Transcript of a Press Briefing on the 2011 Fiscal Monitor Update

January 27, 2011

With Carlo Cottarelli, Director of the Fiscal Affairs Department
Philip Gerson, Senior Advisor of the Fiscal Affairs Department
Manmohan Kumar, Assistant Director of the Fiscal Affairs Department
Simonetta Nardin, Senior Press Officer of the External Relations Department
Washington, D.C.
Thursday, January 27, 2011
Webcast of the press conference Webcast

MS. NARDIN: Good morning. My name is Simonetta Nardin and I am from the External Relations Department of the IMF. This is a press briefing for the Fiscal Monitor Update for January 2011 that will be presented by Carlo Cottarelli, Director of the Fiscal Affairs Department, Philip Gerson who is a Senior Adviser in the Fiscal Affairs Department, and Manmohan Kumar who is an Assistant Director, also in the Fiscal Affairs Department. Carlo will start with some comments and then we will open it up for questions both from journalists here in the room and online, and we invite all journalists who are following the webcast online to submit questions now

MR. COTTARELLI: Thank you very much. I would like first to thank you for being here with us. This is the first update of the Fiscal Monitor. The Fiscal Monitor has two main issues, in the fall and in the spring. We are going to from now on have these shorter updates between the main issues. I will not waste your time before we go into the Q and A session. I would like however to highlight three main points that come out from this update.

The first relates to 2010. This is a comparison between the November 2010 fiscal projections in the Monitor and the current fiscal projections. They are not very different. All together for advanced countries, deficits are on average slightly lower; not by a huge amount, something like 0.3 percent of GDP. Of course, at the individual country level, they are larger, but in general, the fiscal account was slightly better for advanced countries but not dramatically better.

The average fiscal deficit for emerging economies is also similar to what we were projecting in November, again with country differences and with one important element or development that I would like to underscore. There is in this respect for emerging economies both good news and bad news. The good news is that revenues are performing well. Revenues are coming in stronger than expected partly because of higher commodity prices, and partly as a result of higher asset prices, which in turn are due in part to capital and inflows. This is good news. The bad news is that these revenues are actually being used at least in good part to increase spending and our concern is that these revenues will not turn out to be permanent so that there may be a need at one point to tighten spending because revenues come down. This is common in various areas of the world but perhaps a bit more in Latin America.

The second point that I want to make relates to the fiscal consolidation in 2011. Here we have an important change in the fiscal status of the two largest advanced countries, the United States and Japan. In this chart, you see on the horizontal axis our projections for the fiscal consolidation that we made in November 2010. On the vertical axis, you find our current projections. Countries that are below this line are countries where the fiscal adjustment is smaller than we were anticipating; and the country where the deviation from the initial plan is the largest is the United States. Also for Japan as you can see, there is a weaker fiscal stance than initially projected, but the largest difference is for the United States.

To some extent, this change in the deterioration in the fiscal accounts that we are now projecting with respect to earlier projections is due to the fact that 2010 was different from expected, but by and large, this is due to new fiscal stimulus measures that have been undertaken in these two countries. For these two countries, I think there is now a more urgent need to strengthen their fiscal adjustment credentials by identifying in detail the fiscal measures that will be undertaken over the medium term to reduce deficits and reduce debt ratios.

This third point I wanted to make is indeed related to this issue of the medium-term and long-term fiscal adjustment plan. Here we have a mixed picture. I would like to say something on the United States in this respect. The Fiscal Commission in the United States I think has done a wonderful job in identifying and taking a broad approach to fiscal adjustment in the United States and identifying several measures both on the revenue and on the spending side. You know that it did not reach a supermajority needed to send to Congress its report, but the recommendations are very useful and we hope that they will not be lost.

In this respect we welcome very much the emphasis in President Obama's State of the Union address earlier this week on board-based fiscal reforms including control of discretionary spending but going beyond discretionary spending to cover the revenue side and to cover also entitlement spending. Of course, we now look forward to see how this will be reflected in specific proposals in the forthcoming budget.

If we move to Europe, we see that the main change has been the decision by the Council to create a permanent Crisis Management and Resolution Arrangement, which is positive. We have also seen some step-backs in this in some countries. Perhaps one that I want to mention is Hungary, the fact that the Independent Fiscal Council, this fiscal watchdog that has been set up a few years ago, has been effectively closed. Altogether if I can summarize the picture I can say that fiscal risks remain elevated and in some respects have increased since our November Fiscal Monitor. This again underscores the importance of making more specific and more concrete fiscal adjustment plans that countries have to implement over the medium term. With this, I think I will stop at this point.

QUESTION: A couple of things, Carlo. I am interested in your observations about the S&P downgrade of Japan today and what that portends. You have talked a lot over the last year or year and a half about phasing of consolidation. Last summer the commentary was more along the lines that it is okay for the U.S. to stay in an expansionary mode. They need it. Are we past the point where they need it anymore? Is it time for them to get serious about retrenchment? And what are the implications of as unlikely it may be a U.S. downgrade?

