Transcript

Tokyo, Japan
Tuesday, October 9, 2012

Speakers: Carlo Cottarelli, Director, Fiscal Affairs Department
Philip Gerson, Deputy Director, Fiscal Affairs Department
Gita Bhatt, External Relations Department

Ms. Bhatt: Welcome again to this press conference of one of the IMF's flagship publications, the Fiscal Monitor. We have with us Carlo Cottarelli, who is the Director of the Fiscal Affairs Department of the IMF. Next to him is Philip Gerson, Deputy Director in the Fiscal Affairs Department. Without much ado, I will hand over to Mr. Cottarelli who will make some introductory remarks and then we can take your questions.

Mr. Cottarelli: Thank you very much. Thank you to all of you for coming here for the presentation of this issue of the Fiscal Monitor. We have heard earlier this morning in Mr. Blanchard's presentation that economic growth is weakening and in many parts of the world. This in general will make fiscal consolidation a bit more challenging. However, I would like to underscore this: some nontrivial progress has been made during the last two years, after the increase in deficits and debt in 2008 and 2009.

This issue of the Fiscal Monitor takes stock of the progress that has been made in the last two years in strengthening the fiscal accounts all over the world. Let me first say something about advanced economies, which is where the most urgent fiscal problems are at the moment.

Most advanced economies have made significant progress in lowering their fiscal deficit, the imbalance between spending and their revenues.

The fiscal adjustment in 2011 was of the order of 1 percentage point of GDP. In 2012, for the average advanced economy it was a bit less because of the deceleration of the economic activity, and the fact that when economic activity decelerates revenues come in more slowly. So, a bit less fiscal adjustment. And next year we project a decline in fiscal deficits of about 1 percentage point of GDP.

So, deficits are declining, but not declining enough to stop the increase, on average, in public debt. Public debt is still increasing, as you can see in this chart. But, it is increasing at a slower pace, shown on the left-hand side of this chart, right side for you. So there is further increase in public debt, but at a slower pace. These are averages, and averages, as you know, they hide many things, many details. So, we are now going to have a closer look at what individual countries are doing. Again, for advanced economies. It is not all advanced economies, but most of the advanced economies. And, we can group these countries in the following way. Essentially there are three groups of countries.

Group 1 is the group of countries where public debt is already declining or is stable. In this chart I am going to show you a small fiscal movie. On the vertical axis you will see what the deficit has done in these countries since 2007. On the horizontal axis you will see what the public debt-to-GDP ratio has done since 2007. So, the cumulative change in public debt since 2007. This is the average. So we see that deficits initially increase. Actually, surpluses decline initially, then deficits keep going up in 2009. Deficits and debt increase and therefore this group of countries, you see already in 2010 debt stops increasing and deficits remain constant. And then in 2011 more or less the same. 2012, a decline in deficit, public debt stock increasing and this is what we project for 2013. This is the detail for individual countries. You see essentially a story of initial deterioration in deficits, debt increases, but then it comes to a stop, they manage to stop the rise in public debt.

The second group of countries is not too different from the first group, but it is a group of countries where public debt is still increasing a bit. We see the average, again, same story for 2008 and 2009. 2010, however, you see some increases in deficits and in debt. 2011, deficits are declining, public debt continues to increase, you see the balloon moving to the right. Same thing in 2012. In 2013, we project that public debt in these countries will stop rising.

Again, this is the detail for individual countries.

Then, we have the third group of countries, which is the countries that are facing at the moment the largest fiscal challenges. Again, you see the average going up for deficit and debt in 2008. In 2009, by very large amount. 2010, further increases in the deficit, and public debt. Then, you see the adjustment. Deficits coming down, but debt continues to rise. The balloon still moves to the right. Same thing in 2012. And a bit of the same story in 2013.

Here, you see the detail for individual countries that you see visually. These are countries that are different from the first group, although for some countries, like Belgium, that you find on the left-hand side, this is Belgium, the growth of public debt is going down, but from a still quite high level.

These countries are the ones facing the major fiscal challenges. The overall story, however, is that for advanced countries there is some improvement. The situation remains a bit difficult for these countries. So, given this situation, what is our fiscal policy advice for advanced economies?

