Transcript

April 18, 2012 - Washington, DC

José Viñals, Financial Counsellor and Director, Monetary and Capital Markets Department
Robert Sheehy, Deputy Director, Monetary and Capital Markets Department
Jan Brockmeijer, Deputy Director, Monetary and Capital Markets Department
Peter Dattels, Assistant Director, Monetary and Capital Markets Department
William Murray, Division Chief, External Relations Department, IMF

Mr. Murray - Good day. I am William Murray, Chief of Media Relations of the IMF, and this is the Spring 2012 Global Financial Stability Report press conference. Let me do some quick housekeeping before I introduce our briefers today.

First of all, we welcome everybody at our webcast, at the Press Center, and elsewhere that are participating remotely via the internet. For those in the room, we have simultaneous interpretation: English, Channel 1; French, Channel 2; Spanish Channel 3; and Arabic on Channel 6.

Let me now start by introducing our speakers: José Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department; to my far right, Jan Brockmeijer, Deputy Director; Robert Sheehy, Deputy Director; and to my immediate right, Peter Dattels, Assistant Director of the Monetary and Capital Markets Department. José will have some opening remarks, which I believe we have distributed to the press already, and then we will take your questions. José?

Mr. Viñals - Thank you very much, Bill, and good morning to you all. This Global Financial Stability Report has two key messages: first, policy actions have brought gains to global financial stability since our September report; and second, nevertheless current policy efforts are not enough to achieve lasting stability, and this refers both to Europe and to other advanced economies, like the United States and Japan.

Much has been done. In recent months, important and unprecedented policy steps have been taken to quell the crisis in the Euro Area. At the national level, stronger policies are being put in place in Italy and Spain; a new agreement has been reached on Greece; and Ireland and Portugal are making good progress in implementing their respective programs. Importantly, the European Central Bank's decisive actions have supported bank liquidity and eased funding strains while banks are enforcing their capital positions under the guidance of the European Banking authority. Finally, steps have been taken to enhance economic governance, promote fiscal discipline, and buttress the firewall at the Euro Area level.

These actions and policies have brought much-needed relief to financial markets since the peak of the crisis late last year, but it is too soon to say that we have exited from the crisis because lasting financial stability is not yet ensured.

Indeed, we have been reminded in recent weeks that sentiment can quickly shift and rekindle sovereign financing stress, leaving many sovereigns and banking systems caught in a vicious circle. Furthermore, pressures on European banks remain from high rollover requirements, weak growth along with the need to strengthen balance sheets, including by shrinking.

Some deleveraging is healthy when banks increase capital, cut non-core activities, and reduce reliance on wholesale funding that results in more robust balance sheets. But like Goldilocks, the amount, the pace, and the location of deleveraging must be just right at the aggregate level, not too large, too fast, or too concentrated in one region or country.

So far, current policies have prevented a generalized credit crunch, but we still anticipate a considerable squeeze on credit which will impede growth. We estimate that large European Union-based banks could shrink their combined balance sheets by as much as $2.6 trillion, or about 7 percent of total assets, by the end of 2013, with about a quarter of that shrinkage leading to a cutback in lending.

Overall, we estimate that deleveraging by European Union (EU) banks could reduce the supply of credit in the Euro Area by about 1.7 percent over two years. However, if current policy commitments are not implemented and financial stresses intensify, the downside risks of large-scale and synchronized deleveraging could do serious damage to asset prices, credit supply, and economic activity in Europe and beyond.

In this scenario, we estimate that large EU banks could shed a total of $3.8 trillion, or about 10 percent of total assets, by the end of 2013. Such a retrenchment by EU banks could reduce euro-area credit supply by 4.4 percent and GDP could fall by 1.4 percent from the baseline after two years.

Outside the Euro Area, the region potentially most affected by the deleveraging process is Emerging Europe. Other emerging markets are unlikely to remain immune. While emerging markets generally have substantial policy buffers, such an external shock could combine with homegrown vulnerabilities, like those related to persistently rapid growth of credit, and further undermine global stability. Unaddressed fiscal challenges in the United States and in Japan represent also latent risks to global stability. Both countries have yet to forge much-needed political consensus for medium term deficit reductions, and the United States is also grappling with high household debt burdens and an overhang of home foreclosures.

