Transcript

October 10, 2013
Washington, D.C.

Panelists:
Christine Lagarde, IMF Managing Director
David Lipton, IMF First Deputy Managing Director
Gerry Rice, Director, IMF Communications Department

MR. RICE: Good morning, everyone. A very warm welcome to these Annual Meetings on behalf of the IMF. I'm Gerry Rice of the Communications Department. It gives me great pleasure this morning to introduce you to the Managing Director of the Fund, Christine Lagarde and her First Deputy Managing Director, David Lipton. With that, I will ask the Managing Director to make a few opening remarks.

MS. LAGARDE: Thank you very much, Gerry. Good morning to all of you and welcome to the 2013 Annual Meetings of the IMF and the World Bank. I will make my comments very short because I know you have plenty of questions, and David and I are prepared to answer those questions.

But just very quickly, you have seen the WEO. You have seen our revised outlook for 2013. You have seen that we brought it down to 2.9 percent globally, of which 4.5 percent for the emerging market and developing economies, and 1.2 percent for the advanced economies.

2014 looks a little bit better in our forecast with anywhere between 0.5 and 0.7 percent up from this year, but this 2013 forecast of ours clearly indicates that there is recovery, but that it is slow and that it is unbalanced.

You have also heard us, and Olivier Blanchard as well, mention that the global economy is coming out of the sort of great recession that affected some of the economies, and moving toward what we called this period of transitions, otherwise great transition as well.

So what do we mean by that? We mean that the pattern of economic growth, especially affecting the advanced economies and the emerging markets, is shifting. We also mean that there is a transition underway concerning the financial market, and you might even argue that monetary policies adopted by many central banks are also going through transitions.

What does it mean in terms of policy? It means that clearly those transitions have to be addressed and managed very carefully, and they have to be addressed in cooperation. And certainly there is one thing that we advocate strongly is that those solutions be as country-specific as they can, put that there be as much cooperation as is possible.

Now, looking at those economies in particular, concerning the U.S. we believe that, apart from the urgency of the moment, it is critical that the exit from highly accommodative monetary policy be carefully managed, that the fiscal house of the United States of America be put in order, and obviously we know and you know by now that failure to raise the debt ceiling would cause serious damage to the U.S. economy, but also to the global economy as a result of the spillover effects.

Concerning the euro area, which is finally climbing out of recession, we believe that it needs to finish cleaning up its banks, forge ahead with banking union and break down some of the barriers that are still an obstacle to growth and job creation, particularly in the product and service market, but also in the labor market for some of them.

Concerning the emerging market economies, we believe that they need to navigate any short-term financial turbulence as smoothly as possible. There will be turbulence as a result of tapering. And that they have to remove the structural impediments to their medium-term growth and that is a different picture depending on the country.

The low-income countries need to continue to implement policies to protect themselves from any potential fallout from global economic outlook.

And the fourth group of countries that clearly has received a lot of attention from our part has been the group of Arab transition countries that need to continue to steer a path toward more inclusive economies that actually create jobs.

Beyond all this, as I said, we certainly advocate cooperation in order to make sure that growth that is picking up be actually inclusive and more sustainable in the long run. We will continue to provide advice. We will continue to provide that platform, that forum where policymakers can actually get together and have a dialogue and assess their respective policies.

I would like to just close these introductory remarks by one piece of good news that I'm particularly pleased about. We have just reached the threshold of enough approvals from our membership to transfer the existing gold profit to meet the financing needs of our low-income countries. We have something that is called the PRGT, Poverty Reduction and Growth Trust, that we very much wanted to have sustainable so that it can respond to the needs of the low-income countries. That has been done. We needed a threshold of 90 percent. 90 percent of the membership has agreed to transfer over to that trust the windfall profit that was made at the time of the gold sale that took place about three years ago now.

So that is the good news of this week for us and we're very pleased that the membership has recognized the need to actually make sure that the PRGT, Poverty Reduction and Growth Trust, for low-income countries be sustainable.