Many of the economies will have to pursue fiscal adjustment for several years. The speed of adjustment, which doesn't have to be the same for all countries, depends on three things. First, the larger the size of their fiscal imbalances, countries will have to move relatively faster. Second, the degree of market pressure. Countries that are subject to market pressures will also have to move a bit more rapidly. And, third, the state of the economy. The state of the economy is important if you can avoid a tightening, if you can afford moving slowly because you don't have market pressures, move slowly. That is why our summary recommendation remains, a gradual pace of fiscal adjustment is preferable. It must be continuous adjustment because in the absence of adjustment markets may start wondering about fiscal sustainability, but if there are no immediate pressures, the adjustment should be a gradual one.

Gradual adjustment, among other things, means avoiding a fiscal cliff in the United States. This is a chart that I think I showed you in the past. The vertical bars show the fiscal tightening in the past, starting in 1948. These are years of fiscal tightening. I'm not going to show you the fiscal expansion. These are years of fiscal tightening. This is what would be the magnitude of fiscal cliff if nothing happens. It is about 4 percent. Visually, you can see it never happened before, never happened since 1947, such a large fiscal tightening. This needs to be avoided. For the same reason, it is important to increase the ceiling of public debt. If the ceiling of public debt is not increased in the United States you would have what I would call the mother of all fiscal cliffs. You would have essentially an immediate tightening, would be necessary to bring down the deficit of the federal government from the current level, which is about 8 percent of GDP or a bit more, to zero. It would be a huge tightening. In the context of a plan, of a medium-term plan with a gradual adjustment, this kind of adjustment is clearly too large for the United States and for the world economy in 2013.

Let me move to emerging markets.

The Fiscal Monitor underscores that on average their fiscal deficits and debt are well below those of advanced economies. Here you see the comparison. Deficits are lower, debt levels are lower. And are not increasing. That is why it is entirely appropriate for these economies to pause their fiscal adjustment this year and next year.

In 2010, the adjustment will be sizable for these countries: 1.3 percent of GDP. There was a sizable adjustment in also in 2011, 0.9. This year, on average, there is no fiscal tightening, actually a small fiscal expansion. Next year, nothing much happens. These countries are pausing the fiscal adjustment process, which is fine. We support this. Their fiscal situation is better than for advanced economies. They are also facing a deceleration of economic activity. It is okay for them to pause their adjustment. This is in the short run. We need, however, to keep in mind that for a number of these countries there are important medium-term fiscal challenges. And to illustrate this, I want to show you my last chart.

In this chart you will see that on the vertical axis the primary fiscal balances for these economies, the primary balance is the revenues minus the non-interest spending. You see many countries still have a negative primary balance, which means the revenues are not even sufficient to cover the non-interest spending.

However, in these countries the debt-to-GDP ratio is behaving well, is not exploding, is not increasing, because of strong growth. Which means, however, that these countries that are running large primary deficits are quite vulnerable to a deceleration of medium-term growth. That is why it is necessary that over the medium term they strengthen their fiscal accounts.

I will stop at this point. I would just like to thank you for your attention. We are happy to take questions.

QUESTION: On the advanced economies, and on the three groups, have you seen any migration from one group to the other? Because, I was looking at the most improved group, and I was wondering if historically in the last few years we have seen, or the groups have been stable in the last few years?

Mr. Cottarelli – Clearly, there is migration in the following sense that in 2008, 2009, we saw all countries expanding. So, the deficits in all countries increase. So, in a way, in 2008 and 2009, all countries were in the same group, and then some changed, managed to slow down the growth rate of public debt before others. Why? In part, in good part because the initial position in 2008 was strong. So these countries have a deterioration, a weakening in their fiscal deficit that was pretty large in 2008 and 2009, but then the initial position was stronger. Some of them were running a surplus. Sweden is a good example. Sweden was running a surplus. There was a fiscal expansion, but the level of deficit did not reach a very high level. That is why they managed to contain the growth of public debt and now they stabilized the public debt. That is one important reason. Of course, over time, we hopefully see all countries in the first and second group, all countries will manage to stop increasing public debt.

