Transcript

With Olivier Blanchard, IMF Economic Counsellor and Director of Research Department
Jorg Decressin, Senior Adviser, IMF Research Department
Petya Koeva Brooks, Division Chief, World Economic Studies Division
Rupa Duttagupta, Deputy Division Chief, World Economic Studies Division
William Murray, Chief of Media Relations, IMF
September 20, 2011

Mr. Murray - Good day. I’m William Murray, chief of media relations at the IMF. This is the latest briefing on chapters 1 and 2 of the IMF's WEO. Joining us today is Mr. Blanchard, Economic Counselor and Director of the Research Department, Mr. Decressin, Senior Advisor in the Research Department, and the world economic studies team management, Ms. Brooks and Ms. Duttagupta. Just quick housekeeping. If we have simultaneous interpretation, channel 1 English, 2 French, 3 Spanish, and channel 6 is in Arabic.

Mr. Blanchard will have some brief opening remarks and then we'll take your questions.

Mr. Blanchard. Good morning. As the Managing Director said last week, the global economy has entered a dangerous new phase. The recovery has weakened considerably, and downside risks have increased sharply. Strong policies are needed both to improve the outlook and to reduce the risks.

Growth, which had been strong in 2010, decreased in 2011. We had forecast some slowdown due mainly to fiscal consolidation. One time events such as the tragic earthquake in Japan offered further plausible explanations for a further slowdown, and the initial data, at least from the U.S., initially understated the size of the slowdown. But, now that the numbers are in, it is clear that more was going on.

What was going on was the stalling of the two rebalancing acts, which as we have argued in many previous reports, are needed to deliver what the G-20 calls strong, balanced, and sustainable growth.

So, let me just talk a bit about each one, internal rebalancing and external rebalancing. So, internal rebalancing.

What is needed to sustain growth is that households and firms increase their demand as fiscal deficits are being rolled back. And, what we observe is that this is not going well for various reasons, most of them having to do with bad balance sheets, in effect. Tight bank lending, the legacy of the housing boom, high leverage for many households all turn out to be putting stronger brakes on the recovery than we had anticipated.

Now, let me turn to external rebalancing, again, an old theme of these previous conferences. If domestic demand is going to be low in advanced countries, then those countries with current account deficits--and here we have in mind mainly the U.S.-- need to compensate for it through higher foreign demand, that is the only way to sustain growth. This in turn requires corresponding shifts away from foreign demand toward domestic demand in emerging markets countries with current account surpluses and here we have in mind mainly China.

Now, this rebalancing act is not taking place.

While imbalances narrowed in the crisis, this was due more to cyclical factors than to a structural adjustment of these economies. If we look forward, our forecast is for an increase rather than a decrease of imbalances.

By themselves these developments would have led us to reduce our forecasts, but the problems have been compounded by second major developments, a sharp increase in financial volatility since the middle of the summer. What has happened is that markets have become more skeptical about the ability of policy makers of governments to stabilize their public debt. Worries have spread from countries at the periphery of Europe, to countries in the core of Europe, and then to others. Japan, even the United States. Worries about sovereigns have translated into worries about the banks holding these sovereign bonds, mainly in Europe, and these worries have led to a partial freeze of financial relations with banks keeping high levels of liquidity and tightening lending.

Fear of the unknown is very high.

Stock prices have fallen. This will adversely affect spending and growth in the months to come.

These developments have, not surprisingly, led us to revise our forecasts down. We now forecast world growth to be about 4 percent in 2011 and also 4 percent in 2012. This is down from 4.5 percent for both years in our April forecast. Now, 4 percent may not sound too bad, but, again, the recovery is very unbalanced. For 2011, we see growth of 6.4 percent for emerging market countries, which is a good number, but only 1.6 percent for advanced economies.

As usual, but probably bears repeating here, the forecast assumes that existing policy commitments are met. Otherwise, things could be much worse. Low growth, fiscal and financial weaknesses can easily feed on each other. Lower growth makes fiscal consolidation harder, and fiscal consolidation may lead to lower growth. Lower growth weakens banks, and weaker banks lead to tighter bank lending and lower growth. In short, there are clear downside risks to the forecast that I have given you.

