Transcript

Antonio Borges, head of the IMF European Department
September 23, 2011

MS. NARDIN: Good afternoon and welcome to this press conference on Europe.

Antonio Borges, head of the European Department of the IMF, will offer brief introductory remarks, and then we will take your questions.

MR. BORGES: Thank you. Welcome. I will be very brief in my initial remarks, first because most of what I have to say, you already know from the various message that you have been getting in these Annual Meetings; second, because I want to leave as much time as possible for your own questions.

As you know, in Europe, we are quite concerned with the economic situation. Relative to the last press conference on Europe I had, which was at the time of the Spring Meetings, the situation has become much less favorable. In the spring, we were looking at some solid economic growth, export-driven, and so forth. Now there is quite a significant slowdown which, to a certain extent, is inexplicable because we expected that the European economy would be in good shape, on very solid foundations, and in fact this has proven more shaky than we thought, and in fact even the best economies are slowing down significantly, which is certainly concerning.

To a large extent, this reflects what is happening throughout the world. There is a slowdown in world trade. There is a slowdown in the United States of America. Some of the leading European economies are very open, very driven by exports. But at the same time, there is also a lack of internal dynamism, and consumer spending is not as strong as it could be, and there is the overall drive toward fiscal consolidation, and all of these things contribute to the current situation.

Obviously, if things were to stay like that, there would be a soft patch but not much further worry. But as you know, every time the economy slows down, there is always a risk that it will slow down further and in that context, we have been rethinking our advice. The Fund in general has been recommending a nuanced change in policy. Monetary policy might be less focused on inflation--the inflationary fears right now are practically nonexistent, so there is less concern about that problem, and that might actually make it possible to have a more expansionary monetary policy. Many people expect this to happen, and if it does happen, we would be very supportive.

Similarly on the fiscal front, the situation is very, very difficult. Some countries have absolutely no option but to keep on putting their public accounts in order, and the markets expect them to do that and would be severely disappointed if this were not the case. Other countries, on the other hand, have more leeway, and they still have enormous credibility in the markets, and they could at least allow the automatic stabilizers to operate.

In general, what we are more focused on in terms of the fiscal policy is that governments act to regain credibility in the long term. There are reforms that can be put in place in Europe that will have substantial impact in the long term equilibrium of public finances, and that is what should drive all the attention of policymakers. For example, pension reform in quite a few countries still has a long way to go. This is the kind of decision which enhances credibility and does not have an immediate contractionary impact on the economy, while at the same time improving the supply side, if you want. So our recommendation has gone in that direction.

We also spent quite a bit of time on growth. In Europe right now there a lot of discrepancy in terms of growth. Quite a few economies are growing very well. Especially in Central and Eastern Europe, there are remarkable cases of growth , catching up quickly with the more advanced Europe in a very desirable manner. Others, like Turkey, for example, we might even wonder if they are not growing too much, and there is an issue of stability more than anything else.

Then, in Western Europe, you have economies doing very, very well. For example, Sweden is a star performer. And then you have other economies where economic growth is very, very slow, extremely disappointing, and of course, the most worrisome example is Italy.

Why is there this discrepancy in growth across Europe? How do we explain this? These are countries with more or less the same access to finance, the same access to technology, a knowledge-educated labor force--why do some of them do so well and others not so well? This is becoming a very important source of concern for us and a focus of attention, and we will be putting forward more and more recommendations on how to, through certain policies, actually create a better chance for longer-term growth in the parts of Europe that are not working so well.

The second point, of course, is the sovereign debt crisis. This is of great concern to all of us. We are now in a different phase and more worrisome phase. Clearly, everybody understands the problems of the countries that have programs--I will speak about those in a minute--but since the summer, there has already been a first element of contagion which is of great concern, and countries like Spain and Italy have been faced with higher interest rates on their debt financing, and markets wonder if they will not go in the same way as the other countries, which of course would create problems of a completely different magnitude.