QUESTION: In some countries in Europe the pressure for fiscal adjustment seemed to increase beyond what is social acceptable, social sustainable. We have seen in Greece, Spain, Portugal even, recently, would you see the breaking point has been reached? What is your advice for countries which are in a better fiscal position, namely Germany? Would you suggest that they could probably afford some fiscal expansion? Germany is expected to have a balanced budget.

Mr. Cottarelli - On the first question, the Fiscal Monitor has quite an in-depth study of this issue of fiscal adjustment and social equality, social implications. We underscore that although fiscal tightening in principle affects in a negative way more the poor than the rich, there are ways to avoid this. The main reason why fiscal tightening affects more the poor is that unemployment goes up when you have a fiscal tightening. So there is a need to have a large safety net to support the unemployed. If you do this, a lot can be done to avoid this conflict between fiscal tightening and support for those who are in need of economic support.

One has also to keep in mind something else, which is the counterfactual: What would happen in the absence of fiscal adjustment? If the implication of the absence of fiscal adjustment is that there is an economic crisis that is even deeper, then you will see that there would be problems even worse than those that happened at the time of fiscal adjustment.

But, by the way, this is an element of why we underscore that if possible, if countries are not under pressure, they should not tighten fiscal policy too rapidly. And this brings me to the second part of the question: What should countries that have already addressed their fiscal problems, by and large, like Germany, do? We at the moment think the current stance of fiscal policy in Germany is appropriate. However, if there was a severe deceleration in economic activity, Germany would be definitely one of the countries that has more fiscal room to support economic activity.

QUESTION: Mr. Cottarelli, on your problem group, group 3 in the advanced economies, which of those eleven give you the most concern? What are the implications of problems in those countries, or even in the emerging market, high-deficit countries? What could happen? What form would an emergency or a market response likely take?

Mr. Cottarelli - I will leave the part of the question on emerging markets to Phil, but in general what we are concerned about is that in the absence of fiscal adjustment markets lose confidence in the ability of governments to pay back their debt. The good thing is that at present, markets still have a lot of confidence in the ability of most of the countries in group 1 to be able to not only service their debt, but also over time to bring down public debt. You have to look at interest rates. One point made in the Fiscal Monitor is that, in spite of the rising public debt, at present for many countries the ratio between interest payments and GDP has actually declined, because interest rates are low. The question is for how long will interest rates remain low? And there is a big risk here that in the absence of fiscal adjustment, at one point you get a bad market reaction. Interest rates rise a lot. And when the public debt is high, a surge in interest rates will have very bad effects on the economy. Essentially this is why we're concerned. But this is a very drastic fiscal adjustment in countries where interest rates are low. Proceed with a medium-term plan, with gradual adjustment, and the fiscal situation will improve gradually. I don't know if you want to add something about that.

Mr. Gerson - For emerging market economies the answer is quite similar to the one Carlo just gave for advanced economies. There are a number of emerging market economies that have debt ratios that are fairly high and still have fairly substantial borrowing requirements. For the most part these countries have gotten away with this and have reasonably good debt dynamics because interest rates have been fairly low, particularly relative to growth rates, which is what matters for the debt dynamics. They can borrow at low rates relative to how quickly they are growing.

I think the risk in some emerging market economies is that of an adverse market response that leads to a big increase in interest rates and would significantly complicate the debt dynamics for those countries. Again, the answer, as Carlo said, is not to engage in some Draconian tightening immediately but over time bring down the deficit and bring down the borrowing requirements.

QUESTION: My question is, what is your advice to the Japanese fiscal consolidation effort? As you know, the Japanese public debt to the GDP is so high, but I think the market pressure to the Japanese JGB is very low. And, some of the Japanese politicians argued that consumption tax rates should not be raised unless the Japanese economy recovers to a sustainable level. What do you think about this idea?

