Transcript

Washington, D.C.
April 11, 2014

Reza Moghadam, Director, European Department
Phil Gerson, Deputy Director, European Department
Aasim Husain, Deputy Director, European Department
Ranjit Teja, Deputy Director, European Department
Mahmood Pradhan, Deputy Director, European Department
Ángela Gaviria, Senior Communications Officer

MS. GAVIRIA: Good morning and welcome to this press conference by the IMF on Europe. Let me introduce the speakers: in the center is Reza Moghadam, Director of the European Department. To his right is Ranjit Teja, Deputy Director in the same department, and to his right is Phil Gerson, also Deputy Director. To the left of Reza is Mahmood Pradhan, Deputy Director, and at the end of the table is Aasim Husain, also Deputy Director in the European Department. Reza will have some brief remarks, and then they will take your questions. Reza?

MR. MOGHADAM: Hello. Welcome to all of you. Before taking your questions, let me give some context, with a few broad observations on developments across Europe.

First, looking at Western Europe, the recovery we projected last October for the euro area has solidified. This is reflected in our revised forecast--for example, the 2014 forecast for the euro area is up from one percent last October to 1.2 percent now, with substantial upgrades for countries such as Spain. These revisions reflect the stronger data flow on the back of past policy actions, the revival of investor confidence, and the waning drag from fiscal consolidation.

The positive impact on program countries is also palpable. There are improving economies, lower spreads, and evidence of market access.

We have also seen a welcome pickup outside the euro zone. For example, growth in the UK is picking up strongly with almost 3 percent expected for this year.

While stronger growth prospects and market sentiment are welcome, there is still much to do to solidify and boost the recovery, which remains rather weak. And unemployment is still unacceptably high in too many places.

The headwinds in the euro area are many. We have previously emphasized the role of debt overhangs in firms and households, of fragmented financial markets, and of policy uncertainty. Action is being taken to address all these areas both at the country and pan-European level, with steps to banking union--for instance, a single supervisor, the asset quality review, and the stress tests are especially important to ensure adequacy of capital and market confidence.

More recently, we have emphasized the role of what we call "lowflation," i.e., of a large and persistent undershoot relative to the ECB's medium-term price stability objective of below but close to 2 percent inflation. You may have seen our blog on the pressure this puts on debtors, real lending rates, relative price adjustments, and employment. We welcome the attention the ECB is paying to this risk, and its recent statement stresses that it is considering further action including unconventional policies within its mandate.

I would also emphasize the role of structural reforms in reviving long-term growth which has taken a hit from several years of underinvestment and unemployment.

There is too much to say here, so let me just direct you to our recent book, which I have here, and there will be a few copies later.

Let me turn to the East now.

Growth in most of the Central, Eastern, and South-Eastern European countries is recovering, partly driven by the recovery in the euro area, but growth in the region as a whole will be held back. We have marked it down since last October, in part because of the contraction in Ukraine, and slowdowns in Russia and Turkey.

External funding conditions have also become more challenging. Even before the tensions in Ukraine, we saw that capital flows into the region had started to reverse, with portfolio flows turning negative toward the end of 2013. And of course, this comes on top of the ongoing deleveraging that the region has seen.

In the near term, these factors will offset--perhaps even more than offset--the tailwinds from the recovery in the euro area.

Although the reversal in capital flows hurts most emerging markets, the hit to those with stronger policy frameworks and fundamentals has been less. This underlines the case to strengthen policies. Those with exchange rate and monetary policy flexibility should continue to use it as the first line of defense against volatility. All countries, especially those with weaker fundamentals, need to address legacy issues and problems exposed by the crisis, structural weaknesses that hold back growth and keep unemployment high, nonperforming loans that hamstring credit and exhausted fiscal buffers.

Let me say a few words on Ukraine.

We have had, obviously, a very difficult confluence of a geopolitical crisis and an economic one. The Ukrainian authorities are showing a remarkable capacity to rise to the occasion with unprecedented action to tackle not only immediate problems but also chronic ones. This includes actions in five areas: First, ensuring exchange rate flexibility and competitiveness; second, stabilizing the financial system and confidence in banks; third, gradually reducing the fiscal deficit; fourth, adjusting energy prices up from far below world levels, with safeguards, of course, for those with low incomes; and fifth, implementing broader structural reforms to tackle corruption, governance and the business climate.