QUESTIONER: The talk of the IMF quota and governance reform has been going on and on and on for several years. Last September when I asked you how confident you are about the completion of this reform, you used the term "desperately confident." But 13 months later we still haven't gotten approval from the United States. I just wonder where do you stand now, are you more desperate or are you more confident? Do you have something to say to those emerging markets who might be feeling a little bit of being betrayed?

MS. LAGARDE: The 2010 governance reform was to be completed by the end of 2012. We are now in October 2013 and we have not been able to deliver on this governance reform because it has to be ratified by a number of countries, and it has to reach a number of thresholds. All thresholds have been exceeded except the one that is at the supermajority, which is 85 percent, and where we are short of a few members including the United States, which has a significant share and a veto right on such changes.

So, we are very much hoping that the United States will ratify this 2010 governance reform. And in the meantime we haven't wasted our time, because there are clearly other movements underway, including the review of the formula, including further research on the adequacy of funding to respond to the needs of the membership. So we continue the work, as we should, and we are certainly waiting for all members to ratify the 2010 governance reform.

QUESTIONER: You said earlier this week in an interview that the IMF was ready to work with the Egyptian authorities. Is that a recognition of the army-backed government that is currently in place now, and Egyptian officials have been saying that they don't need to turn to the IMF because of Gulf assistance. Do you see the situation as sustainable?

MS. LAGARDE: First of all, the IMF is very keen and ready to engage with the Egyptian authorities in order to help the country and the people of Egypt stabilize the situation, address the economic difficulties that it is facing. We have had discussions over the last year and a half, as you know, and we are certainly prepared to engage.

We believe that it has to be a cooperation between the Egyptian authorities on the one hand, us, the donors, whoever is participating and is keen to stabilize the financial and economic situation in the country.

QUESTIONER: I would like, Madame Lagarde, to know your opinion about Spain. All the focus was on Spain a few months ago. Now what is your opinion of Spain? What have we done right and what is the future, what should we still be doing?

MS. LAGARDE: Let me say three things about Spain. First of all, it's a country where there is still a very, very high number of unemployed people, particularly young people. I think that should be the focus of everybody's energy.

With that in mind, we are clearly focused on the financial stability of the country, but we are also keen to facilitate growth in Spain, growth that creates jobs. So, we have actually asked in due course that the period of time that was given to Spain to adjust its fiscal deficit and to consolidate be longer than was initially planned by the European authorities, together with Spain. And, we are pleased that that was actually taken into account and that more time was given to Spain.

The third thing that we have been, I hope, helpful with has to do with the banking restructuring of the country. As you know, the Europeans have participated actively in that effort. We were engaged in a monitoring capacity, and we are pleased to say that that banking sector restructuring has taken place, has been conducted successfully, and that it should equip Spain in order to actually facilitate the pickup of the real economy so that banks can actually do their job.

QUESTIONER: Madame Lagarde, I would like to ask a more general question. In your opening remarks you mentioned one of the challenges facing the United States was managing the exit. In the WEO one of the downside risks you outline is that financial conditions tighten prematurely raising long-term bond yields. How much confidence do you have in the ability of central banks, including the Fed, to be effective in their forward guidance to make it work, to hold down bond yields and prevent this premature tightening in financial conditions that could really undermine your outlook for world growth?

MS. LAGARDE: Well, I'm certainly confident that the Fed, including under its new chairmanship, will be very attentive to do the tapering that will ultimately take place in as well-communicated way as possible, in as-gradual way as possible, in order to at least temper the potential turbulence of the market, and taking into account within the mandate the spillover effects that such measures could have, and the reverse spillover effect that it could have on the domestic economy of the United States. Those are the three parameters within which we hope that the equation of undoing what has been done under the various QE programs is undone.