Let me now turn to the policy recommendations. The question here is how can we achieve lasting financial stability? In the Euro Area, policy steps are needed along several dimensions. To prevent the materialization of the downside risks that I have just mentioned, continued adjustment efforts are needed at the national level, especially by countries currently under strain.

Those reform efforts are being bolstered by a financing backstop that has recently been strengthened. This Euro Area firewall should also be able to take direct stakes in banks in order to break the adverse feedback loop between sovereigns and banks.

To ensure an orderly process of bank deleveraging, close macro-prudential oversight by European banking authorities of bank business plans is called for, and greater efforts are needed to restructure viable banks and resolve weak banks.

To strive for better and more balanced growth, accommodative monetary policies need to be combined with a sufficiently gradual withdrawal of fiscal support in countries not subject to market pressures, as well as structural policies to lift potential growth rates.

Last on Europe, but certainly far from least, it is necessary to provide a vision of more and better Europe to help regain confidence in the Euro Area future.

A roadmap for a more integrated economic and monetary union should be laid out and committed to. This encompasses two key objectives: a truly Pan-European framework for bank supervision and regulation, as well as deposit insurance, and greater ex ante fiscal risk sharing; for example, through some central financing mechanism. I am well aware that this will not be politically easy, nor immediately achievable, but a consensus needs to be forged now to help restore confidence.

Going beyond Europe, it is essential to start addressing now the medium-term fiscal challenges in the United States and Japan, and this should be accompanied in the United States by stronger efforts to address household debt and accelerate housing market reforms.

In emerging markets, which are in a relatively good situation, policymakers should not take stability for granted. Given the risks in advanced economies, policy room may need to be used to cushion external shocks and volatile capital flows. Home-grown vulnerabilities, like those I mentioned, linked to persistently rapid growth of credit need to be addressed to increase resilience. To conclude, none of these policies are easy and some are, indeed, politically difficult. I believe that they are within reach, so let us not miss this opportunity. Policymakers and politicians must act now and in close collaboration to end this crisis once and for all. This time must be different.

Thank you very much. My colleagues and I will be happy to answer any questions that you may have.

Mr. Murray- Thank you, José. A quick reminder to those that have dialed in by the Press Center. Please start submitting your questions so that we can get to them eventually.

Question - Even in your more benign scenario you imply a very considerable shrinkage in bank lending in Europe over the next two years. In your opinion, should the ECB be countering this with further unconventional measures such as the sort of quantitative easing that both the Fed and the Bank of England have engaged in?

Mr. Viñals - I think that the ECB decisions have been certainly decisive in this crisis, and not just the decisions that have been taken now but the decisions that were taken since the beginning of the crisis, and particularly since the beginning of the sovereign debt crisis when they started with the Securities Market Purchases Program, and then added limited amounts of liquidity, and now they went to the three-year liquidity operation. One thing which I think history has taught us is that, while central bank action may be essential and, indeed, has been essential to avert a collapse, it is certainly not sufficient. I think that the focus should be put not on what else can the ECB do. The ECB has bought very precious time that now the political authorities need to use in order to do the other things which are needed: to implement very strongly the national policies that are needed in order to regain stability and enhance sustained growth—and potential growth, let us remember, is limited in Europe and should be enhanced with appropriate structural reform— and make sure that the time that has been bought is used to put in place this stronger firewall, and that is already happening.

Also, I think that the European authorities need to provide to investors a clear vision of where the monetary union is going, because the answer to this is a more and better Europe, not less Europe. So, let me emphasize that fundamental as the actions of the ECB have been, one cannot count on the ECB being there always to save the day. I think that the action needs to come from the other parts of economic policy.

Question - A technical qualification and a question. How do you arrive at the proportion of one quarter of the shrinkage in the supply of credit from the reduction in assets, in total assets. Also, the deleveraging is bound to hit harder countries in the periphery of Europe. I wonder if you have an estimate of the deleveraging, the shrinkage in assets, and the reduction in credit for the case of Italy, and what is your assessment of the soundness of the Italian banking system.