There is still work to do in terms of finalizing some of the actions and ensuring the program is financed. If all goes well, we expect our Board will consider the program to support Ukraine in late April or early May.

Thank you. I am happy to take your questions.

MS. GAVIRIA: Thank you, Reza.

We'll go to questions now.

QUESTIONER: I have a question about the efforts that the government of Renzi is doing, especially in light of the new economic and financial plan that they approved this week--your assessment on this and also, as part of this, what do you think about the higher costs expected from banks to support some of these tax cuts? We know that in Italy, there are many concerns from the banking system about the higher costs that they are facing.

MR. MOGHADAM: We will have an Article IV discussion later this year, in late spring, with Italy, so we will have an opportunity to look at these issues in a more careful way and make a careful assessment.

We certainly welcome the emphasis on labor and product market reforms. Italy has made strides there. But given the low level of growth, it is essential to continue to make progress in those areas.

But let me turn to Aasim to give a more detailed assessment to you.

MR. HUSAIN: Thanks, Reza. The new DEF just came out earlier this week, and some of the details will still be coming out, so we will be in the process of assessing them in the coming days and weeks.

But a quick analysis of the announced plans looks good. We support the authorities' intention to rebalance the fiscal position, that is, to lower taxes and finance that by lower spending. And that in fact is something that we have been recommending now for some time. And if anything, this is a small step, and an even bigger step over time will be desirable.

This sort of rebalancing is critical to restore growth in Italy, and many of the structural reforms that are also being announced are along the lines of what we have recommended in the past. Particularly with respect to the labor market, it will take time for these to be fleshed out and agreed with Parliament, and therefore, it will take time to assess.

In this fiscal rebalancing, it is important that the cuts in expenditure, as well as the cuts in taxes, are both permanent structural cuts and not just one-off measures, so clearly, those that are permanent will be preferable. At this stage, I think that's all.

QUESTIONER: Do you think that it would be helpful for the EFSF money to be used to recapitalize banks, say, in Spain and Greece? Is it legal, according to your assessment, to use that money under the current framework? And secondly, can you rule out any sort of debt reprofiling or restructuring in the Ukraine bailout in the next 12 months?

MR. MOGHADAM: What do you mean by "EFSF"?

QUESTIONER: Sorry. The European bailout fund.

MR. MOGHADAM: You are referring to direct recapitalization?

QUESTIONER: Yes, instead of putting it on the state's balance sheet, having a direct recap. Right now in Spain, it is on Spain's balance sheet that they could cut funding costs, etcetera.

MR. MOGHADAM: We as an institution have advocated the desirability of having direct recapitalization of the banking system for some time. The broad parameters of it were agreed in the June 2012 Summit, but the specifics have not yet been agreed, and there has been a debate about exactly how it would be implemented.

Here we have to look at the sequence of events. There is a comprehensive assessment in process, and I think the first step is to make sure that that comprehensive assessment is credible, that it meets the objectives of looking at the balance sheet of the banks in a comprehensive way, and in a way that brings out any problems.

But at the same time, it is important to have a backstop, even though we think that the first line of defense in terms of additional capital needs to be the private sector. And judging by recent events, private capital is indeed available and is flowing to--you mentioned Italy and Spain--it is flowing certainly in Italy. Banks have been able to raise capital.

Having said that, it is in our view useful to have some kind of backstop, and in that context, having some framework for direct recapitalization when the debt of the countries is high would be beneficial both for the euro zone as a whole and of course for the indebtedness of that country and for the viability of the system.

In terms of Ukraine and debt, our assessment is that the debt in Ukraine is sustainable. We have looked at how it could be subject to various shocks, and in our view, there is a high probability of sustainability.

Just to give you some detail, external public debt is only around 30 percent of GDP, and total public debt is probably going to rise to around 50 percent of GDP this year and next year. And if you subject that to various shocks, it is difficult to see that it would go on an unsustainable path. So, in that sense, from a policy point of view, as the Fund views the debt to be sustainable, we can go ahead and lend.

