Transcript of a Press Briefing with IMF European Department Director Antonio Borges

April 15, 2011

Washington, D.C.
Friday, April 15, 2011
Webcast of the press briefing Webcast

MS. NARDIN: Good afternoon, everybody, and welcome to the press briefing on Europe by the head of the European Department, Antonio Borges. Welcome to all the journalists here in the room and to those of you who are following us on the Web. And to the journalists on our online media briefing center, please do send your questions now, if you want to send questions by e-mail.

Mr. Borges will offer some brief opening remarks, and then I will take your questions. Antonio.

MR. BORGES: Thank you. First of all, thank you very much for your interest. We are here to be helpful, to answer all your questions, to the extent that we can, and to give you our picture of how the Fund sees developments in Europe, and I mean the whole of Europe.

So, let me start with a positive message. We are quite confident with what's happening in Europe. We are actually very pleased with the fact that there is strong economic growth, that many European countries are doing very well—very, very well, in particular in Eastern Europe where there is plenty of growth, surprisingly strong growth, in the core of Europe. There is good growth in Northern Europe, as well. So, overall, we think Europe is on the right track, and this is an important point.

We are also very pleased with contained inflationary expectations with important progress on public finances across Europe in very, very important countries—in the UK, in Italy, in Germany, in France. All of these countries are doing well on the fiscal front. This is all very positive.

And I'd like to insist on a very significant element of structural optimism, which is that Europe still has a lot to gain from further economic integration. What we are seeing, say, in a country like Germany, is plenty of progress in terms of their competitiveness thanks to their ability to take advantage of the whole of Europe, to reorganize their supply chains, become more competitive, and stronger in the world economy. This is a good signal of what's to come as we succeed in integrating better Eastern and Western Europe in a more cohesive continent. So, this is very good, and I'd like to say that we're also pleased to see Europe making institutional progress towards Europe-wide regulatory agencies which will have more and more influence and importance.

So, my key point is that the background is positive, and you often see the Fund wishing that European did more to help themselves, which is important, but what you are doing is already not bad in many ways. We are in the right direction.

Now, clearly, there are also concerns and we are worried about what's happening in Europe on many fronts, of which the most important one is probably the financial sector. The European financial system is still very dependent on the banking sector, many banks are still weak. This is a problem, this is a concern. There is an element of denial in Europe which we object to. And the most frustrating element of this is that we consider this a problem that could be solved. In fact, it is already being solved in quite a few countries where banks are raising capital, are becoming stronger, but not so vigorously resolved elsewhere in Europe. We would insist this is an important priority that would make Europe more robust and provide more potential for economic growth in the future.

And furthermore, although there are quite a few weak banks in Europe, the vast majority of the banks are strong, are well capitalized, are doing well. So, why don't we adopt more European-wide solutions where strong banks take over weak banks and the problem is instantly solved. All of these solutions are on the table, could be on the table, and we could very quickly move forward, not to mention, of course, the institutional element of moving in the direction of European-wide, for example, bank resolution systems, et cetera.

So, this is an area of concern, one in which progress could be made and more determination would be welcome.

And then, of course, we are still concerned with the periphery, with Greece, with Ireland, with Portugal. These countries are experiencing the difficulties that everybody is aware of. We have programs, there are still many challenges to be resolved. We remain confident that things are on track and that we will succeed, but we certainly recognize that the nature of the problem is very different from many other program countries for the IMF. In many other countries, the problem is more easily solved, is more short-term, economies can be quickly turned around. In the cases of these three countries, the problem is more structural. There have been many years of going in the wrong direction. So, now, we have reverse those trends. This is happening but it will not be immediate. It will be a process that will take time.

In particular, in these countries which have to solve their own banking problems, which are severe, and we have to solve the competitiveness issue, without which there won't be economic growth, and long-term debt sustainability cannot be restored.

So, in fact, the amplitude of the challenge is bigger than elsewhere and so we have to-to a certain extent—recognize that programs have to be more ambitious than elsewhere.