Mr. Viñals - Let me just say a couple of things and then let my colleague, Pete Dattels, provide the answer to the first technical question that you posed.

I think that the soundness of the Italian banking system is elevated. I think it is very encouraging the actions being recently taken by the Italian authorities in order to further enhance the solidity of Italian banks, which have made an important effort in raising capital and in going to a sufficiently strong position.

Regarding the reduction in the supply of credit, in the report we have specific estimates of the impact for Italy as compared to the Euro Area. I was saying before that, in the current policy scenario, the supply of credit in the Euro Area could shrink by up to 1.7 percent over two years. In the case of Italy, this is about 1 percentage point higher. So, the countries which are now subject to more strains regarding sovereign funding and bank funding are naturally the ones which are experiencing a larger impact from the deleveraging process.

Mr. Dattels - Just to describe a little bit the analysis that has been done on a very detailed basis, bank by bank. What we have observed in the deleveraging process is that European-EU banks have resorted to looking, first, at where they can cut back assets as opposed to credit initially. So, we see some trimming of non-core assets, reductions in assets held abroad which have been funded by, let us say, US dollars. So, that type of deleveraging process we see as representing the bulk of that, the downsizing of banks into a more robust footing.

When we go through this process, you will see in the scenarios that we have that, as these scenarios get more progressively severe, the ability for banks to basically do the easy deleveraging starts to finish and then it starts to bite a little bit harder on the loan and the lending. That is why we are emphasizing the need to put the policies in place to manage the deleveraging process.

The other element that we have is that there is a certain degree of home bias to this. In other words, the banks that are under deleveraging pressures protect their home markets and it is the last part of the deleveraging process that hits.

In terms of the impact within the Eurozone, the work that we have done looks at the entire banking system and that is highlighted in Figure 2.31. You do see a substantial amount of difference within the Eurozone where you have very little pressure, let us say, on Germany and France, and increasing pressure on the periphery as those banks are under significant deleveraging pressure and as banks at the core pull back cross-border lending within the Eurozone. So, you can see in Spain that the impact over the two years is about 4 percent on total credit.

Question - Two questions. In your report you mention that a large firewall is needed in Europe. What is "large" in numbers? Second, this deleveraging process in Europe is accompanied by new capital requirements that the banks should address by the end of June. Is this going to accelerate the negative impact for economic activity?

Mr. Viñals - I will answer your second question and then I will go to the first one.

The capital requirements which are coming from the exercise led by the European Banking Authority is fully taken into account in our calculations, so these are already factored in. That is a relatively small part of the total deleveraging forces.

I think that what is much more important is, on the one hand, the plans that banks have to adapt their business lines with the new, let us say, economic realities coming from deregulation. This is going to be put in place coming from the need to adapt to an environment where certain banking activities which were profitable during the crisis are no longer so profitable. This deleveraging is also influenced very much by how easy it is going to be down the road for banks to go back to market financing.

All these factors are much more important than the one linked to capital increases, but these capital increases which are on the way in Europe under the auspices of the European Banking Authority have been fully taken into account so they should not be added as another sort of further pressure to deleveraging on top of what we already have, but, I repeat, these are relatively small in their impact.

Your other question is we are calling for a large firewall. What we are acknowledging is that a large firewall has been put in place. I think that the firewall is important and we think that the efforts made by the European authorities in putting in place a stronger firewall are certainly fundamental.

But the firewall is only one component, is only one piece of a puzzle composed of other things which are fundamental. At the national level, it is essential that the countries that need to do their homework do it without delay and in the right manner. At the European level, it is essential that there is this vision of a more and better Europe which is transmitted to markets, which is transmitted to the public in general, because that is fundamental for confidence to return.

So, we think that one needs to see this in context, and what we are advocating in the report is that the European authorities, which had done very important efforts in recent months both at the national level, at the European and at the Euro Area level, continue these efforts in order to complete the architecture of what we think is the solution to restore lasting financial stability. Without that, we will not be able to exit from the crisis and we have the real danger of going back into vicious circles which can be very damaging to economic activity.