Mr. Cottarelli - The fiscal situation, as you said, in Japan is characterized by a very high level of public debt, and I would add a very high level of deficit. In the short run there is a need to support economic activity in the sense that there is a lot of spending that is related to the reconstruction for the earthquake and the Tsunami. That is why we see a deficit in Japan that is not yet coming down. However, over the medium term, over the medium term, in the absence of fiscal adjustment, it is clear that there would be risks for the Japanese economy coming from this high level of public debt. This is why we think that this increase in the VAT rate was necessary, as a first important measure to contain deficits, and to slow down the growth of public debt. Over the medium term, however, we don't think that this increase in the VAT rate will be sufficient, further measures will be needed in order to stop the rise of public debt in Japan and eventually to bring it down, as I think is necessary over the medium term.

QUESTION: Brazil is in a transition from very high interest rates to a lower level of interest rates, which means that the debt burden is much smaller than has been in the past. What should Brazil do with all the gains? Should Brazil target a lower primary surplus?

Mr. Gerson - Beginning at about August of 2011, the policy approach in Brazil shifted and it shifted to one where the emphasis was on very tight fiscal policy in order to allow the authorities, allow the central bank to begin bringing down the interest rate, which as you know has been historically extremely high in Brazil, which has been extremely successful and in fact there has been quite progress in bringing it down over time. We support a continuation of that process, which is what the authorities envisage as well; that is, maintaining a strong primary surplus and allowing monetary policy to continue to be accommodative.

I think the challenge for the authorities over the medium term is to find ways to increase public saving over time and in particular, as in many emerging economies and in fact many advanced economies, to deal with long-term spending pressures related to population aging—in particular, in Brazil the pension system, but as elsewhere health care costs. But our advice is to continue the policy mix it has now, with tight fiscal and accommodative monetary stance and to focus their efforts in fiscal policy in addressing these medium-term challenges.

QUESTION: What is your opinion about the possibility of Brazil decreasing the primary surplus this year? Because, the economy needs such an amount of fiscal stimulus and even the government gives to the private sector about 40 billion reals, about 1 percent of GDP. Is something interesting, the Brazilian government decreases the primary surplus this year in order to increase the investments for the long-term?

Mr. Gerson - Again our view that the best policy approach for Brazil is the one the authorities are following which is to maintain a high primary surplus and to keep the accommodation on the monetary side.

QUESTION: Could you explain why inflation is not the solution to the problem as it has been in previous generations, allowing inflation to generally rise? Your colleague, Mr. Blanchard, said it was a solution for the euro zone partly, Germany allowing inflation to rise. Why do you not think it is a more general solution?

Mr. Cottarelli - This is actually discussed specifically in the Fiscal Monitor. The Fiscal Monitor notes that unless you accompany inflation with financial repression, which happened in past, which would be more difficult to implement than now, then an increase in inflation would not help, because interest rates would also increase. Nominal interest rates would also increase. The only way to have a major impact on public debt through inflation would be not to increase inflation by 3 or 4 percentage points, but would be a surge in inflation to, say, 30 percent.

Now, you point to a number of specifics in the Fiscal Monitor, but if I remember correctly, if advanced economies increase their inflation rate to 30 percent in one year, for two years, and then they kept it very high in a way in the following years, say at about 10 percent, then after five years the debt ratio would come down by perhaps 30 percentage points. You need that kind of inflation shock, not moderate inflation. I don't think anybody really wants to bring inflation to that level. So it would cause even more problems than the ones being faced at the moment.

QUESTION: Is it a way of tackling private debt? Private debt is one of the biggest problems in the Western economies.

Mr. Cottarelli - Of course, but the same argument applies to private debt. Again, it is through an inflation shock that you manage to reduce debt through inflation. It doesn't work unless you also repress the financial sector, as it happened in the '50s, where interest rates were capped, but is not the situation now.

QUESTION: How does one ensure that enhancing a safety net, that it does not impede fiscal consolidation? No. 2, when one goes into fiscal consolidation, how does one ensure that it doesn't impede on growth?

Mr. Cottarelli - I will answer the second part of the question and Phil can answer the first. Maybe you want to answer.

How can we make sure that fiscal consolidation does not impede growth? The first point that I want to underscore, again, is that have a medium-term plan and move gradually, don't have a fiscal cliff. Move gradually, if you can.