Let me say a word about emerging and developing economies. They're not at the center of the action at this point, but they are clearly affected by it. So far, they have been largely immune to these adverse developments. They have had to deal with volatile capital flows, but in general have continued to sustain high growth. Looking forward, however, they may well face the more difficult environment with more adverse export conditions, and even more volatile capital flows.

Let me turn to policy.

In light of the low baseline, our low forecast, and the high risks, strong policy action is of the essence. It has to rely on three legs: The first leg is fiscal policy. Fiscal consolidation cannot be too fast, as it would kill growth. It cannot be too slow, as it would kill credibility. The speed must vary across countries, the key continues to be credible, medium-term consolidation.

Going beyond fiscal policy, measures which prompt domestic demand, which we explained is quite weak, ranging from continued low interest rates, to increased bank lending, to resolution programs for the housing market, are also of the essence.

This was the first leg.

The second leg is financial measures. Fiscal uncertainty will not go away over night. Even under the most optimistic assumptions, growth in advanced countries will remain low for sometime. During that time, banks must be made stronger. Not only to increase bank lending, which is essential to the recovery, but also to reduce the risks of vicious feedback loops. The ones I've described. For a number of banks, especially in Europe, this requires additional capital buffers, preferably from private sources but if needed from public sources as well.

Let me turn to the third and last leg, which is external rebalancing.

It is hard to see how even with the policy measures listed above U.S. domestic demand can by itself ensure sufficient U.S. growth. Thus, the U.S. must rely more on foreign demand, in other words reduce its current account deficit. Looking at the other side of the world, the number of Asian countries with large current account surpluses, in particular China, have announced plans to rebalance from foreign demand toward domestic demand. These plans clearly cannot be implemented over night, but they must be implemented as fast as can be.

Let me conclude. Only if governments move decisively on fiscal policy, financial repairs, and external rebalancing can we hope for a stronger and more robust recovery. Thank you very much.

Mr. Murray: Thank you, Mr. Blanchard. We're going to take questions from the room and then also from the online media briefing center.

QUESTION: My question is about monetary policy in the emerging markets. You said that some emerging markets can afford to wait and see before taking action in monetary policy, further actions. But, actually, some countries like Brazil they have already taken some actions and they are decreasing interest rates, and others may follow. So, I would like to know your opinion on these developments on monetary policy in emerging markets.

Mr. Blanchard: I'll make some general remarks and maybe Ms. Brooks can intervene for particular countries such as Brazil.

I think this is a case in which one has to first look backward and then look forward. Looking backward, it is clear that a number of economies were very close to overheating last time we met, and some of them are still very close to overheating. So, it is clear that until now, in a number of countries, tightening monetary policy was actually very important to do. Now, we are in an environment in which things are shifting, possibly quite fast. Many of these countries may see a decrease in export growth, may see a decrease in foreign demand, and therefore they have to be ready in some cases to actually change course, not change the principles of policy, but change course, and again adopt a looser monetary policy.

It is going to depend on the state of the country, the state of the exports, so on. But it is clear that in general, we are probably going to see a movement from tightening toward loosening.

Ms. Brooks: If I could add, as Mr. Blanchard mentioned, there are these two sources. In the case of Brazil it is pretty clear the central bank put emphasis on the downside risks of growth which were emerging in the external environment. We have to wait and see to find out what is going to be the impact on domestic demand and on inflation pressures. But we do take some assurance from the fact that fiscal policy at the same time has been tightened, which should help alleviate some of these inflationary pressures.

QUESTION: I wonder if you agree with the assessment of the rating agency Standard & Poor's which downgraded Italy that Italy's main problems are weak government, and weak growth. Also, if you could tell us what you expect the Italian government to do and what do you think they should do? Also, you mentioned lower interest rates. I was wondering if you could tell us if you think that includes the ECB reversing the interest rate increases that they have approved over the past several months.

Mr. Decressin: With respect to the situation in Italy, especially the public finances, I think one should take into account a few things. The first is that Italy's fiscal deficit presently at 4 percent of GDP compares relatively favorably to that of other advanced economies. Second, on our forecast, the deficit will fall to around 1 percent in 2013 and will be substantially lower than that in as that in many other advanced economies. Third, the debt level, in percent of GDP, is on our forecast projected to decline starting in 2013, and by the year 2016 it will actually be slightly lower than that of the United States. Fourth, if you look at the pressures from aging that Italy faces, in a sense it is a society that is already relatively old compared to other advanced economies, and therefore spending on health and pensions is not forecast to increase as much as in many other advanced economies. So you might wonder what is the problem then with Italy? And, the issue here is, the growth rate, which is relatively low. And, the challenge in our view is that the government needs to continue to implement its plans with respect to fiscal consolidation, and at the same time embark on structural reforms to boost growth.