Question - I have two questions. First, in the report you mentioned in facing nonperforming loans the Chinese government has the resources to recapitalize its domestic banks. Could you elaborate more about how this is likely to hurt the central government's fiscal condition?

The second question is your summation about capital flows to emerging market countries, and there are several countries who contracted capital controls. As I understand, the IMF considers capital controls as the last resort. How do you respond to the criticism that the IMF has focused too much on the sequence or the order of the policies instead of on the effectiveness of these policies?

Mr. Viñals - On the first question on China, undoubtedly, if there were to be increases in the nonperforming loans of Chinese banks, this is something which will have to be taken care of. Now, we think that where the risks may be higher are in the area of real estate property developers' loans rather than on the mortgage loans. Of course, the good thing about China is that they have fiscal space to accommodate any shock to the banks. So, instead of ultimately a financial stability issue, what you would have is an incipient financial stability issue dealt with by public finances. That would involve certain risk-sharing in China from the central government to the banks and also perhaps to the local governments, which, through their special vehicles to promote construction, and so on, have taken up those loans. So, certainly it is going to imply some costs on the fiscal side, on the part of the central budget in China.

On your other question regarding the position of the IMF in terms of capital flows, well, we think that capital flows, in principle, are good, but that sometimes they may pose challenges to countries where they change very abruptly. We have looked at this very carefully and we have recommended that there should be a balanced approach to dealing with the macro-financial challenges posed by capital flows.

We have looked at the effectiveness of the different measures, of macroeconomic measures, monetary and fiscal policies, of prudential measures in order to keep the financial system stable, and also to other measures which may influence the size of the flows. We think that capital flow management measures are part of the toolkit but that they have to be used only when appropriate.

So, what would not be right is to use these capital flow measures or to restrict capital flows in order to prevent some problems, where the best way of preventing these problems may be by macroeconomic policy adjustment at home. These capital flow management measures are a complement and not a substitute of much-needed macroeconomic policy adjustment and financial sector adjustment at home. This is the message from the IMF. They are part of the toolkit, but you should not abuse them because, if we were to do so, we would undermine financial globalization. An appropriate use in the context of complete policy strategies is something that the Fund has recognized.

Question - I have two questions. What is your opinion about European banks that are operating in countries of Latin America? How will these banks work in this scenario? What are the risks in countries that are having high levels of credit increases like Paraguay, Nicaragua, for example?

Mr. Viñals - On the risks for countries which have rapid credit growth, as long as this is persistent over time, then you have an issue. Many emerging markets and developing countries need to go through a process of financial deepening, which means that they need to increase the size of their financial sector and, over time, they need to increase the role of credit to GDP because they start from very low ratios. But they have to do this in a gradual manner. When you have periods where credit is growing very fast, very quickly, we know that this is a leading indicator of nonperforming loans tomorrow. That is something which is exemplified by the experience of many countries in the world.

So, we think authorities should exercise vigilance on this, they should make sure that banks are appropriately accounting the quality of these loans, that they are provisioning sufficiently, that they have capital buffers and capital positions which are consistent with the risks that they are undertaking, and also that if you think that the growth of credit is very rapid and that you need to bring this down, you have to use the policy levers at your disposal, including monetary policy, fiscal policy. In some of these countries a lot of this credit may be linked also to public finances and to deficits, and so on, and you also have to use the prudential measures on the financial side that I have just outlined.

Regarding European banks in Latin America, we have looked in our simulations at the impact that the deleveraging process would have in Latin American economies through both those European banks present in Latin America through branches and subsidiaries, and also we have looked at cross-border credit which is supplied to Latin American firms, households, and governments without going strictly through banks or subsidiaries. So, this is truly cross-border. There is some impact in Latin America, but this impact is relatively small compared with other regions, in particular Emerging Europe, which is the one that would be mostly affected.

Now, one thing that is important in Latin America is that, so far, deleveraging has been manageable and has been well managed. For example, when a European bank has sold its stake in a bank in Colombia, then there has been a Latin American bank from another country which has taken this stake. So, there has been some substitution in terms of domestic banks taking the role of foreign banks, and this has helped to keep the situation manageable.

