Transcript of a Press Conference of the Managing Director
April 18, 2013April 18, 2013
Christine Lagarde, IMF Managing Director
David Lipton, IMF First Deputy Managing Director
Gerry Rice, Director, IMF Communications Department
MR. RICE: Good morning, everyone. A warm welcome to these Spring Meetings of the IMF and World Bank, and to this press conference on behalf of the IMF. I am very pleased to introduce to you this morning the Managing Director of the IMF, Christine Lagarde, and our First Deputy Managing Director David Lipton. I would ask you to please identify yourselves by name and affiliation, and please keep it to one question, and if you can make it as short as possible.
With that, I would like to ask the Managing Director to make a few opening remarks, and then we will be happy to take your questions.
MS. LAGARDE: Thank you very much. Good morning to all of you. Before I begin, let me just first of all express my sympathy and on behalf of the entire Fund, the sympathy of the Fund for those who suffered so much in the horrendous bombing in Boston. Really only goes to show how we are bound together by the universal bounds of humanity at moments like that.
We have gathered in Washington at the moment, slightly over 200 ministers of finance and governors of central banks, and gathering at a critical moment to take stock of what the recovery has been, what the prospects are, what the old risks are, what the new risks are.
Let me just remind you of a few numbers. I’m sure those who have attended the WEO conference have that fresh in their mind. But, at this stage, we expect global growth to be at 3.3 percent this year, which is not much different from last year. Looking behind the numbers, we believe that we have avoided the worst and the economic world no longer looks quite as dangerous as it did. At same time, the pickup in financial markets is clearly not translating into a sustained pickup in growth and jobs. What really ultimately matters most for people.
As I have said recently in the speech that I gave in New York at the economic club, we also are seeing the emergence of a three speed global economy, those countries that are doing well, those countries that are on the mend, and those countries that still have quite a distance to travel.
Now, with strong interconnections, and uneven recovery, that three-speed recovery is not the healthiest recovery we could think of. The three-speed recovery is not enough and what we need is a full-speed global economy--growth that is solid, sustainable, balanced, but also inclusive and very much rooted in green developments.
This requires for the global economy to move from that three-speed recovery that we are observing to a full-speed recovery, with the kind of growth that we want, that requires clearly customized policy responses in each of the three groups that I have just identified. Those that are doing well, those on the mend, and those that still have a way to go.
If we look at the first speed, the first group--the emerging markets and the developing economies. Emerging markets face the new risk of avoiding financial excesses. They should rebuild policy space and strengthen financial regulation and supervision. Low-income countries, and in that group you really observe probably the fastest growth rates at the moment, they should build on success and invest in the future, including by meeting infrastructure and social needs. And that is where the inclusive growth really kicks in. It doesn't only apply to that group, but it is very needed in that particular group. The international community, of course, needs to support these countries in addressing these challenges.
The second group includes the United States, but also countries like Sweden, Switzerland, for instance. If we look at the United States, it has managed to avoid the fiscal cliff—much talked about until January 1st. It still needs, however, to fix the pace of its fiscal adjustment--less and better-quality adjustment now, well-planned, well-anchored, well-communicated for the future. This would certainly support the recovery in private demand. Not to say that there is no recovery in private demand at the moment. It is clearly picking up, but it would certainly comfort it and would make it stronger for the long run.
The third group includes the euro area and Japan. Japan is in a space of its own in a way, but we have put it in that group for the moment. On the euro area, policy makers have accomplished a great deal over a short period of time. The priority now is to fix frayed banking systems, and press ahead with banking union.
In Japan, the recently announced framework of ambitious monetary easing is, from our point of view, a positive step. But, it is not enough. Japan needs more ambitious plans to bring down debt, plus structural reforms to shift the economy into higher gear. That is the whole plan behind these three arrows, policy mix which the prime minister has described, and we are certainly keen to see the other two arrows in action.
As well as those customized policies that I have just described to address new risks, policy makers need to also continue to concentrate on the old risks, and in some instances to actually finish the job that has been started. The first issue, which in my view is critical, is the financial sector reform. You will say a lot has been done already. Fair enough. True. In terms of stronger capital, higher capital ratio, better definition of liquidity ratios, and definition of the global SIFIs, and the added buffer they need, the work has been done. But it is now a question of implementing and implementing across the board, without delay and without discrepancy.