You wondered about our position on the ECB monetary policy. Here, we say that if downside risks persist, the ECB should cut rates. At this stage, it is still a bit early, but there are many indicators pointing in the direction of these downside risks persisting and so consistent with that, if the economy doesn't take a turn for the better, there will be a need to cut rates.

QUESTION: Could you elaborate a little more on the downside scenario you mentioned here in the executive summary, which could throw -- as you say here, the euro area and the United States could fall back into recession. What would bring that about, and since we think the downside scenario is becoming more likely, what sort of probabilities are you attaching to that? And secondly, I was hoping you might be able to take us back, a little over a year ago in Canada, the discussion was all about how to synchronize policies to maximize our growth and the recovery. I'm wondering, given the way things have evolved, do you think the IMF erred in sort of hammering so hard on the fiscal consolidation issue a year ago?

Mr. Blanchard: We considered a number of scenarios in the WEO. In particular, we considered a downside scenario, where we assume there are two shocks. One is another flare-up in the euro zone, which leads to an increase in spreads and an increase in rates. The other one is a further decline in the underlying growth rate of the U.S. economy, which affects not only in the U.S. economy in the long run, but expectations and demand now. As you can see from reading the WEO, we get much lower growth than in the baseline.

I think our position on fiscal, since the beginning of the crisis, has been very consistent. You didn't go back to 2008 and 2009, but I'm quite sure that at the time the clear and present danger was in the collapse of aggregate demand. I think at the time it was justified to argue for fiscal expansion.

As you know, most of the increase in the debt to GDP that we have observed since then doesn't come from fiscal stimulus, but comes from the recession itself. We estimate that the contribution of the initial fiscal stimulus is somewhere between 10 and 20 percent. At some stage, it became clear that there had to be a movement away from fiscal expansion, and I think from the beginning, we have had this consistent message which I'm really tired of hearing myself repeat, which is the need for credible, medium-term fiscal consolidation. What we now are doing is trying to put this in practice, and see exactly what it means for each country; this depends on the initial level of debt, the initial level of credibility, the sensitivity of markets, factors like aging and others, and I think that we still very much apply the same logic in giving advice to the various countries.

QUESTION: First of all, I would like to know about your perspective for Spain. In the WEO you indicate that maybe the government should take new measures to gain those medium-term objectives with the deficit. And also I would like to know the impact on the presidential elections in November in achieving those objectives?

Mr. Decressin - As far as Spain is concerned, like in other economies, we have shaved down our forecast for growth, but actually to a more limited extent than in a number of other advanced economies. We're now seeing growth basically for 2011 actually on track with our old forecast, and 2012 slightly lower, by half a percent.

As far as fiscal policy is concerned, it looks like the target for 2011, which is a deficit of 6 percent of GDP, will be met. But, over the medium term additional measures will need to be taken in order to reduce the deficit to around 3 percent of GDP in 2013.

As far as the presidential elections are concerned, honestly, I have no comment on that. Thank you.

QUESTION: I know that, Mr. Blanchard, you have visited Indonesia a couple of years ago and have seen the use of stimulus policies. How do you think Indonesia this time should cope with the deteriorating global economy? Do you think that Indonesia should implement monetary and fiscal stimulative policies next year? Because our government is planning to do that for next year.

Mr. Blanchard: I think that a visit to Indonesia two years ago does not qualify me as the current expert on Indonesia. So I'm going to allow Ms. Duttagupta to answer.

Ms. Duttagupta: Indonesia, like other emerging market countries, is facing tensions. On the one hand, very strong domestic demand whereby growth is projected to be around 6.5 percent both this year and next year. At the same time, there are these potential negative spillovers from the external side.

We think for now the wait-and-see approach is good for Indonesia, but if the baseline forecast continues to prevail, we think an appropriate time to start tightening policies is toward the end of this year and next year. But for now, a wait-and-see approach is good in terms of monetary policy, simply because it is nimble and it can change course relatively easily.