What we point out in the report is not that the situation in terms of deleveraging in the rest of the world has not been manageable. It has been manageable and has been well managed in Latin America, in Asia, and in Eastern Europe. What we point out are the concerns that, if market stress were to increase, could exacerbate these deleveraging pressures and those would be harder to manage than so far has been the case.

Question - My question is if you are in discussions with the European Union about putting direct capital into Spanish banks.

Mr. Viñals - I am not aware of any such discussions.

Question - You talked about what European banks were doing.

Mr. Vinals - Sorry? European banks?

Question - Yes. You talk about European banks cutting back on some part of their assets of about (inaudible). I feel that for most of them, actually, in foreign presses, you have got a chunk lying in (inaudible) Africa and stock markets like Egypt, Nigeria, and South Africa. Now, what is likely impact of some of those assets on the [?] markets and their indices as well?

Mr. Viñals - Sorry, I had some difficulty—

Mr. Murray - Just to clarify, what you are asking is the deleveraging translating into flight of capital to those emerging markets; is that what you are saying?

Question - From those markets.

Mr. Murray - From those markets, South Africa, Nigeria, etc.

Mr. Viñals - Well, so far, we have not seen this happening except in the following sense. Capital flows, they do not like too much risk. So, one thing that we have seen is that when confidence is shaky and risk appetite is low, there tends to be a retrenchment and capital flows out of emerging markets. This is something that happens in general inside and outside of Africa. This is something that happened for the broad category of emerging markets and some frontier countries during October and November where tensions escalated in the Euro Area.

Then, after the actions by the European Central Bank, the policy decisions by the European Leaders, the agreement on Greece happened, all of these tensions deescalated, risk aversion dropped, and then capital flew back to these countries in rather intense amounts. So, what I think is fundamental is capital flow volatility. This is something which is going to affect much more emerging markets and frontier countries than low-income countries. I think that low-income countries have other issues.

They could also be hit through the deleveraging process insofar as strong deleveraging which goes beyond what is reasonable and healthy may put a drain on global economic activity, and this may lead to a drop in exports for these low-income countries. That would be a channel. But I do not think that the capital flows channel is the most relevant for low-income countries, particularly in Africa. I think that the trade channels may be more important.

Mr. Dattels - I might just add that the difference between the Lehman crisis, which affected all banks in the system and where we had a lot of concern about trade finance, which is obviously very important for developing and emerging markets, is that this time around, because it has been concentrated in European banks, and European banks are big providers of trade finance, what we have seen is other stronger banks stepping in to provide trade finance. So, there has been very little impact on that vital financial link.

Where it is slightly different from the Lehman crisis is that, because some of the deleveraging factors are structural, for example, some of the areas of specialty finance require long-term funding from banks, that type of funding is slightly more scarce because of the need for banks to stabilize and lengthen the maturity of their liability structure, but as José was saying, so far, so good, under the current conditions.

Question - Can you give us your estimates of what the spillover effects on the rest of the world would be in the event of another major European crisis both through the financing channels and through the trade channels?

Mr. Viñals - Well, I do not even want to put a number in a trillion-dollar questions. It is a difficult question to answer because one must first have some metric for what do you mean by an escalation of the crisis, up to where it goes. One thing that we have done in the report is to take some scenarios, and I will give you what we have done, which is the following.

If we were to move from the current policy scenario to one where confidence is further shaken and where access of sovereigns and banks to funding is further limited from the levels we have today and spreads increase, and we have some assumptions regarding by how much spreads increased, this is our downside scenario. In this downside scenario, what we have is an acceleration of deleveraging, which will imply that, after two years, economic activity in the Euro Area, for example, would be about 1.4 percent below than what the baseline is. So, it would certainly take a toll in the Euro Area.

We have also looked at what would happen if we had an exit of capital flows from emerging markets like the one that took place during the Lehman period. What we have said is, all the portfolio flows that came into emerging markets or the main emerging markets receiving these inflows between 2009 and 2011, what would happen if they were to exit suddenly in a quarter as it happened during Lehman. The impact that we measure in the report is that you would have reductions in GDP growth in different emerging markets, the ones that have been the most important recipients of these inflows, between 1.5 and 2.5–3 percent of GDP. So, we are saying that, yes, an escalation of tensions in Europe would take a toll on the growth of these emerging markets, as well as taking a toll on the growth of the Euro Area itself.