The second point is the monetary policy needs to remain as supportive as possible. This is what we have seen recently. I would like to underscore two things. First of all, it takes time before monetary policy has an impact on aggregate demand. If monetary policy was relaxed in the past, we should more and more see the effects on the economy.

The second point I would like to underscore is that until recently, before the actions of the European Central Bank, the monetary policy transmission mechanism was impeded, was not working very well. Headline rates, monetary policy rates would decline, but in some countries, however, interest rates would remain very high.

Now, with the actions taken recently by the ECB, with the OMT in particular, the interest rates have started coming down, also, in some countries in Europe that are suffering more from the fiscal adjustment. This should also help.

Finally, I would like to underscore the importance of structural measures to boost productivity and to boost competitiveness of some of the countries that are undertaking structural adjustment. In this way, and if all these actions take place, and in general if there is a reduction of the uncertainty about the policy setting, it is possible to reconcile gradual fiscal adjustment with a continuation of the growth process. The first part of the question related to what can be done to reduce the impact on the poor. You mentioned the social net in low income and developing countries. Phil, do you want to say something?

Mr. Gerson - There is actually a significant portion of the current issue of the Fiscal Monitor that looks at this issue of how do you make adjustment occur in a way that is as positive for the income distribution as possible. I think, you can divide the problem into two halves. There is where the money comes from and there is where the money goes.

In terms of where the money comes from, you want to make sure that you have a revenue system that is progressive. That means that you have a limited number of deductions. Deductions tend to favor higher income people at the expense of lower income people. You want to cut back on deductions. You want to cut back on tax evasion. Wealthy people tend to have sources of income that are easier to evade taxes on than lower income people do. So, there are things you can do on the revenue side to make the system more progressive.

Then there are things you need to do on the spending side as well. One key thing is to target subsidies. There is a lot of evidence that subsidies that are not targeted are largely wasted. A large portion of it goes to the rich. You think about subsidies for gasoline, where the people who consume the most gasoline are the wealthiest who have the biggest cars and are most likely to drive.

So, on the revenue side, you want to make sure the money comes in a progressive way.

On the spending side, you want to make sure that spending as much as possible is targeted to the people most at need and you can do that through direct targeting of the subsidies, through better payments of unemployment compensation, and all sorts of issues like that. There is a range of measures that can be taken which are discussed in this issue of the monitor.

QUESTION: Question about China's public debt. China has very low levels of public debt but in the report in 2010 there appears to be a sudden rise from around 20 percent of GDP to over 30 percent of GDP, and then declines again. And there is a footnote saying the authorities substantially revised upwards the end-2010 debt, but there is no comparable revised data. So, is there a problem with the credibility of China's public debt? What is behind this?

Mr. Cottarelli - I think what has happened in 2010, actually, has strengthened in a way, if you want to put it this way, credibility, because there was part of the public debt that was not measured and has come to the surface. The following decline in the public debt ratio is related to the strong growth of the Chinese economy. So, what you see is actually the capability, given this strong growth rate, of absorbing the increase in public debt in 2010 quite easily. Hence, again, the importance of growth over the medium term for all countries, both for growth and for the fiscal accounts.

QUESTION: Do you have any example of a country that managed to reduce its debt levels by fiscal tightening in times of recession? Just wondering what the empirical evidence for countries like Greece, Portugal and Spain is that this could work out.

Mr. Cottarelli - The reality underscored, not in the Fiscal Monitor, but in the WEO, is that it is much easier to reduce public debt when there is growth. The countries that are now facing a recession, difficult fiscal situation, and are implementing fiscal tightening, the question perhaps you are raising is more for those countries. Here, I would underscore, first of all, what I said earlier. In the absence of fiscal adjustment growth may be even worse because of the complete loss of confidence in the ability of the authorities to address the fiscal problem.