QUESTIONER: When the package was announced, the $27 billion, has enough money been pledged from you and from other bilaterals to cover Ukraine's financing needs completely for the next two years? Because there is still uncertainty about what is under this $27 billion number…

MR. MOGHADAM: I think you may have noted that while we announced the $27 billion, which is the financing need of the country for the next 24 months, we have also given a range for the financing that could come from the Fund, and that range has been $14 to $18 billion. And partly that is a range because we are still talking to bilateral and multilateral lenders, and we have had some success, so that we try to gauge the Fund lending depending on what comes out of others.

So the $27 billion is a fairly firm number. We announced that after the mission had a very careful assessment of the financing needs of the country, the obligations that they would need to pay over the next 24 months. I think the 27 is fairly firm, but our exact financing will depend on how much comes from other bilateral and multilateral lenders, and that is why you have a range. So that range in a way shows the willingness of the Fund to fill the gap. We are hoping that others will also step in so that we don't have to put as much as 18, but the Fund has shown preparedness to put that range to make sure that the program is fully financed.

QUESTIONER: You mentioned the risk with unemployment. It is not only a risk--it is a reality--in the case of Portugal, so I’d ask you a more broad question: What went wrong with the adjustment, the fiscal adjustment in Portugal, and specifically with unemployment? How can we turn that around?

MR. MOGHADAM: I think your point is correct. The unemployment rate in a number of places in Europe, including Portugal, is unacceptably high.

I think the issue has been first stabilizing the economies. Given the high level of debt and given that Portugal and others had lost market access, it was necessary to have a fiscal adjustment program that would bring debt under control. And to some extent, that has been done. Portugal planned a degree of fiscal adjustment, most of which has already been done. Two-thirds of it has already been put in place.

In terms of unemployment, the focus of the program has been to put conditions in place in product and labor markets, not just in Portugal but across the euro zone countries, through reforms in these areas and structural reforms in general in order to increase the potential growth of the economy. Some of those are yielding results. Now, obviously, the situation is difficult and is likely to continue to be difficult, but the starting point was extremely difficult, I would say critical. Some of these economies did lose market access, and the adjustment was necessary to bring the economies back to health.

So, I think that as we move forward, the emphasis on product and labor market reforms needs to continue. Now, Portugal has done a lot--one should commend them--in terms of labor market reforms. I think there also needs to be greater emphasis in terms of product market reforms, liberalization of the services sector, where there is scope to create jobs and reduce unemployment.

MS. GAVIRIA: We have a related question online: "Portugal is on the eve of concluding the financial assistance program. Do you think Portugal should ask for a precautionary program after the end of the bailout?"

MR. MOGHADAM: The Fund and European-supported programs come to an end at the end of June. I think the Portuguese government is in the process of consultation. They are talking to all the key partners, they are talking to market participants, to assess the easiness of access to the markets in the coming months and years.

What is very encouraging is that not only has market access been regained in a significant way; the spreads have been coming down very sharply in Portugal. It is a testimony to the successful implementation of the program despite many problems.

That process of consultation is continuing now. It would be prejudging it if we say it should go one way or the other. There are good reasons for considering a precautionary arrangement as a safety net. Also, equally, if there is market access, if there is commitment to continuing reforms beyond these programs, a credible case can be made for not having one. So that consideration is continuing now, and I think we need to let the government seek views and form its judgment.

QUESTIONER: You mentioned the unacceptably high unemployment, and I understand that measures are being taken on the fiscal level and then on the reform basis. What should the monetary policy of the ECB be? Can the monetary policy or some kind of pan-European reaction help in that respect?

MR. MOGHADAM: What is clear is that demand in Europe, in the euro zone, is depressed. What is clear is that the output gap--the gap between how fast the economies should grow and what they are growing at--is rather large, and in that sense, monetary policy has to play a role, and indeed monetary policy has played a role. The ECB has been very proactive in terms of conventional and unconventional policies, from LTRO to OMT, and significant reductions in rates to historically low levels. In our view, there is still room for further conventional and unconventional easing. We have been advocating that. And what is positive is that the ECB is very actively considering that.