Question - I noticed that you echoed the message in the World Economic Outlook regarding the possible recapitalization of euro zone banks through the firewall. If I remember correctly, when Christine Lagarde suggested this at Jackson Hole, euro zone policymakers scorned the idea. What makes you think that euro zone policymakers' attitudes toward recapitalization have changed since then? Could you shed any light on what is the IMF's thinking on how much needs to be set aside for bank recapitalization and what the trigger would be for making these payments through the euro zone firewall?

Mr. Viñals - Let me clarify the following. The ESM, the European Stability Mechanism, already has legally the capacity to provide money that would be used for recapitalizing banks, and the same thing goes with the European Financial Stability Facility. In fact, part of the money has been used in program countries, like in the case of Greece, for example, where this money is set aside for recapitalization of Greek banks.

The important thing is whether part of the money of the ESM can be used not only to, among other things, help recapitalize banks in the context of lending to the national sovereigns so that the national sovereigns put the money in their banks, so an indirect way of doing that, or whether the ESM should have the ability to directly take a stake in banks.

Why is it that we think that this would be important? Because that will help to break the adverse loop between sovereign risks at the national level and banking risks at the national level. So, by having these directly-taken stakes by the EFSF, ESM—that is, the ESM in the future—you would break this link. That is what we are advocating.

But, remember, the EFSF and the ESM already have the capacity to channel money into banks through the national sovereign, and not only within a program, but it is also envisaged that this could happen outside of a specific IMF-EU program, but as long as it is through the national sovereign.

Now, in terms of the question of how much capital do European banks need, we think that this is an issue that has already been addressed by the European Banking Authority through their recapitalization exercise. We think that European banks complying with the targets set by EBA is the right thing to do, and I think that is the answer. So, we do not have anything beyond that. I think that this is what banks should do and that is what banks are doing according to the plans that they have submitted to EBA. We are putting action now on things which have received less attention. We think that there are three key "Rs" in order to solve the banking problems in Europe. One is recapitalize. The other is restructure. There are times when what you have to think is whether the financial institution, the bank as it is, is not the best possible way it could be and, if not, you have to restructure. Restructuring is fundamental, and this is happening in some European countries, but it is not happening in other European countries.

Then you have to have the third "R," which is resolve. You have to close down and liquidate banks which are not viable. So, recapitalize, restructure, and resolve. This is what we think needs to be done in order to fully stabilize the banking system in Europe.

Mr. Murray - We have a number of questions online. Some of them are really germane to other press briefings we will have over the course of the week in terms of Regional Economic Outlooks. We will get back to those journalists off-line. Let me take a couple more questions here in the room and then I am going to wrap this up.

Question - Just so I can try and explain this to my readers, Spanish ten-year bonds at the moment are close to 6 percent. In any kind of medium term, that is not sustainable. From what I understand, you consider the firewall, the EFSF/ESM, should be principally used to recapitalize banks, but you also in your response to my colleague here pretty much discounted the option of the ECB engaging in massive bond purchases, sovereign bond purchases.

A lot of economists would say it is not going to be possible to bring down interest rates, Spanish interest rates if you do not have one of those options, if you do not use the firewall as a lender of last resort or the ECB. So, how do you expect Spanish bonds to come down to sustainable rates?

Mr. Viñals - Let me clarify something, because I did not say—and I want to emphasize I did not say—that the ECB should not use the tools at its disposal, like the Securities Market Purchase Program that is open and can be used, if needed, or that the ECB should not have further operations. What I am saying is that this is not the solution; this may be part of the solution, but this is not the solution. What you need is to stabilize the situation once and for all, and once and for all meaning doing things that need to be done.

Now, I think that one component which is very important behind the recent stories is that markets need to be persuaded by the national authorities that the national authorities are doing the right thing, and I think that Spain is doing a lot of very important things recently. There is financial sector reform of recapitalizing, reprovisioning, restructuring, which I think has gone in the right direction and which needs to be completed as soon as possible. There has been very ambitious labor reform which has been approved and which needs to be implemented as soon as possible. There are legislative initiatives in order to bring public finances of the autonomous communities under control.