I will just follow-up on your question, as well, because I think that it is a two-way street. The tapering and the winding down of some of the unconventional monetary policy measures that have been taken around the advanced economies, not just in the U.S., will probably take place over a period of time. It was not going to be synchronized, and it will not occur at the same time. That is one thing.

Second thing, the receiving countries in a way, those that have had the benefit or the harm of capital outflow, and that will be preparing for the reverse movement, they have to do some things, too. And there is a set of policy recommendations that we are working with them on that can be adopted to actually temper the effect of turbulence, volatility, increase in the bond prices as a result of tapering. That is where cooperation is really helpful.

QUESTIONER: Two quick points on Greece. First, when do you see the reopening of the discussion on the Greek debt issue based on the November 2012 Eurogroup decision, and what is your position on it? And the second question would be that there is concern in Athens that the IMF is asking, or demanding let's say, for new horizontal fiscal measures based on yesterday's Fiscal Monitor. Can you clarify the stance of the IMF, if it is actually asking or not?

MS. LAGARDE: I'll be very happy to do that. First of all, on the issue of the primary surplus confusion, let me just clarify that issue. The numbers referred to in the Fiscal Monitor that was released yesterday actually refer to an analytical method that is cyclically adjusted. That analytical method, which is fine, does not produce the same results as those that result from the assessment of the performance of the country under the program that we have going on at the moment.

Under the program going on at the moment, Greece has a target of a balance, and based on all the information we have, it will do better than that balance and it will actually produce a primary surplus in 2013. And the authorities, as we understand, are committed to reach the objective of 1.5 primary surplus in 2014. That is point No. 1.

Point No. 2, on the issue of new measures, it's premature, because the mission is due to return to Greece at the end of the months and we'll assess with the authorities where we are, what has been done, what the tax administration reform will produce in particular. If new measures were needed, I can tell you one thing, is that it is not going to be in the form of additional fiscal measures, and it will not be in the form of across-the-board, undifferentiated cuts in wages or pensions. Okay?

The third point that you have raised deals with the debt and that is a matter that has been agreed, which is part of a framework agreement between the European partners on the one hand, the Greek authorities on the other hand, and us. The European partners are committed to do certain things, and they have always reiterated those commitments, and we hope that they will continue to do that. I have no doubt about it. The Greek authorities are committed to deliver under the program, and they are doing everything they can at the moment, as we are observing, and we hope they continue to do that.

As far as the framework is concerned, we have objectives. We have debt sustainability numbers. All that stands, and there is no reason to have trepidation or questions about it. We will re-discuss those matters in mid-2014.

QUESTIONER: I have two questions for you. Can you say that this is the beginning of the end of the recession in Portugal? And, then, if you have a plan B as far as measures if the court rules out the second plan of measures already agreed?

MS. LAGARDE: We certainly hope that this is the beginning of the end of recession on a euro area basis at large. I'm just checking the forecast that we have in terms of growth for 2013 and we are still in negative territory. The forecast is minus 1.8 percent. But, it has improved over the last three years, and it is a good trend. It's not delivering positive growth yet, but it is a good trend.

The reviews that have taken place in Portugal have been positive. The outcome is agreed. And, we certainly hope that the measures that have been decided with the Portuguese authorities will deliver yet more value for the Portuguese economy.

QUESTIONER: Is there a plan B?

MS. LAGARDE: We're working on the basis of a program. We don't have alternative programs. When we have a partnership like that with the country and with the Europeans, we constantly reassess, reexamine, what the results are, what the outcome is, and there have been cases where we have asked that there be a bit more time given to the country, for instance, or that the measures be readjusted depending on what, for instance, constitutional courts will have to say.

QUESTIONER: I would like to know what effect the U.S. shut down will have on the Nigerian economy and other economies in Africa, especially the Nigerian economy?