MR. COTTARELLI: Let me start with Japan. The fiscal accounts of Japan are well known; the fiscal situation is well known to everybody-- that it is clearly in need of an adjustment over the medium term. You know the good news for Japan is that 90 to 95 percent of its public debt is held domestically which is strength but it is not something that would avoid a fiscal adjustment in the long run.

I think that what is particularly important is that reform is being currently discussed in Japan. I think it is good because tax reform and action also on the revenue side is going to be very important. In particular, the VAT rate in Japan remains quite low and there is definitely room to raise it to reduce the deficit over the medium term.

On the United States, I think that our view is that some targeted stimulus measures were important and were necessary given cyclical developments but the fiscal stimulus package is fairly large. Also its composition is such that the impact on the economy is going to be relatively modest compared to the overall size of the stimulus package as I believe was noted in the presentation of the World Economic Outlook a couple of days ago. This again underscores the fact that there is as I was saying earlier an even more urgent need to make more specific plans to reduce deficits and public deficit, that's not only reducing the deficit, but also the need to lower the level of public debt in the United States over the medium term.

QUESTION: Two things, Mr. Cotarelli. First of all, you talked about the in general worldwide fiscal risks to do with the deficits that you outlined there. Could you elaborate on that little bit? Then a specific question on Ireland -- as you I'm sure are aware, Ireland is taking on a significant amount of debt related to the banking collapse there Is it the IMF's view or is it your view that it is right and proper that the public should take on the debts of private banks and outside of Ireland do you think that there needs to be a system for resolving bank debt beyond that? Thank you.

MR. COTTARELLI: On the fiscal risk, when we talk about fiscal risks, there are essentially two kinds of risk that we should monitor and have in mind. One is some forms of rollover problems across countries. You know that the first quarter of this year, a rollover is particularly high for advanced countries and this is mostly what we have on our mind. I think that from that perspective the fact that there has been some deceleration in the pace of fiscal adjustment in some important countries is something that makes it even more important that there is a clarification on how these countries intend to address their fiscal problems in the medium term.

It is also important however to keep in mind that there is another risk-- that is a risk of stabilizing the debt-to-GDP ratio at very high levels. I think that it is a concrete risk given how difficult it would be to bring down public debt. I think it should be avoided. This outcome should be avoided because we have pretty clear evidence that countries with high public debt are countries that grow less than other countries. We have seen in the last two decades Italy and Japan characterized by high public debt and low growth rates but there is more systematic evidence that this is a common feature.

On your other question, it is interesting. But I do not think one can answer this in general. I think that on a case-by-case basis one would have to see to what extent private-sector debt should be taken over by the public sector. What I have myself argued is that so far the level of debt that has been taken over by European countries is something that can be managed. Of course it is going to take time to bring down the debt-to-GDP ratio but it is something that over time can be lowered significantly through those fiscal policies, increasing revenues and reducing spending.

QUESTION: Could I follow-up on that by asking you if there were a threat of let's say defaulting on the bank debt which governments are taking on, what are the risks and what are the challenges involved in that?

MR. COTTARELLI: This is a hypothetical question. My point and the point that I have made is that I think markets at the moment are overestimating the risk of default or debt restructuring in Europe. I do not want to be too optimistic. Spreads have declined in the last few weeks obviously, although it is not a sign that all the risks are disappearing. But I think that the point that we have made in the paper that was issued in September is that there is perhaps too much pessimism on the ability of these European countries to bring down public debt while avoiding forms of debt restructuring and default.

MS. NARDIN: Let me turn now to a couple of questions on Brazil that we have received online. How worrisome is the deterioration in Brazil's fiscal account? And the IMF projections deteriorated a little bit since last November. Is it because we have monetary tightening in Brazil?

MR. COTTARELLI: For Brazil I do not think there is any immediate risk. If anything, they have very large capital inflows in emerging markets in general, but there is a medium-term concern that we have. Increasing the deficit that we project for 2011 is relatively modest, but for Brazil and for other countries in Latin America and elsewhere as I mentioned earlier, there is an issue of revenues that are at the moment perhaps higher than what they will be in the long term, and there is also an issue of interest rates being particularly low. So for a country like Brazil it is possible that in our calculations the underlying deficit is actually larger by perhaps half of a percent or 1 percentage point of GDP in the longer run with respect to current developments, and that is where our concerns come from. In other words, given developments in commodity prices, interest rates and indeed economic activity, the position of countries like Brazil should be stronger than they are currently.

MS. NARDIN: Another question online on the U.S.: Do numbers reflecting the 98-percent debt-to-GDP ratio for the U.S. in 2011 and 102 percent in 2012 include the 50 states' debt or this is only federal debt?

MR. COTTARELLI: No, this includes the general government so that it includes the 50 states.

MS. NARDIN: Also online on the U.S: Do you believe that the U.S. will meet the G-20 target by halving deficits by 2013?