This is concerning, because here there is an element of market fear, which to a very large extent we consider excessive. Spain has been making remarkable progress in terms of its economic policies. They still have a few things that they can and should do, but the progress that has taken place is very, very reassuring in many ways, so it is a great pity that this is not recognized by the remarks, and a certain extent, the same in Italy. Italy of course has a problem of growth but has had a problem of growth for the last decade or more. The Italian public accounts have never been as good as they are now. So why does the market turn around and all of a sudden consider that these two countries are at stake? There is an element of change in market sentiment here, so the problem to a very large extent is how can we restore confidence; how can we in some very, very forceful manner convince investors that these are worthy countries where their investments will be safe and profitable? Even if those countries can go farther and do better, that does not eliminate the central point, which is that they are completely different from the situation of, say, Greece and Portugal, which are substantially in a much more challenging position.

Beyond this we are working very actively to make sure that the current fears that exist with respect to Spain and Italy do not spread to other areas of the continent, in particular to the financial system. The financial system depends very, very much on confidence all over the world--no matter how good the banks are and how well-managed they may be, confidence is still a fundamental ingredient--and so, as we see market sentiment deteriorating, we hope to stop--we have to stop--that before it becomes sort of overwhelming.

Our view is that--you have heard this from our Managing Director and from everybody else--we are at the point now where decisive action needs to be taken very, very soon, and it has to be concerted action, and it has to be collective--everybody, every authority, every market participant, every regulator, the central bank, and everybody else, have to work together to achieve the goal that we want and to restore normalcy, if you want, to the European situation. The economy is fundamentally solid apart from one or two marginal cases, and we have to go back to a normal outlook for this great continent.

Now a couple of quick words on the program countries. We are relatively reassured about Ireland. The Irish Government has been remarkable in its performance, and of course, the battle is far from won, but things are moving exactly in the right direction. The economy is doing better than what was planned in the program, slightly better, and confidence is restored, interest rates are beginning to come down, foreign investors are interested in investing in Ireland. Economic growth is surprisingly strong, according to the latest figures, and we expect that the Irish economy, very much export driven and very much focused on efficiency and competitiveness, will be on the right track very soon.

In Portugal, the program just started two months ago. The government has started with a great deal of determination. The challenges are strong and are difficult. There is a lot to be changed. There are negative surprises as often exist in these cases, with numbers that come out worse than they were expected to. And we just hope that they maintain the right path. It is too early to make any kind of comments, but we think we have a good program in place and that the government seems to be determined to make it happen.

In Greece, things are to a certain extent on hold, as you know. There is a European Strategy for Greece, as defined back in the month of July. That is still the strategy. That strategy will be based on a lot of European support, but it does have one condition: the Greeks have to do what they have to do, so we are negotiating with them on the policies that they need to put in place to be on track, and as soon as those negotiations finish, and the Greeks do what is expected of them, we can resume with the strategy that was put in place in July.

We have to be optimistic that the Greeks know very well what is at stake and will do what they have to do, but things are very much in their hands.

There are other areas in Europe where we have a few concerns. There are other areas where things are going quite well. We are very pleased, for example, with fairly successful programs in Latvia and in Iceland.. But I will now open up for your questions and see where your interests really lie.

QUESTION: I would like to ask you two questions. In order to enhance the capacity of the European Financial Stability Facility (EFSF), there are some people who suggest that it should be allowed to go to the European central Bank (ECB) to enhance its capacity. Is that something that you would support, that you would think is a good idea?

Secondly, you said that in order to enhance growth, central banks, especially the ECB, should be less focused on inflation, since it is not a major threat, anyway. Would you recommend also perhaps not being too strict on the close to 2 percent target that the ECB has set itself for its monetary policy on inflation?

MR. BORGES: The immediate objective with respect to the EFSF is to have its new model approved as quickly as possible. This is now in all of the European Parliaments This is our immediate goal.