So, I think that this is all very important and I think that this will ultimately pay off. That rates may go one day up, even if it is high, I think that should not let us take our eyes off the prize. We need to continue strongly implementing the national measures at the right level.

Another clarification. I did not say that the ESM has to be only or primarily used for recapitalizing banks. There are a number of things the ESM can do, and sometimes it may be helping banks in some countries, and other times it may be helping even to purchase sovereign bonds in other countries. This is also within the legal remit of the ESM. Other times it would be contributing to programs, like has been the case with Greece, and so on.

So, I think that there are a number of things that can be done. The continued support from the ECB through an accommodative monetary policy and intervening in markets by adequate provision of liquidity and buying sovereign bonds when necessary, all of these are options, but that is not the only game in town.

If we think that that is the only game in town, we are wrong, because you also need very important decisions at the European level in terms of the political agreements which are needed in order to continue working, continue the excellent work that has been done recently, and put in place a vision of the European Monetary Union which really helps markets become confident again and say, okay, now we are willing to come back because this is a project which we can believe in and in which we see the full support of the key stakeholders in terms of member countries. That is what is needed. A lot has been done; let us complete the job; let us not leave it unfinished. That is the point I want to make.

Question - Reading the various reports, your report, Mr. Cottarelli's report, it is obvious that states give billions to banks, and without these billions, some of the banks may collapse. Tell me if it is correct. My second question is, what is your outlook for the Greek banks?

Mr. Viñals - Well, I think that from the beginning of the crisis, in the United States, in Europe, the public sector has had to step in in order to safeguard the stability of the banking system, because the banking system provides through credit flows the equivalent of blood in the human body. If blood dries up, you die. So, it is fundamental to keep the financial system and the banking system from imploding and credit from imploding. That is why money was put into the banks subject to conditions so that financial stability could be maintained or preserved as much as possible.

The same thing is happening in Greece. In Greece, the program contemplated by the IMF and our European partners is basically a program where there is a program for fiscal adjustment, for structural reforms to support growth over the medium term, and also for keeping a viable core in the financial system and in the banking system which is capable of providing credit to the economy. Within this program, there is a provision made for public funds which may be used to help support the banking system.

I think that this is natural. The important thing is that these actions pay off and that Greece can recover growth so that it can repay these loans and go back to being a normal economy. That is basically the purpose of the program that we have put forward in Greece. In the case of Ireland, again, the banking system was under tremendous trouble. The government had to step in; resources were not enough; and we had to go to a program. Now they are making good progress and they are on a course to recover. So, that is the story.

Question - I want to ask about the European banks in the Middle East, especially in the Arab Spring countries, that if they do these things, I think the economies in these countries cannot compete, or cannot increase, or something like this.

Mr. Viñals - Well, this is why we are insisting very much in order to avoid any negative impact beyond inside and outside of Europe. This is why we are insisting very much on putting in place the full array of policies, of which part of it has been done, but completing the job by putting in place the full array of policies which will help to restore confidence.

The region you are talking about is not the most affected by the European banking deleveraging. It is really Emerging Europe. The country you represent is not so affected. But, again, I think it is in the interest of the global community to avoid an escalation of tensions in Europe, which may lead not only to negative spillovers through the deleveraging process, but also through trade channels, through a reduction of global confidence, and this is something which, through other ways, would be negative for everybody.

So, it is in the interest of Europe and it is in the interest of the world, and this is why, in addition to the stronger European firewall that has been put in place, the Fund is making efforts to increase its resources sufficiently so as to have a global firewall that can help any member country that may get into trouble.

Mr. Murray - Thank you, José. Just a quick service note reminder here. At 8:45 a.m., Washington time, tomorrow, Christine Lagarde, the Managing Director of the IMF, will hold a press conference here in this room. It will also be webcast. Thank you, José, Robert, Jan, and Peter for joining us today. Thank you all. If you have any follow-up questions, e-mail to media@imf.org and we will follow up for you. Thank you very much.