QUESTION: Two questions if I may. First, about the euro zone. You say in the executive summary that one of the big risks is that the crisis in the euro zone runs away from the control of policy makers. Isn't that precisely what is happening at the moment?

Second question is about the U.K. specifically. You say that countries like Germany and the U.K. which have the ability to borrow cheaply because of their low bond yields should think about doing so, and slowing the pace of fiscal consolidation. Should the U.K. be doing that?

Mr. Blanchard: On the euro zone, you are right. That is the right perception, that policy makers are one step behind the action in markets. And, I think we are very explicit in our messages, both in the WEO and elsewhere, in saying that Europe must get its act together; that they met in July, took a number of decisions as to, for example, the role of the EFSF, and it is absolutely essential that they do what is needed so that this is operational very soon. It is indeed a major source of worry. So you can see us as indeed issuing a call to arms.

Mr. Decressin: Regarding fiscal policy, there are pros and cons in responding quickly to the economy. The pro is, if you loosen up your fiscal policy, you can support activity. The con is that you have actually embarked on a consolidation plan and when you keep changing course very quickly, you can undermine your own credibility. So our view is that policies in Germany and the U.K. should only be loosened if growth really threatens to slow down substantially, relative to what we are forecasting. For as long as our forecast seems to pan out, there is no reason to change fiscal plans.

Mr. Blanchard: Let me make a more general remark about fiscal policy. When things turn out worse than expected, I think the first reaction should be to allow what we call automatic stabilizers to fully function. In the case of the U.K., these are very powerful. There is a moment at which things are so bad, if they get there, when you actually have to revise your plans. We do not think that the UK is quite there yet. .

QUESTION: Can you give us some sort of idea about the timeline we're talking about here, about the risk of the downside scenario? Differentiating between perhaps the U.S. timeline and then Europe, are we talking about days, weeks, months or does Europe have years?

Secondly, you say that European banks in particular must accept, I think the phrase you use is, must accept injection, capital injections. That seems to be code for mandatory recapitalization.Am I interpreting that wrong?

Mr. Blanchard - Let me have a go at both questions. When could things go wrong? Any time. We had two flare-ups in the last two months, and we could have more, and they could be worse. I think the implication is that we don't know. Maybe it doesn't happen, maybe it happens in a long time, maybe it happens sooner. The implication is policy makers don't have the luxury of time. And, again, going back to full passage of the EFSF, it is really essential that it be there as soon as possible and other measures also be ready to be implemented if needed. We cannot assume that we have another three months or six months or a year.

On the capital injections, you will get a more detailed discussion tomorrow when the GFSR is presented. But, our view is that in the current environment in which there is low growth, and therefore the likelihood of increasing nonperforming loans, together with uncertainty about sovereign bonds, it is important for banks to be well capitalized. Now, banks have two ways of increasing their capital ratios, they can do it by decreasing the assets that they hold or by increasing their capital. We are very worried that they are more likely, in the absence of measures, to do it by decreasing the assets they hold, by deleveraging, which would lead to decrease in bank lending and a credit crunch. And therefore, we think the right way of responding in this case is to increase capital.

Now, we think it would be much better for the banks to do it through private funds. But, it has to be that if they do not do it through private funds in some cases, it makes sense to force them to accept public funds to recapitalize.

QUESTION: I have a question about the government bond purchases of the ECB. In your report you say the ECB should go on intervening in the markets. The size of the bonds already purchased is now double, almost double the capital of the ECB. First question. Do we see a limit to how much the ECB can purchase on the markets? Second, given this scenario, what happens with the ECB going on to lose credibility?

Mr. Decressin: We see no signs that the ECB is losing any credibility. Inflationary expectations are very well anchored. Inflation itself in our forecast is expected to decline well below 2 percent in the year 2012. The interventions of around 140 billion euro is very small compared to the size of European GDP. And in our view they're essential in order to maintain orderly conditions in sovereign bond markets that facilitate a pass through of monetary policy to the real economy. If that pass through doesn't take place, then growth will just get worse and with worsening growth, there will be weaker banks, and there will be a downward spiral in European activity. We believe that the ECB is doing absolutely the right thing. Moreover, it is intervening especially in those bond markets where governments are adjusting, so we even have what we call an incentive-compatible solution in place, meaning we are seeing those governments being helped that are also actually helping themselves.