Now, this said, let me point to a very important factor. If we were having this conference a year ago, we would be in a much more worried frame of mind. Since a year ago, there has been fantastic progress, in the sense that this crisis is now, in many ways, contained, and it is contained to three countries which are relatively small countries, and this is a very, very important point. As long as we maintain the crisis within small numbers, small countries, a contained element, this is grounds for good optimism about the future, and this is extremely important.

And this is important on a second element, or a second front, which is the reason why the crisis is now much better contained to these three countries is that there has been a great deal of progress, in particular in Spain. Spain was in the same situation as the others a year ago. Today, it's in a different world altogether and the markets recognize this very well, which is extremely reassuring--not that the Spaniards have solved their problems, they have not, but they are on the right track. And if they are on the right track, the markets recognize that, and this is an extremely important point. As soon as the country gets its policy right, the markets are ready to react to that positively, and this makes the whole difference. So, the progress in Spain shows how good policy can achieve good results quickly.

Now, in Greece, in Portugal, and in Spain, we have to deal with a fiscal adjustment that's very serious, very ambitious, sometimes unprecedented. We have to deal with a banking sector that needs to go back to normal operating procedures that needs to finance the economy under normal conditions, and we have to restore competitiveness by making these countries a lot more export-oriented and a lot more open to foreign competition.

Now, this is happening; it is happening slowly. It is happening, actually, quite rapidly in Ireland, but it's something that forces us to be very much on top of the daily reality in the sense that we cannot, under any circumstances, take the eye off the ball.

Now, clearly, relative to a year ago, we are at a point where our programs are at a critical juncture in Greece in Ireland. The governments have begun implementing the measures that we wanted them to. This is well recognized as fundamental in both Greece and Ireland. There is a great deal of determination to make things happen, but we are the most difficult point in the cycle in the sense that all the cost of the adjustment is now being borne by these economies and we have to wait a few more months before they go back to economic growth and begin to see the light at the end of the tunnel. So, this is not the moment to give up or lose determination.

In Portugal, we are now just beginning, the challenge is pretty much the same as elsewhere, and we have a mission on the ground right now discussing what the nature of the program should be.

So, overall, to conclude, let me simply say that, if we are relatively confident about the general outlook in Europe and we'd like to broaden that perspective to include the whole of Europe and to allow you to have a more optimistic view about the whole continent, there are still challenges out there, they are manageable, they can be managed more confidently, they will be managed, but this is not a moment to waiver or to take our eye off the ball, as I said before.

Thank you. Let me have your questions.

QUESTIONER: You mentioned that banking problems could be instantly solved if stronger banks took over weaker banks. Did you mean that on a cross-border basis? Has the IMF ever advocated that in the Irish case, or would you advocate that?

MR. BORGES: Well, I think, first of all, there's plenty of examples—not plenty, but there are some very good examples in Europe, how this can be done.

For example, if you take Belgium where they have a very difficult problem, one of their largest banks, which is Fortis, they solved the problem quite rapidly by asking a very solid, larger international bank, which is BNP Paribas, to take them over. Problem solved instantly, overnight; right?

In Ireland, your own government and your own governor has very often said, foreigners are welcome to invest in Ireland, and that is a very, very positive attitude to the resolution of the crisis to the extent that Irish banks may need more capital, why not allow capital to come from abroad, and this is what I would call a European solution to the problem as opposed to a specifically national solution to the problem.

Now, the Irish problem is a more serious banking problem, so it may not happen instantly, but I'm very pleased that the Irish Government is open to this solution.

QUESTIONER: I would like to ask you about the Ukraine. The Stand-By program is in force but the country hasn't received the third tranche as it was planned. What is going on, on your point of view, and is the country going the right way? Thank you.

MR. BORGES: Well, the Ukraine is, of course, a very important country for us. It's a big country with a large population, huge challenges in front of it, and we are quite supportive of the Ukrainian government. However, the challenges are very, very substantial.

The biggest problem about the Ukraine is on the fiscal front. We would like the government to maintain its targets as agreed in the program. The program contemplated a very significant increase in gas prices, which are very, very highly subsidized and are a very big drain on the budget. The government considers that this is not the right moment to increase gas prices dramatically and they have proposed offsetting measures. So, they are maintaining their commitment to the targets but through several different channels and we're waiting for that. As soon as that is in place, we will go ahead.