What was decided in July is of enormous importance, and it does have the potential for a major change in how we deal with the crisis, and that is our immediate goal.

I think we have to keep in mind that the EFSF is not the solution to all of our problems, and therefore, many of these ideas that are floating around that we should leverage the EFSF to the hilt and that a $2 trillion EFSF or whatever might be necessary , this is not serious in our view. We have to maintain the EFSF in its central role, but as it is planned today. That is what the parliaments are voting on, and that is how things should be.

Whatever the EFSF then decides to do later on and how it actually wants to intervene and whether it wants to find additional financing in the markets, that is for them to decide, and I don't think we are in a position where we can make very much progress today.

Now, for the ECB, the ECB has to maintain its goal of very, very low inflation, of 2 percent--below 2 percent, but close to 2 percent. This is our biggest capital. This is what the ECB has achieved. I don't think there is any intention on the part of anybody to relax this particular objective or destroy this particular credibility. I think that would be beyond question.

What is remarkable is how the ECB has been able to help resolve many other issues in Europe which are not directly inflation-related but which are at the very core of monetary union, and we are very supportive and very appreciative of the role the ECB has played, for example, in securities markets to create more uniform monetary conditions throughout Europe. Without that, we would really not have a monetary union. I think we are very appreciative of what ECB is doing along those lines.

Any recommendation that anybody would ever make for the ECB should not touch the inflation credibility which is a center element of the whole project, and the fact that I am saying that we would not be unhappy to see some relaxation of monetary policy is only because we don't see any fear at the current time of inflationary pressures.

QUESTION: In your opening statement, you said that one of the countries you worry the most about is Italy, so I would like to ask you to elaborate and to give us some more detail. And also, is one of the factors that you consider in making this assessment the political instability of this country?

MR. BORGES I think the important thing in Italy from the political point of view is that everybody in Italy should maintain a very strong commitment to a course of action based on very solid fiscal stance. I think the Italians have made progress, might still need to make further progress, but so far, it has been quite remarkable progress. And as I said--this is an important point--Italy has the best primary budget or primary balance of all the large European economies, even better than Germany. So, if you look at the Italian figures and take out interest payments--that is what really matters for the long-term debt sustainability--they are in a better position than even Germany, which is remarkable. It is a remarkable achievement. It has to be maintained like that and deserves a lot of market support in our view.

The concern is focused on growth. First of all, Italy is a very prosperous country; it is one of the most important in Europe. Second, it used to be a very dynamic country in the past, very competitive, very much export-oriented. And it has stalled for the last decade or more. There has been very, very limited growth. There must be very substantial obstacles and barriers to growth in Italy that need to be removed.

We are quite supportive of the Italian Government's intentions as communicated to us by Minister Tremonti that, now that they have a clear path for fiscal policy, they are going to put the accent or the emphasis on growth and will put in place a plan to remove these obstacles to growth which seem to be so devastating.

QUESTION: Mr. Borges, I would like to ask you a couple of questions. —Can the ECB actually stop buying bonds once the EFSF is approved? Another one is what, in your opinion, are the biggest risks for the programs in Portugal and Ireland that you have just mentioned. And finally, what is the IMF additional lending capacity to Europe? Is there any idea for how much money the IMF could actually lend?

MR. BORGES: First of all, on ECB's role, clearly, as you know, the current plan is for the EFSF to have new powers, not just more resources but also more freedom on how to use them, and therefore, the EFSF will have the possibility of intervening in the markets in a way that they could not do before, and that will be very helpful and very important. That should be interpreted as a strategic intervention to deal with specific situations and in fact to bridge, for example, countries that are in a tough spot and want to gain some time until they are back in good shape. That is the general plan.

The intervention of the ECB is very different. The ECB as a central bank has unlimited resources, number one, and therefore, it can have a completely different impact on the markets, and the role of the ECB is not to help countries solve their problems. The role of the ECB is to normalize markets.