Mr. Blanchard: Let me add something to this answer to the previous answer Mr Decressin gave about Italy. Mr. Decressin gave numbers for the budget in Italy which are quite impressive in many ways, and if Italy implements these measures, and is able to borrow at a relatively low rate, then we think that debt in Italy is sustainable. If, for some reason, the markets start believing that Italy's debt is not sustainable, and starts asking for interest rates of 8, 9, 10 percent then it is clear that Italy's debt is not sustainable. This is what we economists call multiple equilibria, but it is a very simple thing to understand. In this case, it is absolutely essential that somebody be there to make sure that the interest rate is low and that Italy's debt is sustainable. At this stage, this role is played by the ECB, and that is a very important role for the ECB to play.

QUESTION: How do you see the economic performance in the Middle East in the short and medium term in light of uncertainty in the global economy, and regional unrest? What countries do you think need help to adjust their fiscal policies and to overcome economic challenges?

Ms. Duttagupta: Overall, for the Middle East and North African region, we expect growth to slow down slightly from about 4.4 percent to 4 percent this year, and furthermore to 3.5, there is quite a bit of difference between the oil exporters on the one hand and the oil importers, and also those that underwent very deep social and political turmoil.

For the oil exporters—given our forecast of still very strong commodity prices, although with a little bit less momentum for this year and next—we expect them to have strong fiscal and current account balances, but the opposite holds true for countries that are importing commodities, and those undergoing very protracted political transition to stability.

In terms of needs, the urgency is to bring in place political stability, and then put fiscal policies on a sustainable footing and also put in place the broad institutions, and structural reforms needed for a more inclusive growth agenda that would attract private sector jobs, and support the fast growth of labor force in the region, and reduce unemployment, including for the youth.

QUESTION: They say that the BRICs may cooperate to support the troubled European countries. I just wonder, in your view, what do these troubled European countries really need in terms of external support out of Europe?

Mr. Decressin - I think first and foremost the troubled European countries need to help themselves. So, they need to implement strong fiscal adjustment programs, and as they're implementing strong programs, they can count on external support first and foremost from the European peers, but also from the IMF. That for us is absolutely critical.

QUESTION: On the question of commodities, you make the point just now that commodity prices remain robust, but in the scenario that there was considerable downside in the emerging markets, particularly Chinese growth. What impact do you feel that would have on the commodity market, the oil price but also other commodities?

As a supplementary to that, growth in sub-Saharan Africa, for example, has been quite impressive over the last two or three years. If commodity prices came under pressure, just how serious do you think that would be for the sub-Saharan economies, and do you believe that they're actually now sufficiently restructured to be able to take significant pressure on that front?

Mr. Decressin - Growth in emerging economies has a very important impact on commodity markets, because their growth is, especially, more energy intensive. In our downside scenario, for example, you find that GDP in emerging Asia is lower by 2.5 percent relative to our WEO projections and this will be consistent with the drop in oil prices of around 25 percent.

At this stage, though, because of the strong growth that we keep forecasting for the emerging economies, we do not see such a downside scenario materializing for oil prices and that is also why oil prices are still relatively high and other commodity prices as well, although they have of course retreated from the peak they reached in April/May.

As far as sub-Saharan Africa, I will let Ms. Duttagupta respond.

Ms. Duttagupta - On the baseline, you are right that strong commodity prices are helping growth among the oil and commodity exporters in sub-Saharan Africa. Besides, other factors that are expected to help maintain growth momentum over 2011 and 2012 are still accommodative macroeconomic policies; and second, they have also reoriented their trade more toward other developing and emerging markets, including China and India. So to the extent our forecast assumes that in some of these bigger emerging markets there is enough policy space to support domestic demand should external risks start materializing, that will pull ahead many of the other developing countries, including sub-Saharan Africa.

Mr. Murray - I'm going to take a question from the media briefing center. I believe it is about some research that Mr. Decressin has published in the latest WEO. Can you provide a little more detail on this research about how equity prices can predict recessions? And, expand on how seriously you take the notion that, according to that, the U.S. has a 38 percent chance of Q3 recession, the U.K. a 17 percent chance, and France a 18 percent chance.

