western Hemisphere Department, immediately to Madame Lagarde’s right; Roberto Cardarelli, who is the head of our North American Division in that department, Roberto at the far right; and Gian Maria Milesi-Ferretti, who is the IMF mission chief for the United States.

We’re on the record this morning. I would ask that you please identify yourselves by name and by affiliation, that we keep the questions short, and that we please keep the questions focused on the United States since that is the topic of the press briefing this morning.

And with that, I will ask the managing director for some opening remarks. Thank you.

MS. LAGARDE: Thank you very much, Gerry, and thank you very much for coming to this briefing on the Article IV on the U.S. economy.

Just to give you a bit of background about what an Article IV is, it’s really a review of a particular economy. In the case of the United States, it has kept a group of about 12 economists busy, extremely engaged throughout the year, but with a particular emphasis over three weeks of non-stop meetings with the U.S. authorities, which is followed by extensive drafting, preparation, analysis, confrontation of views, and then visits to the authorities to actually explain what our positions are to see whether we get any factual errors in the process of our work, and then from there on we’ll present it to you and, further on, to the board. That will be the case on July the 30th for a board meeting review.

Now, if I was to highlight two key messages out of this Article IV review, I would say that, first of all, the U.S. economy recovery remains tepid, and downside risks have intensified. They’re of two types. One is clearly external and comes from the current European situation and its potential deterioration, and the second is domestic and is really closely associated with No. 1, the debt ceiling, and No. 2, the fiscal cliff. But I will come back to that in a second.

The second message is that that the continued policy action is needed to boost the recovery. We believe that the U.S. authorities do not have a lot of space available. They have limited space, actually, to act, but they should use it to support the recovery in the near term and promptly tackle the medium-term challenges both in terms of fiscal sustainability and financial sector reform.

So, let me go back to the first of the two messages. Remember the first message was that the U.S. economic recovery remains tepid with two significant downside risks. After rebounds in the second half of 2011, growth has slowed at around 2 percent during the first half of 2012, and this sluggish path is not surprising; it’s quite typical of the aftermath of a financial crisis and real estate bust.

Indeed, the net wealth of the majority of U.S. households is still well below pre-boom levels, reflecting depressed although stabilizing house prices, as well as high debt. We expect growth to remain modest at about 2 percent in 2012 and 2.3 percent in 2013. That’s for growth.

Looking now at the two downside risks that I have identified. The first one is clearly an exposure to potential contagion from an intensification of the Euro-area debt crisis, which would be transmitted mainly via a generalized increase in risk aversion and lower asset prices, as well as transmission via the trade channel both directly and indirectly. That’s the first downside risk.

The second downside risk is obviously a failure to reach an agreement on near-term tax and spending policies that would trigger what is well known as the fiscal cliff. In addition to that, obviously the risk of the debt ceiling being reached and not being resolved is also a clear potential for financial market disruption.

Now, in response to that situation of tepid economic recovery, we still could clear downside risks. What are the policies available, and how much room is there?

We believe that fiscal consolidation is necessary, but not just any fiscal consolidation. It has to be sensible and certainly not excessive. So, avoiding excessive fiscal consolidation and promptly raising the debt ceiling are two policy actions that need to be had. The threat -- only the threat -- of a delay in raising the debt ceiling and of the fiscal cliff could weaken growth already later this year, and should they materialize because no agreement can be reached, the domestic effects would be severe with negative spillovers to the rest of the world. In our view, a small deficit reduction for 2013 -- and what we call a small deficit reduction is about 1 percent of GDP for general government balance -- that would be perfectly appropriate.

Second: policy action that is available and should be used. Short-term support to the recovery is crucial, and the U.S. must also promptly restore medium-term fiscal sustainability. And to do so, policymakers should agree as early as possible on comprehensive measures to stabilize the public debt ratio by mid-decade and subsequently put it firmly on the downward path. The plan will require both higher revenue and less public spending.

Third: a set of policies that is available, monetary policy. It has played a significant role already. We certainly welcome the Federal Reserve’s recent decision to further extend the maturity of its securities holding, which should keep long-term interest rates low. And while the monetary policy conditions are appropriately accommodative, further easing might be needed and used if the situation was to deteriorate.