MS. LAGARDE: Can I combine, if that is okay with you, the shutdown/debt ceiling. I will say this. There will be very negative consequences for the U.S. economy and there would be very negative consequences outside of the U.S. economy. And, the IMF does not take a stand and does not make a recommendation as to how politically this matter can be resolved. This is not for the IMF to say. We don't take a political view. We only look at the economic consequences of measures decided anywhere in the world.

When it affects the largest economy in the world, we are bound to not only look at the immediate domestic consequences, but we also have to look at what happens elsewhere, and we have to engage in a dialogue with our members to see how they can best prepare for that and anticipate. That is the work that is underway. I hope in a few weeks' time we will look back and say what a waste of time that was, because it was unnecessary, because it didn't happen. But, we have to look at potential risks, however improbable they are likely to materialize. And what I can tell you is that the transmission channels elsewhere, including in Nigeria, would include the trade channel, because the U.S. economy would have to balance its budget and would certainly reduce its economic activity starting from the third quarter onwards. I can tell you that the second channel, which is probably going to be much more active, is the financial channel, where as a result of uncertainty and material, practical issues having to do with impaired versus non-impaired securities, we are likely to see, if that matter was not resolved, we are likely to see volatility, uncertainty, and consequences on the rest of the world.

Now, as far as Nigeria is concerned, clearly we would have to look into how it would affect the price of oil, for instance, because Nigeria is an oil consuming and exporting country. We are, as I said, currently working on this analysis and engaging in a dialogue with countries.

QUESTIONER: So, I'm wondering for either of you, has the IMF modeled the optimal rate of tapering and/or asset sales? If so, what are those rates, and has it been communicated to the Fed?

MS. LAGARDE: Since you offered the floor to both of us, I'll let David answer your question. I will take a little break.

MR. LIPTON: We said that the Fed, that the U.S. authorities still need to provide accommodative policy, and we believe that unconventional monetary policy is still contributing to support both in the United States and the global economy. What is at issue is in a sense whether to have the foot a little less firmly on the gas pedal. They have said that they will be looking at their two targets, inflation and unemployment rates, in making these decisions and they will be seeing how the economy is evolving. The answer to the previous question, the issue of what is going on in U.S. budgetary decision making, is uncertain and germane. So there is no way to say today what the optimal rate of taper is without having a supposition about the resolution of budgetary issues, except as a conditional matter that if the economy is strengthening sufficiently, tapering can and should begin. But, I think it's really still premature to suggest that there is anything different that should be done until the Fed makes an assessment of the underlying strength of the economy.

QUESTIONER: Madame Lagarde, the IMF spoke a lot, we have a lot of notes about the effects of austerity in countries such as Portugal, Greece or Spain, but I'm talking about Portugal. We have a few problems with that. We would like to know what kind of measures can you suggest to the government of Portugal concerning the pernicious effect of austerity? And point 2, if you believe that the government of Portugal has done enough in what concerns structural reforms of the state?

MS. LAGARDE: First of all, Portugal is one of those countries where the IMF said a bit more time is needed, because one of the key attributes that a country has available to reconcile fiscal discipline on the one hand, growth on the other hand, is time. Front-loading, massive, heavy duty fiscal consolidation is not necessarily appropriate everywhere, which is why in the case of Portugal, as in the case of Greece, we had said more time is needed and will be helpful in order to address and protect those areas that will be conducive to growth and to job creation.

Now, as you know in the case of Portugal we have a particular difficulty which has to do with the view taken by the constitutional court, which has overriding authority in the country to decide what is or what is not constitutional. And that has led to regular revisiting of the program in order to comply with the requirements set out by the constitutional court. But, given that the program is moving on and that the reviews are taking place, clearly the government is addressing those issues and we strongly hope that they will continue to do that, for the good of the country and for the good of the Portuguese people.

QUESTIONER: Madame Lagarde, the major advanced economies and emerging economies seem to be busy with tackling their own financial, fiscal and structural challenges. So in your view, is now good timing, another Washington moment, for global policy coordination? If so, what is on top of your agenda?