In addition, there are areas in the financial sector that need particular attention. Some of them are clearly growing. Here I am talking about the shadow banking, about the derivative market, although progress is being made in that particular area as well, and finally, we need clear resolution mechanisms, particularly regarding the too-big-to-fail entities, and those entities that have cross-border ramifications.
The second issue is to support the adjustment of global imbalances, especially in the surplus countries. It has to be tailored to the specificities of the country, and for instance, if you look at China, it is clearly a question of moving into efficient infrastructure, not any infrastructure projects, not any investment project. It is also very much a question of moving gradually toward more consumption for the domestic market. If you look at Germany, same is true. And in the case of Germany, the domestic market most likely requires more investment.
The third issue which is very much on everybody's mind and it is certainly an area where we intended to do more work, although it is not necessarily the core area associated with the IMF, is growth, jobs, and equity. We need growth first and foremost, but we also need direct policies to spur job creation. We need to protect people most affected by crisis, and make sure that adjustment is as fair as possible. That is a principle that we try to apply in the program design that we do with countries in the implementation review that we conduct, and where we will do a bit more research on our own, while of course, working with other international institutions, such as the World Bank and the ILO.
So, these are the basic challenges as we see them. As always, we will do whatever we can to help the membership, all 188 members. In particular, we are striving to shine a light on the spillovers that weave their way through an increasingly interconnected global economy. All this cooperation remains essential, and that is why the IMF was founded in first place, and in a world of vast interconnections, it is all the more important than ever.
Clearly, our institution has to mirror the world, has to mirror the evolution of the world as well in order to be legitimate, credible, and to that end we hope very much that the 2010 governance and quota reform will be implementable and implemented in the short run, just as much as we want to also pursue in parallel the quota formula review as well as the 15th review of our quotas.
So, there is the message. If you were to only remember one thing, we want to move from three speed to full speed recovery, and growth should certainly be as we hope solid, sustainable, balanced, but also inclusive, and with green development. Thank you very much. Happy to take questions now.
QUESTIONER: Madame Lagarde, there are some signs of a fragmentation in trade and monetary policy making in some parts of the world. How can the IMF help to prosper multilateralism and global coordination?
Secondly, the IMF is a pillar of the Bretton Woods system. What is your insight on reforming the IMF and the Bretton Woods system to make them more aligned with the changing global economic landscape and some long-term mega trends taking place?
MS. LAGARDE: Thank you very much. It is a twofold question really.
On the first one, ever since the crisis started, most of us have been worried about the risk of fragmentation and together with it the risk of protectionism. I think the efforts undertaken by governments, by regions, and certainly under the auspices of international institutions, including the WTO for instance, has been to push against this risk of fragmentation, and push against the risk of rising protectionism, which has been fairly successful if you look at the reports from the WTO.
In terms of fragmentation, we still have some. You are right. But, the question is, is it such a bad thing to have the development of regional trade, for instance, which many have called for, now, finally, coming to the fore, to have some of the sub-Saharan African countries, for instance, doing more trade amongst themselves, to see the development in Asia. There is not much of it, if you look at numbers. And if it prospers, it will probably give an edge to those countries that were predominantly reliant on one major client or a group of countries in the advanced economies that are currently moving at a much slower pace.
In terms of monetary policy and its risk of fragmentation, I think with the External Sector Report, which we produce on an annual basis, we are trying to assess the alignment between exchange rate and fundamentals. We will continue to look at that very carefully in the future, as monetary policies unfold, and clearly there is great innovation in that particular field. I would observe that there is clearly an alignment of the central banks to move from the traditional interest-linked type of policies to more unconventional types of policies, generally tailored to the specific needs and the areas of their market where there is a need for central banking push.
On the alignment of the institution, I tried to address that point in my concluding remarks. It is critically important that the IMF, like any international institution, be the mirror of where the world is going, and how it is readjusting, how it is rebalancing, if you will, and particularly on the occasion of the crisis.
Because emerging market economies and developing market economies are accelerating and moving fast and advanced economies moving more slowly, that has to take place. And it is not just an issue of quota, it is not just an issue of votes. It is also an issue of participation in the staff, for instance. If you look at staff in the IMF, for instance, about 44 percent of the staff comes from the emerging market economies and the developing market economies.