Turning now to a sector, which in our view is important, the housing sector. We welcome the authority’s new measures to confront the crisis. As you may have seen in the concluding statement, we have suggested some additional steps that could be taken to strengthen the housing recovery. This includes, in particular, measures that would facilitate the conversion of foreclosed properties in rental units and supporting access to refinancing on a larger scale in line with the administration’s proposals.

We also believe that more resources should be devoted to minimize the risk that high and persistent long-term unemployment could reduce skilled labor force participation. We do believe that the unemployment is essentially of a cyclical nature, but given the length of unemployment, there is a risk that some of the workforce being kept away from the labor market for too long lose their skills and cause a significant drag on the U.S. economy.

Finally, in terms of policies, and it’s more on the side of the structural reform, if you will, it seems important to us that the reform of financial regulation and supervision be completed as quickly as possible. A lot of work has been done. There’s more to be done, and particularly in relation to implementing the Dodd-Frank Act there is obviously -- and you know that, because you covered those sectors -- work to be done by the supervisors. In particular, that includes the enhanced supervision of key non-bank financial institutions and the enactment of the Volcker rule.

So, to conclude, as I said earlier on, the U.S. economic recovery is tepid. It is recovering nonetheless. We are in positive territory, but it is tepid. The two clear downside risks -- U.S. authorities have little room to maneuver, but they can use that policy room to avoid those downside risks to the maximum possible extent, and they should continue the structural reforms that have envisaged, particularly to strengthen the labor market on the one hand and to continue the reform of the financial sector on the other hand.

I’ll be happy to take some of your questions.

MR. RICE: Okay, thank you very much. And, again, questions to the point and on the U.S. Let me start over on this side of the house and we’ll swing around.

QUESTIONER: Thanks. I can’t see you, but -- this cameraman’s -- over to your left.

MS. LAGARDE: Oh, there you are.

QUESTIONER: Not ideologically necessary, but I have to be agnostic on that. (Laughter)

Two things real quick. One, on a broad level, you mention here that countries need to -- that systemic countries need to look multilaterally at what they’re doing, and I’m wondering, given the plans put out by the Obama administration so far you suggest that they ought to slow down their pace of consolidation. Do you feel they are looking multilaterally enough in setting policy right now or is domestic politics and constraints sort of taking over?

And then, secondly, a specific question, the three-quarter percent slowdown, you suggest they could cut less. You know, why three-quarters of a percent of GDP and why not one and a half or one or a quarter? I’m just wondering how you decided sort of where to draw that line between consolidation and supporting growth.

MS. LAGARDE: Shall we take a question at a time?

MR. RICE: Yes.

MS. LAGARDE: Okay. Thank you for this twofold question.

On the first one, we do tend to look, now, at spillover effects of policy decisions in systemic countries. That really is becoming almost the bread and butter of the Fund. And as I mentioned earlier on, clearly too strong a contraction of the U.S. economy as a result of, say, the realization of the fiscal cliff would have significant spillover effects outside the United States. So not only the fiscal cliff realization would contract the U.S. economy and reduce it to largely positive, if at all, but it would have effects outside the United States.

Now, you asked me about the multilateral approach that authorities have when they determine their policy. There are two ways to have this multilateral approach: either you look at it because you’re on the receiving end or you look at it because you’re on the sending end. And I think the perfect multilateral approach should look at both from the receiving end point of view and from the sending end point of view. It’s more natural for authorities to look at it from a receiving end and to be concerned about, say, what is happening in the euro zone.

I’ve heard that many times over in the last few months whenever I’ve visited a country, the first question was what is happening on the euro zone and what will be the effects on my economy? And that is certainly case for the U.S. economy, and I’ve seen the U.S. authorities extremely engaged and active in trying to help resolve the situation in the euro zone. I think equally it’s good when authorities are concerned about the consequences of what they are deciding for their own domestic markets. It’s not always the case, and it’s the role of the IMF to actually try to remind authorities that whatever they decide at home is going to have consequences at home but also outside from home.