As I said, this is a very important element, because monetary union is a concept in which monetary conditions are very much the same throughout the monetary union, and that is not what we observe today. Monetary conditions in France, in Germany, in Italy, and in Spain are quite different, so this is not what we had in mind. The ECB can play a role in normalizing markets, and that is the kind of intervention that we would expect from them. In that sense, the ECB is irreplaceable, and we are very pleased that they have found a way to step in and do what they have done in a remarkably effective manner.

Regarding the programs, as I already said, the Irish program is doing well. The Irish economy is very much export-driven, export-oriented, and if there is a big slowdown in Europe, which I very much hope will not be the case, of course, the Irish will find themselves with additional difficulties. But otherwise, I think we can be confident--I think that is the word--that the Irish economy is on track and that things are evolving as had been planned, and that is very satisfactory.

The Portuguese program is just starting, and inevitably, the government is focusing immediately on the budget and the budget problems and the big objectives of cutting down the budget. I would argue that the fundamental challenge for Portugal is to regain competitiveness and start growing again. If the economy falls into a downward spiral of recession and further budget problems and further recession, then it becomes almost insoluble.

We want Portugal to go back to economic growth as quickly as possible, and therefore, the Portuguese program contemplates a whole series of measures to increase competitiveness and restore export growth.

With respect to the resources of the Fund, the Fund has very, very substantial resources--I wouldn't like to quote the figure because that depends very much on how you do the calculations, but it is certainly very substantial resources--the problem is that they are not to be used in Europe alone; they are to be used all over the world, and the needs are quite substantial everywhere. Today the Fund is already using a significant part of its resources in Europe because that is where the bigger problems are, but in that sense, the question that you asked--how much more money do we have available for Europe--is really not the question that we ask ourselves ever, because the resources that we have are to be used all over the world.

This said, let's keep in mind that the Fund's main contribution is not the financial contribution, and whenever we are prepared to enter into a program, many other investors will go along. The Fund's contribution is the credibility of the programs and therefore the policies that we put in place. That is the real point, and therefore, we have to insist very much on this point. If we think the program is successful, and we approve it, then many others will be prepared to invest alongside the Fund, and that changes quite a bit the dimension of the financial resources.

QUESTION: Latvia expects to close the EU/IMF-supported program at the end of this year. Do you see there are any concerns left, and how do you see the situation could develop?

MR. BORGES: Well, Latvia is in many ways a success story in the sense that it was a very controversial program when it was put in place. Many, many economists, including some very famous ones, argued that it would never work. The Latvians did remarkably well. It was a fantastic effort, national effort, at great cost initially, because the fall in activity was very substantial, but then, many things were corrected and corrected in time, and the economy is growing very solidly now. So in that sense, we are pleased. .

There is still a long way to go. We are not there yet. There is still very high unemployment. But the path right now is excellent, and I think we can argue that the program was the right program, and the Latvians were extremely competent at putting it in place.

We just met with the Latvian authorities. They are determined to continue on the right track. There have been elections recently, but we don't expect any change in economic policy as a consequence of those elections, and this commitment to staying on the right track seems to be very strong.

QUESTION: You referred in your opening remarks to some countries have some leeway to do other things, and you also referred to automatic stabilizers. In the case of the UK, do you think there is room to go beyond the automatic stabilizers and do other things to restore growth to where we want it to be?

MR. BORGES: Well, the UK has plenty of room in the sense that it has plenty of access to inexpensive finance. The UK is an economy and a government with plenty of credibility, and they can fund themselves at very cheap prices, so in that sense, they have much more room than many other countries who are not at all in the same situation.

We are not saying that it would be desirable for the UK to embark on expansionary fiscal policy at all. That is not what we are saying. We are simply saying that we approve of the current stance of fiscal policy in the UK, but if indeed the economic slowdown proves to be more severe than it is, we would not be unhappy to see the role of the economic stabilizers unfold as it should, and that would mean that the objectives of fiscal consolidation would have to be delayed, but that would be the right approach. And if--I hope this will not be the case--but if, hypothetically, there were a severe recession, then we would be looking at a reversal of policy. But for the time being, we have been supportive of the strategy of the UK Government, and we hope it is successful.