So, I think you have to look at it from various angles, not just a question of the governance as measured by the evolution of the institution, it is also a question of how staff is welcome in the institution, their voices heard and at the highest level. If you look at the management circle, you will see quite a few members of the emerging market economies holding very high ranking positions in the organization. I can tell you that David Lipton and I listen to them carefully, and their voices are very much heard.
QUESTIONER: A question on the Arab Spring, in particular Egypt. There are signs that Arab governments, including the Egyptian government, are unable to provide a robust economic reform program that would enable them to tap funds from the IMF and to move on beyond their fiscal crises and political crises. What advice do you give to them and where do you see the Arab Spring going?
MS. LAGARDE: The Arab Spring countries is not such a homogeneous group. There are different countries, some of them with resources, natural resources, some without natural resources. And, clearly, we need to adjust our instruments depending on each individual situation. That is point number one.
Point number two, what is really needed for economic development to pick up and to respond to the needs of the population, to respond to the needs in terms of food, in terms of supply of power, in terms of jobs for the young generation, is going to also be a factor of how stable the political environment is.
Clearly, when we have a dialogue and we propose revisions, modifications to their economic program and discuss the terms of lending, we need to have that counterparty, if you will, in the negotiations. Turning to Egypt, we have been in negotiations with Egypt for quite awhile now. I was in Egypt myself in August 2012. We had a program that was just about ready in November 2012, when, as you know, political decisions were made to not put in place the fiscal decisions that were intended, which obviously made the whole program redundant. We have gone back to the drawing board. We have been working with the Egyptian authorities--a team was on the ground until a few days ago. We have not concluded yet, and there is clearly more work to be done, more numbers to be aligned, and worked on.
I very much hope that we can succeed. I very much hope that we do, because I think the country is exposed to vulnerabilities. It has lost quite a bit of reserves and the Egyptian population deserves to have this economic ambitious goal to recover. It is growing, but the growth numbers could be certainly a lot better if the situation was stable from the financial and economic point of view.
QUESTIONER: I want to go back to a comment you made in response to the question regarding central banks. I think the assumption has been that we're in this sort of unconventional period and at some point there will be an exit from that and central banks will return to the way they did business, worrying about interest rates and inflation primarily.
What you said a minute ago seemed to suggest this period of unconventional policy may in fact be, I hate to use this phrase, but the ‘new normal’ and we’re entering a phase where the major central banks will continue to have multiple targets, multiple tools to use, and that this is what we're going to be living with now. If that is the case, does the IMF think that is a good situation to be in?
MS. LAGARDE: I would like to correct that. I don't have the answer. I'm not sure that central bankers who are congregating and the day before around rethinking macroeconomics [conference] had the answer. I think they concurred that they are very much traveling in uncharted territories and given their conventional wisdom and their sense of measure, I’m sure they would like to return to their more charted territories. But at the moment they are in those unconventional policies because they’re at that zero-interest bound and there is not much else at the moment to try to kick start growth in economies, to lower longer-term interest rates, and to actually provide that breathing space which the authorities have to use to actually deliver on their fiscal policies as well as their structural reforms.
So, if all ends well in a way, the fiscal consolidation pace is properly tuned, with not too much at the front end, a lot more well-anchored, irreversible in the medium term. Structural reforms where needed are put in place and are delivering results, at which point central bankers should be in a position to gradually, with proper communication, with the right notice, phase out of their unconventional policies.
Now, I think we need to listen to what they’re saying about the uncharted territories and how they see themselves moving out of it. What we are certain of is that they cannot be the only game in town. And there has to be other players putting in place the right policies, so that there is a policy mix which allows them to be relieved of the weight that they carry on their shoulder by themselves at the moment.
QUESTIONER: I have a question about Spain. Do you think Spain should be more flexible in their fiscal adjustment to make the recovery easier?
MS. LAGARDE: We believe that considering the situation of the country, and the efforts that have been undertaken, the 25-percent unemployment rate at the moment is clearly needed to do fiscal consolidation, but we do not see a need to do up front, heavy duty fiscal consolidation as was initially planned. That country needs more time and needs to be able to adjust into its fiscal consolidation efforts after what it has done already.
QUESTIONER: A question with regard to China. Fitch has recently downgraded China’s sovereign bond rating and actually the IMF voiced moderate concern about the shadow banking of the China, too. It seems to me that all this is as a result of the China's 4 trillion stimulus package at the height of the crisis as part of the global coordinated action.