QUESTIONER: I have a question on Ukraine. The Ukraine currency has dropped significantly during the last few days. How can you predict the situation will be stabilized within the IMF program?

MR. MOGHADAM: I think you raise a very good question. Obviously, one of the planks of the new program hopefully will be a floating exchange rate. And one needs to commend the Ukrainian central bank and the authorities in general to have floated the exchange rate recently.

Now, the market is very thin; reserves, while they are being preserved, are not very high; and the geopolitical situation is very volatile. In that environment, it is not surprising that there is exchange rate volatility.

Our hope is that as the program goes into effect, as reserves are built up, one can preserve the floating exchange rate regime but make sure that the volatility is reduced as the reserves are built up. So I am afraid that in the short run, one needs to expect this kind of volatility, but hopefully, as we move on, the volatility would decrease.

QUESTION: The fact that Greece went to the financial markets contradicts your previous estimation that the debt is not sustainable and needs restructuring.

MR. MOGHADAM: Is this a question?

QUESTION: This is a question.

MR. MOGHADAM: Okay. I think it is positive that Greece is able to tap the financial markets, but I would say that when it comes to the question of sustainability, they are able to tap financial markets for a number of reasons. The most important is that Greece has implemented very important, very difficult reforms to stabilize its economy. The fiscal adjustment in Greece in view of extremely high debt--the highest in the euro zone--has been impressive adjustment. Turning to labor and product market adjustments, in the review that is being completed, there is a very impressive list of structural adjustments on the product market side. So it is a testimony to successful implementation despite difficulty, despite delays. First, I think it is that.

Secondly, I would say that they are able to tap the markets because there was a framework agreed in November 2012 to ensure that debt remains under control and is sustainable. The European countries and Greece have made commitments. Greece has made a commitment to fulfill its obligations on the fiscal side and structural side and reform, and the European countries have made a commitment to make sure that the debt level does not rise above a certain level. So because of those Greece can access the markets.

Finally, I would say that financing needs remain very large, the debt remains very high, and these issues will continue to be addressed, and need to be addressed, by Europe and the Fund in the context of future reviews, because the financing needs for the next two years will be quite large, much larger than the amounts that are currently being raised by the markets. So there will be a continued need for support and looking at the framework.

MS. GAVIRIA: I have a question online on Turkey: "What should Turkey do about its current account deficit? Do you have any suggestions?"

MR. GERSON: It is clear that one of the weaknesses of Turkey going forward is its large external financing requirement, its large current account deficit. We are in fact already projecting a decline in the current account deficit this year that reflects a couple of factors. It reflects tighter monetary policy. It reflects some macroprudential measures that the authorities have introduced to slow the growth in consumer credit. And it also reflects in general the more difficult external financing environment.

A couple of things are clear. One is that the financing environment has changed in a way that is likely to persist for some time. Another thing that is clear is that it is going to take a while given the size of Turkey's current account deficit for that deficit to come down.

So, the authorities need to maintain a lot of what they are already doing. There has been a tightening of monetary policy recently which has helped, and that is going to need to continue for some time. There also over time needs to be a continued gradual tightening of fiscal policy in order to increase public savings and help redress the imbalance between savings and investment.

So the authorities are already in the process of implementing policies that are dealing with this large external financing requirement, this big current account deficit. And the recipe going forward is to maintain those policies for as long as it takes for the external financing requirement to come down to a more sustainable level.

QUESTIONER: Last year there was plenty of speculation that Slovenia might be forced to ask for a bailout. Luckily, we avoided that. What measures taken by the government last year would you single out as positive, what would you consider as negative, and what should we focus on now? Should the privatization process proceed faster?

MR GERSON: You are right that the situation in Slovenia has improved significantly over the last year. In fact, we are now beginning to see signs of growth reemerging in the economy after what was a very difficult period, a very sharp downturn in Slovenia. I believe it had the second-largest downturn in the euro area at the height of the crisis.

There are a number of things that the Slovenians have done over the last year to make that possible. The stress-testing of the banks and the recapitalization has been implemented. The authorities have identified a number of industries for privatization. Fiscal policy has been tightened. So there is a lot that the government has done or has started to do, and we think that that is reflected in the pickup in growth, in the much better financing conditions, and in general, an improvement of confidence in Slovenia.