QUESTIONER: I would like your comment about the plan of privatization which the Greek government announced a few hours ago. Would you characterize it as realistic?

MR. BORGES: Well, the privatization scenario in Greece is probably one of the best news of the last few months. Greece has a very, very high debt level, and so that's of great concern to all of us. But it's the government with the largest portfolio of assets that can be privatized. So, this is a very important component of the way everybody now looks at Greece.

And within Greece, there are even very reputable think thanks that advise us that, of the portfolio of government assets, a vast tranche could be privatized rather quickly, which is reassuring. According to your own experts, this could be done relatively fast. So, that's, again, very reassuring.

Furthermore, there is now a big price: If you do privatize, the Europeans will be happy to reduce the interest rate by 1 percentage point, which is not meaningless, it's quite significant. So, the stakes are very high here.

Now, we all understand here that privatization is not simple, that the process takes time, that there are always very, very important domestic interests and national interests to be taken into account, that not everything can be privatized, but the amount of assets available for privatization is so large that even simply going for the non-controversial relatively trivial assets that the government could dispose of will already provide a great deal of that relief. So, we are very keen that the government has now embraced this goal, and frankly, it can make an enormous difference in the whole story.

QUESTIONER: Many people are worried that lots of banks, especially in America, but generally are going back to the old way of doing things with derivatives and with large exposures. How worried are you about that? Is it a real problem and is this a time bomb that may have a negative impact on the work that has been done to reestablish the system?

MR. BORGES: Well, obviously, this is not a European-specific problem; right?

QUESTIONER: [Off microphone.]

MR. BORGES: It does have, although, in particular because you are from Italy, it is not a great problem in Italy where the banks are extremely safe from that point of view.

Let me answer quickly. The question is one of balance. Obviously, banks have to deal with risk. The financial system, in general, exists to handle risk and banks have to deal with risk. We don't want banks to run excessive risk, but if you insist that banks don't take any risks at all then there is no banking. So, there is an element of balance, here, and clearly banks took risks that they should never have taken and that led to the great crisis of 2008.

Then, there was a backlash and the real retrenchment and we're going back to the normal way of doing business, which is: let's make sure that we operate as we should with proper risk measures, with proper capital, but without, under any circumstances, taking excessive risk.

So, this is the challenge in front of us. I think we should not look at it lightly and, in particular from the point of view of banking regulation and banking supervision, the level of demand is now a lot higher. But I do not think there is any reason at this point to be excessively concerned about that.

QUESTIONER: First question I had for you is about the political situation in Portugal that you know extremely well. How concerned are you about the difficulty of having two big parties on the eve of the big election agree upon such long-term measures?

MR. BORGES: Well, we have a bit of a problem here for several reasons. Number one, the Fund does not really get involved in domestic politics, so I'm not going to comment about any of this. Number two, we have a policy that nationals should not get involved from their own countries. So, because I am from Portugal, I am not going to be very much involved in the Portugal—in fact, I am going to be distanced from the Portuguese program and I am not going to get involved in Portugal.

Number three, I can only tell you that the Fund is here to help Portugal and there's a mission on the ground right now. They are now beginning to negotiate with the government. Of course, they will negotiate also with all the opposition parties. We have to have broad support because there are elections coming, but that's normal, standard practice on the part of the Fund.

QUESTIONER: I had two quick questions.

First, there are calls from Germany today about the possibility about restructuring debt in Greece. How did you—is this still—any possibility of that happening?

And also, what would you say are the lessons learned by the IMF in the two previous programs, in Ireland and in Greece in terms of what went right, what went wrong, what can be applied to this third program in Portugal? Thank you.

MR. BORGES: Okay. So, on the German statements, I would certainly encourage you to read the statements by Mr. Schäuble today in which he felt that it was necessary to clarify what he had said before, so that's the first point.

Second point, the view of the Fund is that we would never engage in a program unless we were confident that the problem could be solved, meaning that the debt could be sustainable. So, it is our official and firm view that we are confident that these countries will be able to return to debt sustainability or, in fact, we will be able to establish their debt sustainability and that will be recognized by the markets. So, that is the Fund's official position which has been reaffirmed by our Managing Director repeatedly over the last few days.