QUESTION: Two things: one, just to clarify your comment about the EFSF, that it is not the solution to all of the problems, and that we don't want to see it leveraged to the hilt. Are you saying that you don't want to see it leveraged, or you don't want to see that discussion until all the parliaments have cleared it, cleared the establishment of the EFSF new powers?

Then, secondly, this idea of getting back to normal--there is an argument afoot now that that is going to take a really long time in the case of rating sovereign debt in Europe because of this disconnection that has been proved now between the debt of the individual countries and the central bank, and that until you have a clear commitment of a central bank standing behind each of those countries fully, just like the Fed stands behind the U.S. Government, and the Bank of England stands behind the UK Government, it is not going to be normal.

MR. BORGES: On the EFSF, the point that I would like to insist upon is that the EFSF is a central element of our crisis management approach, but it is not the solution to every problem that we might have on our hands. People who are arguing that we need a gigantic EFSF I think are going way beyond what is reasonable.

So that is the first point. When I talked about a more collective approach with coordinated, cooperative action on the parts of many authorities and many regulators and the market participants, the EFSF will play a role and a very important role in that but must not be considered as the only solution for the European problems. That is number one.

Whatever happens with how the EFSF will operate, whether it will be leveraged or not leveraged, I don't think this is the time to discuss it. As you correctly point out, we have not even gone past the approval of the measures that were decided in July. Let's approve that, and then we can think, or they can think--and there are many suggestions out there--about how they want to maximize their impact in the economy. But indeed, it is a bit too early to get into that discussion. Now, there are proposals floating left and right, but we don't yet have a clear view of this.

Now, what will it take to go back to normal? I would not be so convinced of this argument that only the central bank can restore normalcy. As I said, the ECB does have a role to play, it is playing that role, and we welcome that. We are very supportive of that. It is playing that role to intervene in the markets when necessary. But that cannot be the solution to the sovereign debt problems. The solution to the sovereign debt problems has to come essentially from restoring confidence on the part of investors, on the part of market participants, that sovereign debt in Europe deserves their capital. That is what will restore normalcy; let me put it this way.

And as I said, this is already the case, in our judgment, in a few countries. Unfortunately, it is not the judgment of the market, so that is what we have to change. And this requires that everybody work in parallel to achieve this goal, including market participants, including regulators, including governments. Governments still have to take action. I am not saying that everything that Italy and Spain have done is sufficient. In normal times, it would be, but in emergency times, they may have to go a step further, and I think they are going a step further. But beyond that, we also have to make sure that insurance companies, banks, other types of investors, pension funds and so forth, go back to the markets and that regulators are supportive of that and that they do this collectively so there is no stigma attached to having sovereign debt on your balance sheet and so forth, and that in the process, there is a demand for sovereign to go back to where it should be.

That is what will restore normalcy, and this requires that we don't operate on a bank-by-bank, country-by-country, regulator-by-regulator approach. We have to have concerted action, which is of course what our MD has been talking about all the time.

QUESTION: I am just wondering if the IMF has any estimate of how big the bank hole could be in the case of a default by Greece and what kind of stopgap the IMF is thinking of contributing in the case of a widespread bank crisis as a result of a Greek default.

MS. NARDIN: Can I just say that we have a similar question from Ta Nea in Greece.

MR. BORGES: First of all, this is of course a hypothetical question. Second, I think the question does not have an answer, and I will explain why. And we are beyond that, really. Greece is a small country. The impact of problems associated with Greece is small. The European banks would not have that much trouble, contrary to what people sometimes think, absorbing any losses related to Greece. Of course, it would be costly, and of course, it would damage their profitability, but it would not be a dramatic blow by any stretch of the imagination.