Mr. Decressin - What we're doing in this research is basically establishing a relationship between whether or not there is a recession in a country, and whether or not there has been a large fall in equity prices that took place more or less at the same time. That relation suggests that given the drops in equity prices that we have seen so far, the chances of a recession in the U.S. would be 38 percent, and then 18 and 17 percent in the U.K. and France, respectively. This is a purely an econometric relationship based on past behavior of stock prices and recessions. One has to be very careful in bringing this to today and making a judgment on the economy today. Whether or not there will be a depends on many other factors, especially what happens to policy. What happens to policy in the United States and the euro area, will be of much more importance than what has happened to equity prices over the past few months.

Nonetheless, the sharp decline of equity prices and the volatility in financial markets is of course a source of concern for the global economy.

Mr. Blanchard:- An old, tired joke which comes from Paul Samuelson is that the stock market has predicted nine out of the last five recessions, and I think that has to be taken as an indication that the stock market has information but it doesn't know everything.

QUESTION: Can I ask in French?

(Interpreted).

(No interpretation provided).

Mr. Blanchard - Here we have a problem, which I understand your question, but Ms. Duttagupta is the one who has to give the answer. The question is whether instability in the MENA may have implications beyond the MENA for the world economy?

Ms. Duttagupta: What we saw in the spring of this year give reasons for your concerns. Indeed instability in the MENA region led to a sharp increase in oil prices. However, there was good response from the OPEC which helped basically attenuate the effect. That said, continued or a sudden increase in instability in the MENA region continues to be a downside risk for the region, and therefore for the rest of the world, by propagating through higher oil prices in particular.

QUESTION: Can I ask about the IMF position about the situation in Greece, and how it is developing, according to the latest articles from Mr. Roubini that he raised again the question of leaving the euro zone.

Mr. Decressin - As far as we know the Greek government is fully committed to staying in the euro area. Its euro area peers are fully committed to preserving the integrity of the euro area. The government is intent on implementing a strong adjustment program, a review of which we are now in the process of assessing with them. And, the European partners of Greece are committed to helping the country for as long as it is helping itself in the context of the program. So this issue really for us does not arise.

QUESTION: What further do you think needs to be done to underpin the euro besides the call to arms on implementation of the current program? I'm thinking in particular about what the IMF supports further enlargement of the financial stability facility, and the idea of eurobonds?

Mr. Blanchard: I would say that in the list of things we would like to see in Europe, the first one is implementation of what was agreed to in July, which seems to us to be terribly important. The second is the increase in capital buffers of banks. We discussed it already. Then, clearly, you want to put in place a fiscal structure which makes sense for the future. This is not fighting today's fire, but it is preventing future fires.

Actually, there is progress. There is the so-called six-pack set of measures, which establishes surveillance of both budget and macro developments. And that should be put in place as well. It is not going to make a difference in the next week or month, but it is essential.

On the eurobonds, our position is that it would be premature to issue a eurobond before the previous item, namely a good system of surveillance is in place. You cannot give the right to a country to just borrow at the same rate as you do without having some control or some interaction as to what it is doing is right or not. It is probably a good idea for later. It is not a good idea for now.

QUESTION: There is a continuing debate on whether to tame inflation to restart growth rates in such a developing country like Vietnam. Right now, the inflation rate in Viet Nam is almost 20 percent, and the interest rate is also 20 percent. The problem is that the depositors expect that inflation will increase more in the future so that they want to decrease interest rates but they cannot. What should a country like Vietnam do in such a circumstance? Do they loosen monetary policy right now, or keep on tightening?

Ms. Duttagupta: Our assessment is basically that the priority for Vietnam should be on tackling very high inflation. It is, as you mentioned, facing very high inflation pressures and that should be the priority. And, growth has been reasonably good, and monetary policy should continue to be on the tightening phase.

QUESTION: Latin America seems to lead growth in this month, like the WEO says. What is your opinion of the regional initiatives they are taking in these economies to tackle this crisis in advanced economies like promoting traditional commerce initiatives and new financial instruments, like Banco del Sur, or to promote local currencies for international commerce in the region.

Ms. Brooks - The Latin American region has weathered the global crisis very well, partly because of the policy response and the very good use of policy space in many countries. Another reason is that the region itself has become very interconnected with the rest of the world and within the region itself. Latin America has benefited from the very strong commodity prices, and indirectly from the very strong growth in emerging Asia. But on the other hand, it has also benefited quite a lot from growth in Brazil and the positive spillover effects into neighboring countries.