The IMF is always very sharp and always very balanced. I want to know the IMF's view on China's legacy for fighting with the financial crisis? Also, what is China's new role and China's new task in the global international community at this moment?
MS. LAGARDE: A very broad question, but thank you for the compliment. I will certainly not take it for myself, but I will pass it on to our staff.
The role of China going forward is in our view critically important, if you look at the size of the economy, if you look at the pace at which it grows. If you look at its ability to gradually reshape its business model by focusing gradually more on the domestic market, in order not to be overly reliant on exports, moving from quantity growth to quality growth, being more attentive to the return on investment, being willing to expand the consumption in the territory, being willing to start negotiating on wages. All of this is really heading in the right direction of an economy that assumes leadership as well as responsibility.
In terms of currency, I mentioned our External Sector Report (ESR) and that could help us assess the currency. We considered that the Chinese currency was moderately undervalued.
In terms of the financial sector, which you asked me about at the beginning of your question, it is clearly a part of the economy that is in transition at the moment—historically banks have dominated China’s financial system, accounting for almost 90 percent of intermediation. If you look at the last five years, this has clearly changed significantly over time with financing needs assumed and undertaken by the nonbanking sector increasing by 40 percent, if I recall. It is not bad, but it is a concern that needs to be addressed in terms of supervision, in terms of keeping all that in check to make sure that there are no bubble developments that would be harmful for the economy.
QUESTIONER: The euro area seems to be suffering from a lack of credit especially for small- and medium-size enterprises [SMEs], especially in the periphery of the euro area. What is your advice to the European authorities? Is this a matter for the ECB? Should they lower interest rates more, or are there other actors that should come into play on this particular question?
MS. LAGARDE: Of all the major central banks in the world, clearly the ECB is the one that still has room to maneuver. And it will be for them independently to determine when is the right time to use that space and potentially reduce interest rates. What in our view is more critically important is to make sure that there is fluid transmission between central banks and banks, and amongst banks, so now--that a lot of deleveraging has taken place by way of potentially reducing the activity because so much capital could be used to reinforce the banking sector--the monetary tools that the ECB could use are properly transmitted, and the lower rates can actually translate into lower rates for the small- and medium-size enterprises as well. I think it is an approach that is a combination of a top-down and bottom-up, if you will, where there has to be enough strengthening as well as restructuring, if need be, of the banks within the eurozone, in particular, as well as the right influx from the top at the right moment. And that should hopefully unleash the credit that is so much needed for SMEs and households to be able to invest again.
QUESTIONER: Could you please tell us a little bit more about the global resolution of banking, and better coordination between cross-border authorities, because it is supposed to be on the calendar of the G-20’s last two meetings that this January. And according to Basle III, national authorities in the United States, in Great Britain were supposed to begin to issue reforms, financial reforms, but delay could be disturbing the financial system, and there is a risk of fragmentation of the financial system. Could you please talk about this?
MS. LAGARDE: I think the worst risk would be the uncertainty resulting from the non-resolution of this issue. Not knowing how a bank has to be resolved when it has to be resolved. What is the creditors’ pecking order, for instance? Which authority can make decisions and enforce them depending on whether it applies to the parents and branches, how the subsidiaries are handled. I know in the case of Mexico there have been quite a few operations in Mexico of foreign banks that are doing well, but where clearly one could wonder what would eventually be the treatment if something was to happen.
So, one, the real concern, is uncertainty, and lack of resolution. Second, the FSB has issued recommendations and guidance with respect to resolution and particularly cross-border resolution. The United States and the U.K. have started the process of working out between themselves on the basis of that FSB recommendation how they would work out, for instance, cross-border resolution that would affect the U.S. and the U.K. operations of an institution.
I think what is needed is that this movement be continued by other large regions. Within the euro area, for instance, I believe that the European Commission in charge of financial affairs is working actively on that and there should be a draft coming out before the end of the year for discussion by the council and at parliament. That is good. But it has to be spread out sufficiently so that there is no hole in the network, if you will, so that we all know what the resolution systems are, and will be and how they will be enforced.