The problem today is that we are beyond Greece, and the real question about the problems in Greece is what will happen in the rest of Europe, and if the problem mushrooms, and that is why the markets are nervous. And in that sense, first of all, we have to do the best we can to help the Greeks get back on track and make sure that their program is successful, and at the same time and in parallel, strengthen the general situation throughout Europe, both in terms of sovereign debt and in terms of the solidity of the financial system to make sure there is no contagion.

QUESTION: You said that in Spain there is still room for more, and I would like to know if you can develop a little bit more in which areas we can work to improve our fiscal condition.

MR. BORGES: It is not only the fiscal condition. The problem in Spain today is lack of growth, very high unemployment, the need to go back to very strong exports and rebalance the economy, and so forth. So it is a whole series of structural measures there.

On the fiscal front, the central government has done rather well, but there is still some difficulty with regional and local governments, which have to be aligned with the same type of effort that is happening at the central level.

We were very happy to see how quickly Spain introduced this Constitutional Amendment to control public finances. This goes exactly in the direction of what is recommended for the whole of Europe. And the fact that Spain managed to approve it so quickly proves that there is a national consensus on this which is very reassuring. So those are all steps in the right direction.

Spain still have a terrible labor market--I think everybody agrees with this--so anything that could be done--a lot has already been done, but a lot more can still be done to make the labor market more efficient, to allow people to move to allow indexation of wages, and other forms of wage bargaining which are not most adapted to market efficiency. There has been pension reform. It could go further. It is not as good as we have seen in other parts of Europe. And in general, there has to be in Spain a stronger and stronger effort to get the economy more export-oriented and more open.

There has been a great deal of progress in the banking sector, but still, confidence is not restored. Of course, right now, it is difficult. I admire very much the Spanish Government for having demanded capital increases on the banks, for having gone for stress tests that are extremely credible, complete transparency in terms of bank accounts.

One thing that the Spaniards might consider would be to have an outsider provide an evaluation of bank assets, as was done in Ireland, for example, with great success just to restore confidence so there is no more uncertainty about the actual situation.

So there are a few things that can still be done, but in general, Spain is moving rapidly in the right direction. We know there are elections coming up, but because both sides of the spectrum are aligned on what are the right measures to take, so whatever the outcome is, I think that Spain will maintain the right path.

QUESTION: Where and when should this bold collective action come from? Are we talking about these Annual Meetings? ? What results would you consider to be the best possible from the Annual Meetings or from the next stage that I was referring to Also, the BRICS yesterday were asked about helping the euro, which is a first. They said they will be helping through international for a like G20 and the IMF. Are you satisfied with that approach? What would you expect from a grouping like the BRICS?

MR. BORGES: Well, let me start at the end. The BRICS of course are concerned, because the current increase in the degree of risk aversion on the part of investors means that there has been an outflow of capital from emerging markets, which of course is not something that is helpful to them. This is why we need a global approach, because everybody is concerned. There is no country that can say, "Oh, this has nothing to do with me." The difficulties in Europe, the difficulties in the United States, are sufficiently important that everybody should be concerned. And some of the BRICS, like Russia or like China, have huge resources, huge capital, and they have to worry quite a bit how to invest it well, how to invest it in their own interest, and in their own interest, I think the euro does play a role, and they would suffer very much if the euro were to suffer. So it is in that sense that there may be some collective interest in cooperating.

Now, your first question is a different type of question. The Annual Meetings are not a deliberating moment. People come here to discuss, to develop a common understanding of what is happening, and the main message that we are sending is that there is a need for urgent action.

So when you ask how much time we have, we don't have much time. It should be in the next few weeks that policymakers throughout the world and key market participants and regulators and central banks and so forth should sit around the table and put in place more cooperative approaches to these problems--and cooperative cross-border, meaning we are in a position in Europe where a single country cannot or can only with great difficulty resolve the problem. It has to be a more collective approach. And the economies and the countries are so interdependent now that this is absolutely fully justified.