Now, what have learned in these programs in Greece and Ireland? That the challenge is quite big and we're not—this is not a simple, old-fashioned program where we put the budget in order and the problem is solved. There are broader issues of competitiveness of the banking system and so forth. So, the program has to be more and more ambitious and probably will take a little longer. As you know, this was already recognized by the Europeans who offered to extend the maturity of the Greek loans. So, I think there is general consensus on this.

QUESTIONER: Mr. Borges, I understand the en masse denials of the IMF and the EU of the possibility of restructuring, but can I ask you something: Can you give me one good reason on why you feel confident that Greece will be able to return to the markets, especially in a very few months, like next year, when they need to raise 30 billion euros, with the spreads over 1,000 points now?

MR. BORGES: Well, there is one good reason, it's the program. The program establishes that Greece will go back to the markets and will be able to confirm debt sustainability, and the program is on track.

I also said that it is not generally recognized—that it may take a little longer. And in fact, maybe it will not be exactly in 12 months down the road, but it will happen; that's our confidence.

And furthermore, keep in mind that, of course, this is all subject to the general precondition that the program will be executed, that the Greeks will do it, but they are doing it. So, far, they are doing it. So, if they don't lose their determination and, from everything we hear from them is that they are very determined to make it happen, I think the program will succeed; we are confident the program will succeed.

And furthermore, keep in mind that when we drafted the program we did not have any of these privatization scenarios in mind. The Greek government, I insist on this, has more than 100 percent of GDP in privatizable assets, more than—it's a complete outlier in Europe and there's nobody else in this situation. So, if there is an important element that's a new element that should reassure us, it's this one. So, we remain confident.

QUESTIONER: Do you think that they will be able, in the next 5 years, to accumulate 50 billion euros, because previous 5 years' attempts have been brought in a maximum of 7 to 8 billion euros? There's major problems in Greece there of understanding what is state property, who owns it, which part of the government owns it. It's a very major problem. So, again, I do not understand your optimism.

MR. BORGES: Good, that's fair. We are in a free country, each one has their own views; okay?

But let me emphasize: We did a study of privatizations across Europe over the last 20 years or so. Plenty of countries privatized more than that, a lot more than that, up to 30 percent of GDP, including countries from Eastern Europe where there was a lot more uncertainty about ownership and about title and the legal status, all of that. So, this can be done. Of course, it has not been done in Greece until now because the Greeks didn't feel the need to do it. But now, the important new element is that the Greek Government accepts the priority that should be attached to this and, you know, privatizations can happen very quickly. In particular, if you decide to get the experts in and if you outsource it and find the right people to make it happen, it can happen very, very quickly, I can assure you.

QUESTIONER: You just mentioned that markets buy policies--such in the Spanish case, so I would like to know why they are not buying that--policies in Ireland and in Greece, because we saw today that the markets are beating very hard these two countries.

And the second quick question is about weak banks in Europe. You have just mentioned very quickly that there are still weak banks in Europe. I would like to know if you can identify a little bit those banks who are listed--that is, if they are in the three big economies, France, Germany, and Italy.

MR. BORGES: Well, on your first point, it's very difficult to time market reactions. As I said, the positive element is that the markets have reacted very significantly to the policy changes in Spain.

And if you let me highlight one point, probably the most decisive element in the Spanish reaction to the crisis is how they dealt with their banking problems, their banking challenges, and how the markets received very well the Spanish approach, which is an approach of transparency, of saying, here are the accounts, here are the numbers, now you make your own judgments. And this movement toward transparency was very well received in the markets, as also in Ireland, incidentally, but especially in Spain.

And you know, another very important is that in Spain many of the banking problems were with the so-called "cajas", the savings banks which were a very serious political problem because they were very much part of the political governance of the country, their links with the local authorities and regional—and yet, the Spaniards managed to solve the problem.

So, in other countries in Europe where the banking problems also have a political dimension, the same solution could be applied as in Spain. So, in a sense, Spain is the model in many ways, and I think the markets recognize that and that is very positive.