MR. COTTARELLI: Mr. Lipsky in Davos today made the point that of course these targets will require a very important adjustment. It is an ambitious target. We cannot allow the possibility of this being achieved but of course it will require an effort because initially as I was mentioning earlier, in our November outlook we were projecting based on the announcement of the administration at the time a decline in the deficit for the United States in 2011, while now we are projecting a small expansion in the headline deficit and even a larger expansion in the cyclically adjusted overall balance. Therefore this means that to achieve those targets more effort is required in 2012 and 2013.

MS. NARDIN: Another question online. The report advises some economies to devise contingency plans to ensure that adjustment goals are met. Does this mean that the IMF thinks it would be better for some of these countries to have a Plan B to meet their goals in case the action plans prove not to be enough?

MR. COTTARELLI: I think in general a country should always have a Plan B. Contingency planning is always a good thing. We always recommend that countries keep a reserve in their budget and I think in general one should say that contingency plans should be available for many countries. Of course, for countries that are more under market pressure this point is even more important for these countries.

MS. NARDIN: I am moving now to Latin America: Do you have a deficit projection for the Latin American region for 2011 and 2012? Are the new numbers lower or higher than before?

MR. COTTARELLI: In this update we do not have a full presentation of all the fiscal accounts in all countries of the world, so that what we have is what you find published in this update or in the main table of this update. Phil?

MR. GERSON: That is exactly right. As Carlo said, what we have is what is here. I think in general what's going on in the region has been quite similar to what Carlo described for the emerging G-20 overall, that there are some countries, notably commodity exporters, that are doing quite well, there are other countries where there are concerns about dealing with rising revenues by increasing expenditures at the same time. So I think although we do not have an aggregate figure for Latin America or for South America, if we did have a figure what we would show is some divergence of behavior across types of countries.

QUESTION: If I could, one or two more questions on the U.S. The S&P I think it was last week made some comments that while they were not close to downgrading the U.S., they said it is not unthinkable, that no AAA is sacrosanct and nothing lasts forever. I'm wondering is there any feeling at all that that there was an argument of thought that U.S. officials or U.S. politicians rely on the dollar's reserve to kind of immunize them from these concerns? And I am wondering if you think that that's, A, a dynamic that is at work here and, B, is it realistic to think that that immunization can last forever?

MR. COTTARELLI: On the first part of the question, this is not for me. You should ask them whether they believe that this keeps them --

QUESTION: I am asking if you think that has put them in a position of not having the same very tough conversations with their people that some of the European leaders have been having.

MR. COTTARELLI: It is a very good question. We have been wondering ourselves what it is that makes a currency a reserve currency and we still need to do more work on this definitely. I think that what we can be sure is that this is nothing that can last forever regardless of economic conditions. The United States however at the moment has a lot of credibility as it has indeed been shown by still very, very low interest rates. This however does not imply obviously that this can last forever in the absence of a fiscal adjustment. I think fiscal adjustment remains a key priority for this country and that is why I was mentioning that we welcome very much the emphasis given in the State of the Union address on these issues.

QUESTION: If I could follow-up on the State of the Union, that's true, but at the same time I believe Obama also made comments that he was not inclined to look at Social Security which puts an awful big pot of money off the table that the IMF has encouraged every country to look at carefully.

MR. COTARELLI: He followed a broad approach in his State of the Union address. On Social Security, here I will include all entitlement spending, Social Security, and health care spending, for the United States there will be a need for action in this area. We will publish probably at the end of this month our revised projections for health care spending increases over the next 20 years for advanced and emerging economies so I don't want to anticipate anything specific on individual countries, but on average we project health care spending to increase in advanced countries by about 3 percentage points of GDP over the next 20 years with the United States being above the average. For emerging economies, the projected increase is actually smaller at 1 percentage point, but even 1 percentage point is not trivial. But for the advanced economies, 3 percentage points with the United States being above average.

QUESTION: Just to jump off of that, is there an increase that is consistent with the fiscal consolidation that is also necessary? Is 3 percent worrisome to you? Is 1 percent okay?

MR. COTTARELLI: I think that it is going to be difficult for the United States and for other countries to reduce their debt-to-GDP ratio if some items of spending increase as much as 3 percentage points or more. It is not impossible, but that means you need to do much more in the other areas of spending or on the revenue side.

MS. NARDIN: We have another question online, asking whether the Spanish government's efforts are enough to reduce expenditures. Do you think an additional effort will be necessary?

MR. COTTARELLI: I think that what the Spanish government is doing is actually very important. The adjustment that is being undertaken is frontloaded. We indicate in the update of the Monitor that that is the largest adjustment in 2011 among advanced countries so I think that that obviously at the end of the year we will have to see what is actually being delivered. But I think that the actions that have been taken so far are important and adequate.

MS. NARDIN: If there are no more questions or in the room, this concludes the press briefing on the Fiscal Monitor for 2011. Thank you very much everybody for attending this event here or online.


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