And if that works well, then we will see this return to normalcy, which for us would be when investors go back, as they should, to buying sovereign debt.

QUESTION The German Minister of Finance made an ambivalent statement some time ago, saying that he would not be surprised if some changes to last July’s decisions to support Greece would be changed. Do you think that the political decision for a second bailout to Greece is under discussion, and as long as the Greek default is on the table for discussion, would you ensure that Greece will not go to a default in the next month?

MR. BORGES: Well, those two questions have the same answer. The decisions that were made in July were extremely important. This is something which I would like to call your attention to. What the European leaders said in July was that they were prepared, every, single country, to put on the table as much money as necessary to help the countries in difficulty. This is a remarkable statement for people who don't think there is enough commitment to the euro and there isn't enough commitment to solidarity in Europe and so forth. They should go back and read that statement, because it is all there.

However, there is a condition in that decision, and the condition is that the countries that want support have to do the right thing, have to put their house in order, have to follow the right policies, and that is what is a stake today. If the Greeks do what they have to do, I think they can count on full support from the rest of Europe for as long as it takes and in whatever amount, if they are on track. If they are not on track, I think the support will evaporate very quickly, because it is not the governments--it is the citizens of Europe who don't want to see their money wasted, let's say, in programs that have no hope.

So that is the real message that everybody is sending. And of course, if the Greeks do what they have to do, there will be no default. But on the other hand, if they hesitate, procrastinate, find it impossible, et cetera, then it is very hard to avoid it.

QUESTION: A little bit of a follow-up on this question about the BRICS and the possible intervention. You talk, and others have been saying in the last few days, about the coordinated approach and all that. In the last few weeks, there were more than rumors, official statements by individual members of the BRICS, about the idea of investing in individual markets.

Is there a clear opinion of the IMF that this is wrong, that there should be a common approach, and that explains why the BRICS come out with a statement saying, "If we do it, we will do it in coordination with the IMF," as opposed to an hour later, the Deputy Governor of the Bank of China saying, "We are considering it"?

MR. BORGES: No. I think there is a misunderstanding there. We are very supportive. As I said, many of the BRICS countries have huge resources at their disposal. We would be very pleased to see those invested, and invested not just in risk-free assets but also in other types of securities all over the world, and certainly in Europe, and our Managing Director has said this more than once, that she would be very pleased to see some of that capital invested in Europe. The reality is that those countries, even though they are very wealthy in terms of their accumulated capital, are also very conservative, and they don't like to waste their money and for the time being, they still consider that U.S. Treasuries are the safest asset them can think of, so they invest disproportionately in U.S. Treasuries.

It is for that reason that we have to create the conditions that will make those investors consider that it is in their interest to invest in Europe, and that is why it may require more of an effort. But if individual countries would like to invest in Europe, that would certainly be most welcome. It has not happened, and it has not happened because those countries are prudent, and very, very prudent, in fact very cautious investors.

This said, one area in which you can expect those countries to be bolder is when it comes to buying assets, real assets, companies, sometimes what they consider to be strategic companies. We may see some of that, and as far as I am concerned, that is very welcome, too. But although that contributes to the general financing of the European economies, it does not contribute to solving the sovereign debt problem.

QUESTION: You mentioned earlier some surprises in the Portuguese economy. I would like to ask if you think that the actual funding is enough for Portugal, bearing in mind what is happening in Greece; and also about the BRICS, if you think there is any other way of Brazil helping Europe, since they have also said that they are willing to do that. MR. BORGES: The bad news coming from Portugal is not altogether unexpected, because in many countries, this happens. We go in, we have a certain set of data, and six months later or a year later, as we start working with the authorities, we discover other things.