Now, how do we perfectly calibrate what is the appropriate fiscal consolidation as opposed to what would be excessive? And I would turn to my expert team. They take all sorts of components into consideration. They model those components into what would be not the perfect storm but, you know, the perfect economic situation that combines some degree of fiscal consolidation, because we believe that the U.S. economy needs fiscal consolidation. We believe that it should be anchored in the medium term so that people have confidence that authorities are determined to reduce the deficit for the long term in order to redress the debt situation. But equally we don’t think that it should be so frontloaded that it is going to, you know, act like a brake on the U.S. economy. So, the calibrating is really left to the experts to take into account all the components and to arrive at this good trajectory.

MR. RICE: Good. Just sticking to this side of the room, I’m going to go with this lady right here. Thank you.

QUESTIONER: Thank you. I have two questions -- both of them about U.S. -- the first one is that recently that’s a book coming out from the Peterson Institute written by a former IMF deputy director from the Research Department where he lays out a scenario that in eight years U.S. will end up borrowing money from the IMF under a similar crisis that the European countries are facing right now. So, in your discussions currently, has this scenario ever come up in your discussions?

The second question is that I understand that the IMF has made great progress over the recent G-20 summit regarding raising more contributions from member countries. However, yours did not contribute in this round. And over the course of debate, even some American experts raised concerns about the fact that the U.S. Government decided to shy away from such a responsibility. As the director, as the main director for IMF, what’s your comment for U.S. non-participation in this round of contributions? Thanks.

MS. LAGARDE: You know, I look forward to reading this book, of course, but I was asked exactly the same question last year in July, you know, when there was this raging debate about the debt ceiling, and I was asked by one of your colleagues, you know, is the U.S. going to borrow from the IMF? My response was we wouldn’t have enough resources to lend to the United States of America and to any kind of program. But, clearly, that shows that that was a very farfetched and very, very hypothetical question, you know, and I trust that the U.S. authorities will have the wisdom and the sagacity to choose the right policies and to avoid the obstacles, the hurdles, and the traps that are facing any economy in the course of things.

Your second point about the contributions, first of all, I’m very pleased and very grateful to all those who contributed that we could actually increase the resources of the Fund by $456 billion by way of bilateral loans. The principle of bilateral loans is that they are voluntary. Whoever wants to participate, participates, and the amounts are not predicated on the quotas. It’s also a temporary measure that is intended to address the current economic situation and potential risks. The United States of America did not contribute by way of a bilateral contribution to the IMF. They do other things by way of swap lines between central banks, for instance, which operate as a strong support very efficiently.

As I said, you know, what’s important to me is that the institution is strengthened and reinforced in order to serve the needs of the entire membership, whoever that is across the world, and not particularly in the euro zone, but across the world.

MR. RICE: Let’s swing around here. Gentleman in the front.

QUESTIONER: Just housekeeping, you talked about a small deficit reduction of 1 percent GDP. You’re talking about for just next year, correct? Okay.

MS. LAGARDE: 2013.

QUESTIONER: Okay, I just wanted it clear.

MS. LAGARDE: I mean, our Article IV is really focused on 2012/2013. It may well be that going forward we think that 1 percent reduction is sensible and should be continued for a longer period of time. But in terms of, you know, predicament, that’s what we --

MR. TALLEY: I assumed so, but I just wanted to -- more substantively, you quantified the potential impact of even the threat of delaying a decision on fiscal reduction and the debt ceiling. Can you do the same for the U.S. exposure to the euro zone? You talked about the trade impact and risk aversion. What about the financial impact? Can you quantify that?

And secondly, so oftentimes countries have the ability to edit Article IVs. China has in the past requested certain numbers on exchange rate be withheld. What changes, if any, did the U.S. request, any management edits?

MS. LAGARDE: You know, to actually quantify a threat is a job. You have to be an actuary and eventually you succeed as an insurer. The IMF is not exactly in that business, but we try to identify and we try to analyze remedies and make recommendations on policies that can be adopted to avoid the threat.