MS. LAGARDE: I would hope that we have those Washington moments as often as possible, with nicer weather outside.

If there is one key word from our perspective, it's cooperation between the countries, so that when they devise their policy mix, be it monetary policy, be it fiscal policy, and when they look at the structural reforms that they will conduct, and when they look at the financial sector within which they facilitate fluidity, good monetary transmission, and protect against the downfall of any financial institution, they do so together. Why is that? Not to promote the platform of the IMF. Not because we think that we are the only ideal forum. But because we know for having studied the interconnections between those economies that the transmission channels are very efficient, that what goes well in a country can affect another one, and that needs to be taken into account. Because we know that the financial system is a global system that needs to be addressed in a very coherent way, with as much cooperation between the players, and because we think that this will actually restore unbalances that we have seen at work, that are reducing over time. There is no question about it. But those need to continue to reduce, and not just for cyclical reasons, but also for structural reasons. And there is a win to be had by all members if they play that cooperation game.

QUESTIONER: I was wondering, do you think that the failure to increase the debt ceiling in the U.S. could undermine the U.S. economic leadership in the world?

MS. LAGARDE: As I said, we don't take political views and we look at what happens in the economy, we look at what happens on the markets. And seeing the indexes, whether it is the VIX, the CDS, whether it is price, value of certain bonds, it is not helping the U.S. economy to have this uncertainty and this protracted way of dealing with fiscal issues and debt issues.

QUESTIONER: I would like to ask you about the Balkan region. Croatia and Slovenia have huge economic problems, with Serbia you already started some discussions and probably for some Stand-by Arrangement next year. And, with Bosnia you already have a Stand-by. Their delegation is coming to ask for more time and more money next year. So, what is your opinion on all these countries, let's say, and situations?

MR. LIPTON: I'll say just a couple words on that. Yes, you are right. The countries in the region are having some economic difficulties. We have a program with Bosnia. We have been having conversations with Croatia and Slovenia about what their economic problems are and offering our advice. Slovenia has had some intensification of problems in its banking sector. Right now our relationship with Slovenia is one of trying to offer advice and counsel.

QUESTIONER: Madame Lagarde, while Greece may be committed to reaching its primary surplus target of 1.5 percent, you would agree that currently as it is budgeted that there may need to be new measures, would you not? And secondly, is it not possible that by the time the IMF bailout program ends next year that there will be actually no resolution and be no need for the IMF to force Europe to live up to its debt relief targets?

MS. LAGARDE: I would not agree with what you just said, because I think we cannot prejudge and anticipate what the outcome of the tax administration reform is going to be. We cannot preclude or pass a judgment on how much additional collection there will be as a result. We cannot prejudge how privatizations will pan out. So, we try to base our work on effective, real, tangible and measured results of the efforts undertaken by the Greek authorities and the Greek people. What I can tell you is that if there was a shortfall, if there was a gap as a result of the efforts undertaken, then we would sit down with the Greek authorities and we would look at what needs to be done and over what period of time. But as I said to the gentleman earlier on, we are ruling out across-the-board cuts in wages and pensions. Okay?

Now, as far as the European partners' commitment, as I said, I have no reason to doubt that they will honor and that if needed they will reiterate their commitment in relation to the Greek economy.

QUESTIONER: Madame Lagarde, on the slowdown of the Chinese economy do you think this indicates what is slowing down is China's extensive growth model? And, do you think China's economy is turning to the right direction?

MS. LAGARDE: Well, I would observe that when you are north of 7.5 percent growth it is not a distressing environment and it is not bad news as such. There might actually be good reason to believe that it's actually a healthy turn toward a more stable and well-financed growth in the country. What we have seen lately is a strongly credit-financed economy, particularly to finance large investment projects, infrastructure projects, and we certainly hope that going forward that engine for growth will shift a little bit more toward consumption rather than investment. But, we are observing with great interest this evolution.

MR. RICE: Thank you very much, everyone. We'll see you soon.