In the case of Portugal, the surprises were very large, very, very large, and that is a matter of concern not just because of the size but also because it reflects a lack of control which is very, very worrisome. This does give the government the opportunity to put the situation on a clean basis now and say "We are not going to tolerate this anymore, and from now on, this won't happen again." And if this were the outcome, it would be a great step in the right direction.

So I think, as I said, it is not altogether unexpected, but it does require decisive action.

Whether the program is enough or not enough is a different question. We always try to develop programs that are appropriate, but we always try to make them as small as possible, because the program implies more debt. These countries are already with too high debt, so saddling them with even more debt is not a good idea, you see. I have heard people in Portugal saying, "Why not $20 billion more or $30 billion more? That would help us." This is $30 billion that you have to pay in the next three years.

So this is not the point. The point is that essentially, we should have as little finance as possible to bridge the short-term difficulties, and then the real focus must be on the policies to restore market access as quickly as possible, and that is what everybody in Portugal has to get into their minds, that there isn't this unlimited amount of money that comes from outside to solve their problems. This is what got Portugal in trouble in the first place, so the program should be limited.

Now, with respect to what the BRICS can or cannot do, in the case of Portugal, there is an obvious example of how the BRICS could help. Portugal has a privatization program underway which we very much support and which could actually have a big impact on the efficiency of the economy. We understand that the Brazilian companies can use this opportunity to enter into Europe, and if that were to happen, I think it would be very, very welcome.

QUESTION: Just going back to Greece quickly, one of the problems seems to be that they are struggling to meet their requirements because of recession and because of the effect of the fiscal consolidation and also possibly because of the euro zone and wider euro zone problems. Secondly, on private sector involvement, I just wondered where we are on that.And thirdly, is there not a case for a bigger default, because a typical IMF program would actually involve a default, and they obviously have major debt issues.

MR. BORGES: Well, first of all, what are the Greek difficulties? They are very much related to the fact that the Greek economy has been shrinking quite rapidly. So the way we look at it is, as I said before, we have to get the Greek economy back to growth, export-oriented growth, through more competition, a more open economy, more emphasis on productivity and competitiveness and so forth. This has been lacking over the last few years. And if I can be frank on this, we are concerned with what is happening on the budget front, but we are even more concerned with a certain lack of implementation of measures that were designed to get the economy growing again and to make the economy more competitive and more open.

So this is what needs to be done in Greece. In that sense, of course, the Greek program is a difficult program, and there is a lot of opposition to it, but I would like to point out that we have seen opinion polls that show that the majority of the Greek population wants the program to be successful and wants the program to go ahead. So, in spite of all the difficulties and challenges and so forth, this is still perceived by the majority of the population as being very much in their interest.

We have to persist on the right track, and they have to do that; otherwise, I think the alternative is really catastrophic for them.

On your final point which was why not default, period, let's keep in mind that even if Greece were to have a major default, even if Greece were to refuse to pay back all of their debt, which I hope will never be the case, they still have massive needs for foreign financing because they have a very big budget deficit which, even without interest payments, is still very negative, and they still have a current account deficit, meaning that the country depends fundamentally on foreign credit. So the idea that you just default and your problems are solved is very far from the truth.

On the private sector component the Europeans put together a plan for private sector involvement which they found was possible. It does involve, in our judgment, very favorable outcomes for the banking--for all of the investors--let's put it this way--because of course, they will have to commit themselves to Greece for a long period of time, but they would get a fair amount of government guarantees, European government guarantees, and so forth in a way that would certainly be beneficial to them.

This program is still on the books. It may well go ahead in the fall. Our position, though, is that it should never be put in place unless we are confident that Greece is back on track, because we are not going to create a whole series of guarantees and support for investors in Greece only to have Greece get into a major problem a few months later.

So it is only if we are confident that the Greeks will be on track. Only then does this program make sense.

MS. NARDIN: Thank you very much. This concludes our press conference. I want to remind you that Mr. Borges will be in Brussels on October 5 for the launch of the Regional Economic Outlook on Europe.