You know, what we see is clearly a risk that confidence be eroded as a result of the threat. You know, most will assume that the threat is such and the risk to the U.S. economy that it contracts to the point of being marginally positive if at all, that people will find a solution somehow. This is part of the assumptions that we had used in our forecast for the 2% and 2.3% growth in 2012 and 2013. But it is the eroded confidence that seems to us to be the worst consequence of the threat of the fiscal cliff and the debt ceiling not being moved.

In terms of the quantification of the risk arising from the Eurozone crisis deteriorating, let me observe that what happened last Thursday at the European Council seems to have indicated to most, including the markets most lately, that there is a change for a better union, which is not limited to a monetary union but which would also extend to a banking union and which would allow, for instance, the direct participation of the European Stability Mechanism into the capital of a Spanish bank, which is another indication of the fact that the Europeans are really attacking the roots of the issues and are decided to not only strengthen, but really arrange any of the architecture of the union. So that threat and that risk is clearly mitigated by significant actions that have been taken, that have just lately been taken, and that we hope will continue to be not only implemented, but improved upon because we believe that in addition to banking union, fiscal union is desirable and should be the sort of second goal after the banking union.

But the channels of potential vulnerabilities are many as far as the U.S. is concerned. You have the direct trade channel, which is, you know, the fact that as a result of a slowdown in the euro zone in particular the demand addressed by the euro zone to the United States would be reduced. It’s about 15 percent of U.S. exports. So you have that as the first channel of vulnerabilities.

The second one is clearly the one that is induced by the U.S. dollar becoming yet again another safe haven for all sorts of reasons and the dollar being highly regarded as a reserve currency, and that affects the U.S. trade as well the other way around. The U.S. dollar being strengthened as a result of the current environment, therefore, U.S. exports become, you know, more costly, if you will. That’s sort of trade -- direct trade, indirect channel.

The third one is the one of, as I said earlier on, generally eroded confidence because things don’t get fixed and, therefore, people are uncertain about investment, uncertain about the future.

The fourth one is a general reduction of asset prices across the board as a result of that.

Now, I think I covered all your -- yeah, I covered all your questions. Oh, no, you wanted, also, to know whether we had a contentious discussions about anything in particular in the Article IV Report. I’d turn to Nicolas, but to my knowledge there has been no contention, no request for modifications. And we have independently, as always, and candidly prepared that report. Right?

MR. EYZAGUIRRE: You’re right. Nothing to add.

MR. RICE: So I want to look over here. Let me take this gentleman.

QUESTIONER: Thank you. Just a follow-up question. Could you explain a little bit about when IMF assesses the U.S. financial institutions’ exposure to the euro crisis what kind of scenarios you have used? Thank you.

MS. LAGARDE: Well, first of all, on the U.S. financial sector, let me say that we regard it as generally solid, very well restructured, meeting the Basel 2.5 criterias, therefore, the capital ratios are met, and we have seen since late 2010, if I recall, a significantly slowdown of the number and volume of bankruptcy of U.S. banks. So there is clearly, you know, a much improved situation and most significant and certainly the systemic institutions of the United States are regarded by us as solid.

MR. RICE: Good. Going to the front here.

QUESTIONER: Thanks. I wanted to follow up on the very first question that you had about the multilateral coordination.

You do mention a number of potential spillovers in the papers, including, for instance, the potential challenges for macroeconomic management of countries with favorable growth prospects due to the easy monetary policy that you referred to in the U.S. So in that overall context, what are the possibilities, in your opinion, for better coordination between the U.S. and, for instance, countries such as the BRICS? Because, again, I’m from Russia and the other countries of the group also expressed some concern. They seem to be implying that they do not have full understanding of what’s going on, at least they want a better understanding of what’s going on. What can be done in that regard and especially what could be the potential role of the IMF or are you just playing a support role for the G-20? Thank you.

MS. LAGARDE: Well, thank you very much for your questions. Two things maybe.

First of all, you know, we observe very carefully, very attentively the movement of capital flows in and out. And obviously we’ve seen in the last four years some significant movement which has often benefited, but sometimes because of the velocity and volume, also impacted negatively on some economies. And we’ve had the debates and certainly some of the BRIC countries, probably led by Brazil, have, you know, decided to really address the matter and sometimes take domestic measures to actually, you know, secure their economy and take measures.