Now, I'm not going to tell you in that Country A, B, and C the weak banks are this and that one and the other. I'm telling you the position of the Fund is very clear on this: There is a tail risk in the banking situations in Europe of banks that are not necessarily very big but they are a problem. They are under-capitalized and we're not confident in them, and many of those banks could really solve their problem rather quickly if only they were open to solutions of restructuring which would involve acquisitions, cross-border mergers, and so forth. So, this is really a small problem.

In the U.S., you see this all the time: You have a small bank here in difficulty, a big bank there takes it over and the problem disappears. We have to do more of this in Europe. I mean, we cannot be in a monetary union and not accept European solutions to the problems.

QUESTIONER: I would like to ask you, how do you rate the chances of the current Polish government to bring down--to meet the Maastricht criteria within the next five years.

And the second question regarding the eurozone, what is the risk of the rising interest rates in the eurozone for Spain and what you highlighted as positive that might be a negative.

MR. BORGES: Well, Poland is, of course, an extraordinary case, extraordinary successful case, the only country in Europe that went through this whole series of years without a GDP decline. So, that's a remarkable story, and we're very pleased with Poland. Poland benefits from a Flexible Credit Line from the IMF which is a stamp of approval in the sense that the country has a good economic policy that we're so confident that we give them this credit line. So, all of this is extremely positive.

Frankly, I don't see why they should have a difficulty in meeting the Maastricht criteria given that the country is growing, growing rapidly and, reducing budget deficits—when you are growing it is a lot better than otherwise. So, this is all going in the right direction.

We hope—this is probably the key point—that because of all this success, the Poles don't become complacent and that they really focus on the reforms that are still to be made, that are extremely important on many different fronts, and which will modernize the country quite rapidly.

Poland is integrating rapidly with the rest of Europe. That integration will also involve very important elements of financial integration. We think that the Poles need a very robust financial system, they need to develop their capital markets, need to move in the direction of promoting long-term savings, et cetera. So, in that sense, there's still a lot to be done, and the government should contribute to that with better, more solid public finances, but in an environment of very solid and positive growth, this should not be such a challenge.

MS. NARDIN: Oh, yes on interest rates?

MR. BORGES: Well, interest rates is exactly the same issue. The exchange rate in Poland has been very well managed, very successfully managed, and therefore the degree of risk associated with Poland is now relatively small. So, the interest rates can easily be brought to the European levels, especially as the European interest rates increase –there could be coverage and rather quickly--but for this, the Polish budget deficit has to indeed be reduced.

Now, your question was on the impact of interest rates on the rest of Europe. We have to keep in mind that the interest rates in Europe are extraordinarily low. Nobody can expect interest rates to remain at 1.25 percent; this is just not possible. This would be wrong from the point of view of resource allocation. We can have a discussion about the timing of the increase, should it be sooner, should it be later. Of course, the ECB has all the responsibility here, and I think they know exactly what they are doing. But there is no question that interest rates have to go back to normal sooner or later, let me put it this way: Even if there were no inflationary concerns, it would not be reasonable to expect interest rates to remain where they are today.

What impact will this have on the periphery? I think that's completely secondary. If you are in Greece or Ireland or Portugal or even in Spain, it's not the ECB interest rate that matters, it is the market interest rate which suffers from a huge spread which, in the case of Greece or Portugal, is gigantic, really. And so, reducing that spread has a lot more impact than whatever the ECB will do on their policy rights. So, that's the real question.

Of course, many loans in these countries are linked to the policy rate--at least to the market rate, and will go up--their cost will go up a little, but that is fairly marginal compared with the overall impact of the market interest rates in those countries as determined by the spreads.

QUESTIONER: How should the problem of the corporate taxation in Ireland be resolved?

MR. BORGES: Well, that's an area in which normally the Fund does not have a view, because it's a very political element, extraordinarily controversial, as you know, within Europe. Therefore we don't normally get involved in matters of that nature. The Irish have to manage their budget problem. They should have discretion on how to handle, whether they want to do it on tax or on expense side, whether they want to do it with personal income tax or corporate. That should be their decision and we don't get involved in that kind of controversy, in particular because it is a very difficult one—a very, very difficult one. We recognize that there are elements of great validity on both sides of the argument, so we stay out of it.