The challenge for the authorities going forward is to keep going with those reforms. Although the banks have been recapitalized, nonperforming loans remain a big problem. Many of the large banks still have very high levels of nonperforming loans.

The authorities have set up an asset management company, but the process of moving those nonperforming loans to the asset management company has not moved as quickly as we would have hoped. So one thing they need to do is speed up that process. The privatization bill has passed, which has identified a number of companies for privatization. The authorities now need to begin making those sales go forward. That will do two things. First of all, it will increase financing for the budget, but even more importantly, it will help increase the efficiency of the economy and serve as a further spur to growth.

Finally, on fiscal, the authorities have identified an appropriate fiscal target for this year, but we still have to see the measures that they are going to take to implement that. So there is a need to specify the measures that will be taken.

But it is clear that the authorities have made a very good start. It has been reflected in much better financing conditions and even in a pickup in growth, and the challenge for them now is to keep going on this reform agenda and implement those policies that they have identified.

QUESTION: Do you think that the Cyprus experiment, the bailing-in, is successful and should be followed by other countries?

MR. MOGHADAM: I think there were specific circumstances in Cyprus that necessitated the program there to require a bailing in of depositors. The debt otherwise would not have been sustainable. And there were no alternative credits that could be written down. But I think that the experience so far with the Cyprus program has been very positive. The Cypriot authorities have shown a very high degree of commitment to implementing the program. The economic indicators have been in line with or better than was projected at the start of the program. The schedule for reform is proceeding as envisaged at the outset of the program.

The challenges are enormous, particularly in the banking system, and specifically on addressing the problems in the largest banks; nonperforming loans are very high, and that remains a major challenge; the fact that there are still payment restrictions in place, and the lifting of domestic restrictions will be a major step going forward.

So I think that so far, the experience has been extremely positive. It makes one optimistic that the objectives of the program will be met. But a lot of challenges remain ahead, particularly on the banking sector.

MS. GAVIRIA: I will move briefly to a question online, and then we will continue here. This is coming from Hong Kong: "The French economy seems to be stagnating. Does it need further reform in terms of fiscal or labor policy?"

MR. MOGHADAM: France is pursuing a kind of fiscal adjustment program in a challenging environment for the country’s external sector, particularly its export market. This is a change that has been going on over some time. And within that fiscal adjustment, the fiscal framework of the European Commission has shown sufficient flexibility to allow France time to adjust its deficit. But the more important challenge for France is to change the composition of that adjustment, and that is currently underway.

QUESTIONER: I have a question for Mr. Moghadam. Could you just elaborate a little bit on what you said about Greece, that it will need more official financing despite its success on the markets now? Could you give us an idea of how much we are talking about; will the IMF participate in a third program for Greece, etcetera?

MR. MOGHADAM: Our program is currently envisaged to go to the end of the first quarter of 2016, and it already has financing attached to it until then. So, in that sense, official financing certainly from the Fund is already available. In that context also, as part of concluding the current review, you will have seen the statement from the Eurogroup. The European partners have said, as they have said previously, that they will continue to ensure that the Greek program is financed as long as it is on track.

So, in that sense, we have the commitments to ensure that Greece will continue to have sufficient financing and would meet its obligations. I think the priority has been to try to complete the current review which, as you know, has taken some time. After this, after the summer, we will come back and assess the situation and the financing needs. We will take into account the recent market access and look at both debt and financing as well as program implementation going forward.

QUESTIONER: It seems that Spain is going to be stalled. From this year to next year, there is a pretty big difference in growth projections from the IMF and the rest--the Bank of Spain and other figures. I am wondering what needs to be done to get out of there. We are also working on fiscal reform, and I would like to know what the IMF recommends. And then, just a last question: When we are talking about unconventional measures from the ECB, are we talking about buying bonds or asset-backed securities?