Our own position concerning capital flows has evolved over time as time as well. And whereas we have sort of consistently in the past argued against capital flow measures, certainly if everything else has failed, such as macroprudential measures in particular, then we regard some capital flows measures as occasionally legitimate. That’s number one.

Number two, our research department has extensively reviewed from all possible angles the eventual spillovers and direct consequences of some of the quantitative easing measures that have been taken lately, particularly QE1 if I recall. And they have not been able to actually demonstrate the causal link between QE1 in particular and the capital flow movement. So I’m not suggesting that the research is closed and that the matter is over, but I think that we need to look at it carefully and we should not, you know, sort of get ahead of research before we reach conclusion. But we need to be very attentive to that because it clearly could have an impact and, if so, we need to be aware of it and we need to respond collectively.

MR. RICE: Yes, madam.

QUESTIONER: I’ve got two questions for you. One is on the labor market. You mentioned that you are of the view that much of the unemployment problem is mostly cyclical. I was just wondering would you have sort of like a focus on what the natural unemployment rate is?

And also, the second question is you also mentioned that further policy easing might be necessary. This is in terms of monetary policy easing. But I’m just wondering what more can the Fed do given that interest rates are already near zero and they’ve pumped up $2.3 trillion into the markets already? What more can they do?

MS. LAGARDE: Well, in terms of unemployment, yes, we believe that it’s predominantly cyclical and we think that the first and best measure to address a cyclical issue to actually encourage growth, support growth, and make sure that it doesn’t stay tepid for too long because that’s the best response. And I have to say that the latest numbers that we’ve seen, particularly in the construction sector, are an encouragement. It’s a sector that is labor-intensive and that can, you know, bring a level of response.

Equally, in the growth-friendly policy measures that are taken by the U.S. authorities, we highly recommend that those that are, you know, pro-labor, if you will, be selected versus the ones that are not pro-labor.

For that portion of unemployment that we fear could be non-cyclical, we also believe that it would be in interest of the U.S. economy that appropriate measures be taken in terms of vocational training, in terms of specific job search support, and other, you know, instruments and policies that can be used to actually address the gap between the skill set of the manpower and the needs of the labor market. So that, I think, addresses your first point.

Your second point was about the room that is available in terms of monetary policy, and you’re right that the Federal Reserve has taken a lot of measures, and rightly so, and has adopted accommodative monetary policy in the interest of the U.S. economy, both in terms of traditional policy by lowering the interest rate to the point where it is -- very low -- and has also adopted some more innovative types of monetary policies: QE1, QE2 being examples in case; purchasing programs within the boundaries of what the Fed is allowed to do. And I’m sure that Chairman Bernanke has ideas and views that I’m sure he will be happy to share with you, but it’s for him to decide what is next on his list of potential support to the U.S. economy.

MR. RICE: Okay, last question. Right here.

QUESTIONER: Thank you. Madame Lagarde, how does the evolving situation in Greece affect the United States and the troubled economy given that Greece has a new prime minister, Mr. Samaras, who is said to be looking for changes to the program?

And the second question, if you can tell us anything on Cyprus, since the IMF mission is in Nicosia today. Thank you very much.

MS. LAGARDE: I appreciate the nice link that you made between Greece and the United States and Cyprus. (Laughter)

Well, I’m certain that the U.S. economy would benefit from a more stable and better united Euro-zone in all respects. And in that vein, certainly the negotiations that will begin in the next 48 hours -- sorry, not the negotiations, the discussions with a purpose of doing fact-finding that will begin in the next 48 hours will be important not only for the
Euro-zone, but for the sense of union within the zone and stability of the economies. So we certainly look forward as a member of the troika to the discussions we will have and to finding out exactly what has happened in the last few months, what has not happened, and how we can proceed further and work, you know, collaboratively with the new Greek authorities.

In terms of Cyprus, we have a team that is on the ground and I would not want to prejudge what their findings will be. But as is always the case when a member of the IMF asks for support, needs help, we roll up our sleeves and we’re on the ground in next to no time, that’s the case.

MR. RICE: Okay, I think that wraps it up. Thanks to everyone on the panel and everyone in the room. Thank you.