QUESTIONER: I wanted to ask something country-specific and then something responding to what you said. Do you know where it was said that Serbia was coming to these Spring Meetings and was seeking some kind of a precautionary deal? I know that may be emerging Europe from your point of view, but do you know where that stands?

And also, you seem to be saying that bank mergers—small banks being bought by big ones sort of unqualifiedly may be a good thing. In some countries people think that local banks are more accountable, that if you move the assets to a faraway headquarters that there's less responsive. What do you say to that critique and is that something that the IMF takes any account of?

MR. BORGES: Well, first of all, on Serbia, of course, it is a country that we follow very closely. I cannot tell you exactly where things are in terms of eventually a program for Serbia of one kind or another, the initiative is always on the side of the country, so we have to wait for their positions.

We look forward to close cooperation because Serbia has many, many challenges. We believe there is an intention to move in the direction of the European Union and to negotiate to become a candidate for the European Union; that's a major step for Serbia. So, all of this represents very big challenges and we are behind Serbia in this in helping them move in the right direction. So, no question about this.

Second, on the merger solution, this is—you ask a very interesting question, because this is a problem we were faced with over the last few years. In many of the countries of emerging Europe, you find banks that actually are owned by other banks elsewhere and there were concerns that, as there might be problems in the domestic countries of those banks that assets would be pulled out from emerging Europe and they might suffer. And the Fund, the IMF, invested quite a bit of effort to organize a coordinated effort on the part of all these banks to behave in the best possible interests of those economies, and I must say this was quite successful, because as a result, these countries are now recovering very well and their banks are operating well. So, if anything, the experience of emerging Europe demonstrates that having large, solid banks operate in your country may be an important source of stability if things are properly managed.

QUESTIONER: Do you think that Portuguese banks are a problem?

MR. BORGES: As I'm telling you, I cannot answer questions on Portugal as a matter of policy, so I apologize for that.

But for those of you who have an interest in Portugal, the Managing Director gave an interview yesterday, which is available on the Web, and you can certainly get the view of the Fund on these matters.

QUESTIONER: Do you think that Greece actually still has the leeway to take on any of the contingent banking liabilities that it's guaranteeing at the moment?

MR. BORGES: I'm sorry?

QUESTIONER: Do you think that Greece still has the--

MR. BORGES: Leeway?

QUESTIONER: --the arithmetical freedom as regards debt sustainability, to take on any of the contingent banking liabilities that it's guaranteeing at the moment?

There's a sense that Greece has used up all its room for maneuver on fulfilling the program and everything, and if you wanted to recapitalize Greek banks from now, there's no point in putting extra debt onto the sovereign balance sheets trying to solve that problem because nobody is going to believe that sovereign debt would be sustainable if you do so.

MR. BORGES: Yes. As I said, initially, the problem in all these countries is there is very little distinction between sovereign debt and bank debt, given that these are so intricately connected.

Now, in the case of Greece, let me tell you that we are actually quite pleased with what's happening with Greek banks because they have been able to recapitalize thanks to a very determined focus on their core business, a sale of assets including sometimes some very lucrative assets that they had abroad.

And so, we are very pleased with the general trend of what's happening. There are still challenges. There are still banks that need resolution. Our recommendation is that the Greek government should seek European solutions to these problems, but until now, things have gone very well, actually.

MS. NARDIN: Okay. I think this concludes the press conference on Europe. Do you want to say a few words?

MR. BORGES: Yes. For those of you who maintain an interest in Europe, we publish an Economic Outlook for Europe, which is our most important publication in the European Department and that will come out on the 12th of May. There will be a press conference in Frankfurt and then followed by additional conferences in London, Warsaw, and elsewhere in Europe. So, stay tuned, that there will be quite interesting messages there so that you have a better grasp of what's the Fund's vies on Europe.

Thank you very much.

MS. NARDIN: Thank you very much.

[Whereupon, at 3:10 p.m., the Press Conference was concluded.]


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