The second point that I want to underscore is that when you have a fiscal tightening, you have a temporary decline in growth. The deficit is reduced as a result of the fiscal tightening. Temporarily growth slows down. But once you have done this, then the growth rate will tend to recover. So, it is necessary in many cases to have an initial fiscal tightening that is accompanied by a slowing down of growth, but this does not mean the growth will remain low forever. In this respect, if you look at the euro area in particular, you will see in the Fiscal Monitor numbers showing that the fiscal tightening in 2011 and 2012 is stronger than the one you find in the future. With lower deficits, however, the fiscal accounts will improve, and the recovery of growth that we expect will happen as a result of the lower interest rates and improved monetary conditions will affect growth.

While it is more difficult to implement fiscal adjustment in the absence of growth, fiscal adjustment does not necessarily need to be accompanied by lower growth forever. We would expect eventually growth to recover.

In many countries implementing fiscal adjustment -- I worked myself on a country, for example, about ten years ago, Turkey, which underwent a very deep process of fiscal adjustment because it started very weak, but eventually growth did recover.

QUESTION: I want to ask about the Middle East and especially Egypt. What is your opinion about the economy in Egypt?

Mr. Gerson - Let me address the fiscal aspects of that subject. Clearly, there was a large increase in the fiscal deficit in Egypt, in the Middle East in general, as a result of
Arab Spring and the pressing concerns for expenditure and needs for social expenditure, and the increasing deficit is understandable. Over time those deficits need to come down and we need to move to a more sustainable set of public finances. That is going to require a couple of things. It is going to require better targeting on social expenditure and also going to require efforts to encourage greater mobilization of domestic resources through things like a reform of the tax system, a broadening of the tax base, and other reforms that will allow the authorities there to generate more internal resources, to address it. In addition, in some countries there will be a need to diversify revenue sources away from petroleum. In some countries in the Middle East petroleum still remains far and away the main source of revenue. There is a need for reforms in those countries as well to help diversify revenue sources over the medium term.

QUESTION: Coming back to the euro zone, specifically on Greece, do you see any chance that Greece can return to any sustainable path on debt without any official debt restructuring?

Mr. Cottarelli - The goal of the program with Greece is to restore the sustainability of the fiscal accounts in Greece, and to restore growth in Greece through a combination of structural reforms, fiscal adjustment. Of course, I cannot comment on the specifics of Greece because now, to answer indirectly your question, there are discussions in progress. It would not be appropriate for me to comment when discussions are ongoing.

QUESTION: My question is about Japan and the United States which both have very high budget deficits forecasts, more or less as long as the eye can see. And, you encourage all countries to move toward a primary budget surplus which would require other sectors, I guess, households and corporates, to offset that. It seems hard for me to believe that U.S. households are going to want to increase their relative deficit given that most of them seem to have a lot of debt. I'm not sure about the situation in Japan. I'm curious, just to understand, this medium-term fiscal consolidation in the U.S. and Japan requires significant change to the household and corporate behavior, is there policy suggestions or tax proposals that can help that happen? Or interest rate requirements for private lenders?

Mr. Cottarelli - What I underscored in the past and underscore also today is that, first of all, again, gradualism in fiscal adjustment would help. The second point, monetary policy, low interest rates, and quantitative easing do have an impact on the demand, aggregate demand from the private sector. So, we would expect that as fiscal support is removed gradually, there will be some recovery in private sector demand, supported primarily by this decline in interest rates, which, as I said, it takes time before it impacts, but eventually there is an impact.

This said, as it has been underscored by many, after a financial crisis like the one that affected the world economy in 2008 and 2009, it is clear that the process of recovery is a difficult one, but we think with this combination, a very, very relaxed monetary condition and a fiscal adjustment at an appropriate pace, the basis for a continued growth in economic activity would be set, and that is what we expect over the medium term.

QUESTION: Italy. About taxation, countries have to transfer taxation from direct tax from workers to indirect taxation. In Italy, they are making the change. Is that correct? Or what in general do you think Italy has to do to improve its debt situation and sustain growth?