QUESTIONER: Just a quick U.K. question, a more general one. When you came to London for the Article IV last summer you talked about how you shuddered to think what would have happened to the U.K. economy had George Osborne not responded with the fiscal consolidation that he planned. And now we have heard Olivier Blanchard talk about the fact that there needs to be a real change of plan there, the notion of the U.K. playing with fire with economic policy. Keen to clarify where you stand on that. Do you support Olivier Blanchard’s position?
A quick second question: You have been in the news for other reasons in connection with the Tapie case in France and having to go over there to appear in court. Can you just give a reassurance that is not going to affect your work at the IMF?
MS. LAGARDE: With pleasure. On the U.K., I vividly remember the Chancellor of the Exchequer coming as he had been appointed, and announcing to members of the ECOFIN that he was not particularly proud of carrying the biggest deficit in the room. Of the 27 member states in the room, he confessed that he was not particularly pleased about that. Over the years what we have done at the IMF is really try to observe as closely as possible what the outcome of the policy was, and we clearly support the policy. And we have said so repeatedly. However, we have also repeatedly said in the last couple of years--and I would not prejudge what we’ll do with the next Article IV--that should growth abate, should growth be particularly low, then there should be consideration to adjusting by way of slowing the pace.
This is nothing new. And, this is still the position and one that has been very clearly articulated within the various departments. So we very much stand by that. Consideration should be given if growth weakens, and looking at numbers, without having dwelled and looked under the skin of the British economy, as we will do in a few weeks time under the Article IV, the growth numbers are certainly not particularly good. So in a sense, this is a continuum of the position. What has changed is clearly the quality of the numbers. But, I would not, and I don’t think anybody in this institution would want to prejudge ahead of the Article IV, because that is when we spend three weeks discussing, debating, exploring, understanding, trying to go really under the skin as I said of each economy, and we will do that.
On your second question, there is nothing new under the sun. Ever since 2011, I had known very well that I would be heard by the investigating commission. So a date has been set, it will be at the end of May and I am happy to travel for a couple of days to Paris, but it is not going to change my focus and my attention and my enthusiasm for doing the work I do. My lawyer has issued a statement. For any further and additional information I would really refer you to that. I look forward to it.
QUESTIONER: You talk about the challenges facing the developing countries, like South Sudan. What strategic plan have you put forward to build the capacity of these countries?
MS. LAGARDE: Thank you for your question. I remember you from last afternoon, right? You were in the seminar yesterday.
First of all, I would like to say that we welcome the recent announcement by Sudan and South Sudan to implement security and oil related agreement. I think these two countries have suffered more than enough in regard to these issues, the splitting and the sharing of oil resources. I think what will be implemented will actually relieve both countries’ economies, and we look forward to it. The Fund will continue to provide capacity building advice, technical assistance advice as needed. We have done that, we will continue to do so and we very much look forward to an improvement in security on the ground as well as the compliance and respect of the agreements that have been entered between the two countries. We will be there, we will be on the side of both.
QUESTIONER: Many consider the solution for Cyprus bad. There are some other people that even consider the solution inhuman. The real question here is, is the solution for Cyprus going to be a template for other countries?
MS. LAGARDE: I have said it, but happy to repeat it, because I think it is critically important: No. The Cyprus resolution is not a template. The way in which the two largest banks of Cyprus and the rest of the banking system has been restructured in the way it has, and the way it should have been, is not a template for other countries. If only because the situation of Cyprus is extremely specific for all sorts of reasons: the size of the sector, very limited number and size of bondholders, which made the restructuring very specific as well. So no template.
QUESTIONER: Madame Lagarde, you just called for the earliest completion of the 2010 reforms. Yesterday, your press service reminded us that it is basically the U.S. that single handedly is holding back the reforms—I should say, the U.S. Congress as we all know in this room. My question is, is this system fair, where one shareholder can hold back the whole world? Is this effective? Does this system need change?
MS. LAGARDE: I would like to say that I draw some hope from the fact that the United States ratification of the quota and governance reform that had been approved by President Obama and is now included in the budget law that is going to be discussed by the Senate. And given the multilateral nature, or DNA, of this institution, I very, very much hope that the U.S. authorities, the legislative branch, if you will, will support that proposal, and will join the club of the many, many member states that have ratified the reform.
MR. RICE: With that, we bring the press conference to a conclusion. Thank you Madame Lagarde. Thank you, Mr. Lipton. Thank you all.