MR. TEJA: On Spain, our message is that Spain has turned the corner; it is doing very well. Growth has turned positive, finally. We are projecting growth of almost one percent this year and next year. The difference relative to the consensus forecast is quite small. It is about 1.2 for this year, so it is not huge. We will be looking at this again in the Article IV Consultation that is coming up next month. Certainly, as the data strengthens, we will be moving our forecast up or down, depending on what is happening.

As we emphasized in the last Article IV, Spain faces a lot of headwinds. Its biggest challenge is obviously unemployment. But the headwinds come not only from the reduction in demand from this pool of people who are no longer able to demand as much, but also from the fact that households and corporations are quite indebted. Those need to be worked out. There have been some new initiatives that the government took only last month. Those are a great start in the right direction.

We do think that continued wage moderation is also important to get employment back up and, therefore, demand.

Similarly, the government has put in place some new initiatives to reduce employment taxes. We think that is a great idea. If there were a way to extend that and target it at the lower end of the wage distribution, that would also be extremely useful.

So we do see that Spain is moving ahead. We think this path will continue. But there is more that can be done to speed this up, and what, more precisely, we can outline in more detail after the Article IV.

MR. PRADHAN: On the ECB, as Reza mentioned earlier to your question about the bonds, the unconventional policies in principle are something that expands the balance sheet--and before I get to the question on what to buy, expanding the balance sheet can include things like an extended LTRO, longer-term liquidity facilities, which we recommended in the last Article IV.

In terms of your question on whether to buy bonds, whether it is private or sovereign, it could include both. The constraints will become the operational issues as to the relative size of markets--if they look to buy private sector assets, which assets and the size of that particular market. But nothing will be ruled out.

QUESTIONER: As you know, S&P has warned of downgrades for several European banks after it was announced that they were instituting the Cyprus-style single resolution mechanism regime, or the "bail-in," so-called. To many, this represents the beginning of a rapid contraction of financial aggregates in the system and has actually been compared to an elevator whose cord has been cut and is going into freefall. In Great Britain, of all places, calls for Glass-Steagall have reemerged from Liam Halligan and others, and as an orderly bankruptcy reorganization of the type that Franklin Roosevelt instituted here in the United States. So, what are you prepared to do to reinstate Glass-Steagall?

MR. PRADHAN: Can I first start with a comment just observing where we are in the European banking system? You referred to the bail-in framework, the BRRD, and the extent of deleveraging. If you went back 12 months, relative to that period, I think the banks are in a much stronger position.

As Reza mentioned earlier, if you look at a variety of indicators, the ability to raise capital and therefore to avoid this forced deleveraging is much better now. Bank valuations are much higher. Access to capital markets is higher. And just to take one example, the large writedown of the large NPLs in Italy two months ago was taken very positively by the markets. So it is within that context.

The EU framework for resolution of banks is also helping because that gives you more predictability on the types of investors who would want to take particular types of risks in the capital structure of banks.

I don't think there is a need for a different framework, along the lines of Glass-Steagall that you mention. This is not something the EU needs to entertain at this stage.  The current framework, including the various directives on CRD-4, will strengthen the capital base.  The proposals that are around, from the Vickers proposals to the Liikanen proposals, to make banks somewhat safer than they have been, as well as higher capital requirements from Basel III that would reduce leverage inside banks and thereby reduce the steady state demand on the public sector, I think are in the right direction.
MS. GAVIRIA: Thank you. The last question is coming online from Hong Kong: "How do you see the inequality problem in the euro area?"

MR. MOGHADAM: Obviously, it is an issue. Maybe it is not as big an issue as in the rest of the world for a number of reasons. There are good social protection schemes in place, and whether it is the fuel prices in Ukraine, where we are looking at potentially protecting the lowest 30 percent income households from the impact of the price increases, or the unemployment protection schemes in various places in Europe, there is major social support across European economies.

Now, of course, the fact that unemployment is very high adds to inequality, so a major focus needs to be on reducing unemployment, and here again, I come back to the book. Our emphasis has been on improving the workings of the labor markets and improving the efficiencies of the product markets in order to make job creation more successful in Europe. At the end of the day, that is the best way to reduce inequality, to create jobs.

MS. GAVIRIA: Thank you, Reza. We end this press conference here. Thank you for coming, and thank you to the speakers.