Mr. Cottarelli - I think Italy has to do what it is doing. We fully support the action of the Monti government in its efforts to reduce deficits, which are proceeding at a very significant pace this year, and, to stop the increase in public debt. Equally important are reforms in the pension system that have been implemented by the multigovernment, as it is shown in the Fiscal Monitor. As a result of these reforms, Italy is in the best situation in terms, across all advanced economies, in terms of facing the pressure from increasing spending in health care and pensions over the next 20 years. The best position of all advanced economies in terms of changes in spending over the next 20 years in this area

Regarding the tax part of your question, you may have seen our recent report, the "Delega Fiscale," that was introduced, in which we fully support the action of the government. Of course, we underscore that over the medium term there is a need to reduce the weight of the taxation of labor, but it takes time to introduce reforms and one cannot expect that in just a few months all the problems that have been accumulated for years, after years and perhaps decades of absence of adjustment, are resolved. So, it takes time. What the multigovernment is doing is the best that can possibly be done in the current circumstances. The actions, the reform process is not over. It will have to continue over the medium term.

QUESTION: Obviously, fiscal revenues to a large extent are a function of economic activity. Economic activity is continuing to slow. Growth is being revised downward. Aren't you possibly a little overly optimistic about your assumptions about future fiscal balances?

A very quick technical question, when you differentiate between gross and net debt, essentially what are you netting out?

Mr. Cottarelli - I will start with your second question, so I won't forget it. We net out for the financial assets only of the government. We don't net out for the real wealth of the government, because very often the real wealth, the real assets of the government, like buildings, are difficult to sell. So we already net out the financial assets of various governments.

Regarding the first part of the question, this is in way more a question for the WEO. The WEO has projections in terms of growth that feed into our Fiscal Monitor projections. As Mr. Blanchard underscored this morning, we do expect a recovery in economic activity over the medium term, boosted by low interest rates and a recovery in economic activity of the private sector. That is our baseline projection. It underscores that there are also some upside risks. So I don't think the fiscal projections that derive from that outlook are particularly optimistic. There are some upsides, there are some downside risks. We regard it as an appropriate projection, as you can imagine.

QUESTION: My question is a general question to you, Mr. Cottarelli. What would be your response to New Keynesian critics of fiscal tightening and austerity such as Paul Krugman and others who have very been vocal in their objections to too much austerity?

Mr. Cottarelli - The position that was taken, that is being taken by Paul Krugman and others, is one that needs to be taken seriously. It is important. People like Prof. Krugman note that interest rates are very low, and at very low interest rates governments can borrow very easily, cheaply, and therefore they should borrow and boost aggregate demand. It is a valid point.

What we think, however, is that a bit missing in this argument is the counterfactual. Public debt levels are very high. So, what happens if all the sudden markets lose confidence in the ability of governments to repair their debt? What happens if interest rates surge? With high public debt an increase, even a marginal one, of public debt, would have very serious consequences for the fiscal accounts and therefore for the rest of the economy. We have seen cases in the last few years of countries where interest rates were very low, public debt was very high. All the sudden interest rates surged, and those countries had to face a severe economic crisis. One has to take into account the risk that this happens when assessing the appropriate fiscal policy.

QUESTION: Very understandable, sir, but the crisis of confidence in, for example, the American economy and subsequent skyrocketing of American interest rates has been projected or warned against several times and it has not yet manifested, as you pointed out yourself. The concern of crisis of confidence is certainly very important, but is it perhaps also slightly overstated, considering how tough fiscal tightening may be for, say, Spain, Greece?

Mr. Cottarelli - I always argue that with respect to the United States, a loss of confidence was the low probability event, something that is unlikely to happen. But, it is an event that if it happens, has a very serious consequence for not only the U.S. economy, but for the world economy. So, in designing fiscal policy one has to also take into account these, if you want to call them, tail risk events that have low probability, but if they happen, they have very serious consequences for the economy.

QUESTION: You mentioned a lot of times that the adjustment has to be gradual. After a couple of years of this in Greece, do you feel it has been gradual? Because a lot of people would suggest that it has been quite strong with the results we have seen, recession after recession?

Mr. Cottarelli - You quoted only part of my position. I said, fiscal adjustment has to be gradual if you can afford it. If you are not under pressure of financial markets. If you cannot borrow from markets, then the adjustment unfortunately has to be much more front-loaded.