So, from that point of view, when we are in a world where the external environment is getting worse, regional arrangements and regional initiatives to promote trade would definitely have a beneficial effect on growth going forward.

QUESTION: There are many economists and analysts who think that a breakup of the euro zone is now a reasonable scenario, that it is no longer just a crazy scenario. I was wondering why you did not put this in the WEO, and how you would assess the risks for the world economy if this event should come through.

Mr. Decressin - The Europeans are fully committed to making the euro area work. This is, as you well know, more than just an economic project. It is also a political project. And moreover, for the most part, it is still working reasonably well and far away from any scenario that would be close to one that you are contemplating. For us, we are seeing the adjustments, for example, in the peripheral economies taking place. The program with Portugal is advancing well, with Ireland is advancing well. You see the adjustments now happening also in Spain. In Italy. And, in this respect, the program with Greece still under the review is a relatively small part of the euro, a problem that is imminently manageable if the right actions are taken. We still think it is a crazy proposition to think about the breakup of the euro area. That is why it is not in the WEO.

Mr. Blanchard: Let me take a bit of a risk and add something to the answer. The usual answer is that we don't deal with hypotheticals, which is the easy answer. It is clear that if it were to happen, then it is clear that policies would be needed to ring fence the other countries, the other European countries at risk. That would be absolutely essential.

QUESTION: Amid today's high uncertainties, if you have 1 billion U.S. dollars, I wonder where would you invest it, to hold in the dollar, to buy euro, or to buy gold, or euro government securities, or else why? Secondly, in your perspective, are the short-term solutions taken by advanced economies, including providing liquidity, strong enough to solve the long-term and structural problems and boost weak demand and confidence?

Mr. Blanchard: On the first question, let me indicate that I am not an investment advisor, so I'm not going to tell you where to put your money… More seriously, it is clear, and we saw this with the downgrade, the S&P downgrade of U.S. bonds, that we may have entered a world in which there is no longer a truly riskless asset. Many strategies, many portfolio strategies based on the existence of some riskless assets and then some risky assets have to be reconsidered.. This means that the allocation of portfolios over the next months and years will be different from what it was in the past, maybe more volatile, and that is a factor we have to take into consideration.

QUESTION: I've lived in Japan for the past 20 years and we know that when you have a major asset bubble and problems in the financial system, you tend to get a balance sheet recession, you tend to get very slow real growth, even despite heavy fiscal incentives. So, my question is, can the United States and Europe avoid a lost decade Japan style? And if so, how?

Very briefly on the emerging markets, your forecast of 6 percent, I think, seems rather on the optimistic side. Are you assuming there that essentially domestic demand in the emerging markets is going to sustain that level of growth?

Mr. Decressin - On the lost decade, we are three years into a very sluggish recovery, so there are now seven years left. If strong policies are being implemented this can easily be avoided. In Europe, and we talked about the increase in capital of banks in Europe––recognizing the problems and dealing with them, that is one of the lessons of Japan. We talked about the need for the U.S. to put in place a medium-term fiscal adjustment program -- another lesson of Japan -- a medium-term fiscal adjustment program so that they can in the short run support the economy through such useful measures as there are in the American Jobs Act. And, if there is a general sense that policy makers can actually deal with the problems, then the lost decade can be easily avoided.

Let me come to your second question, which is about emerging economies.

We are forecasting around 6 percent growth. In our previous WEO we were expecting that many of these economies had to tighten both on the monetary front, and on the fiscal front. Now, with less external demand, what many of these economies can do is they can pause the tightening on the monetary front and still achieve a relatively higher growth rate. So that is what is underlying our forecast.

Mr. Blanchard: Let me add something about the lessons of Japan--which were lessons similar to those drawn from looking at the aftermath of many other financial crises. After a financial crisis, after a boom/bust in asset prices, you have serious balance sheet problems and you have many years of balance sheet repairs. That is what we saw in Japan and that is what we're seeing here. I think we're now better informed as to what implications this has. So, for example, the measures about increasing the capital of banks, resolving some of the problems in the housing markets seem to us to be essential, and hopefully will avoid that kind of outcome.

Mr. Murray - On that, I would like to wrap up this press briefing. Thank you all for joining us. Mr. Blanchard, Mr. Decressin, Ms. Brooks, and Ms. Duttagupta, thank you all for coming.