October 20, 2007
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MR. AHMED: Good afternoon and welcome to this press conference of the IMFC. I have here the chairman of the IMFC, Mr. Padoa-Schioppa, the Managing Director of the IMF, Mr. de Rato, and the First Deputy Managing Director, Mr. Lipsky. The chairman and the Managing Director will make some opening remarks and then they will take questions from you.
MR. PADOA-SCHIOPPA: This is a very intimidating place. I will try to expose quickly and leave the floor to more expert persons, persons who are unfortunately about to leave this place. So, since my role is to illustrate the communiqué, that the IMFC has just approved let me start with paragraph 18 of the communiqué on page 5, which is summarizing in a few lines, to my mind, outstanding achievements that the Managing Director sitting here to my left, has been able to obtain in a very short, I would say, too short tenure of the position as Managing Director.
There is a list of at least six important achievements. Mr. de Rato has been the architect of the Fund's Medium-Term Strategy. He has deepened the integration of the financial sector issues into the Fund's framework, my former colleague, Mr. Caruana, having been and being the key person in this respect. He has launched the reform to strengthen the voice and representation of low income and emerging market countries. We will come to that in a moment. And, he has relaunched the definition and role of bilateral surveillance and introduced multilateral consultation procedures. And finally, triggered work on a new income model. I must confess that only when reading the draft of this paragraph I got the magnitude of the achievement, Mr. de Rato. So let me say that this is a sad day for the IMF, what should be of great satisfaction for you.
We did not spend the whole morning discussing this paragraph, because there were no disagreements on those six points.
We spent more time on two fundamental items of the agenda. One, the global economy, and financial markets outlook, risks, and policy responses. And the other, paragraph 10 of the communiqué, the implementation of the IMF's medium-term strategy, and the priorities ahead.
I will quickly go through the paragraphs. They are for the first part on growth, on the way central banks have acted and are acting in this conjuncture on the lessons to be drawn from the financial market turbulence of the summer, one on topics on which standard setting bodies, the Financial Stability Forum, the bank of international settlements, and the IMF should work. On the basis of this experience, work that the IMF, paragraph 6, should do in the field of financial sector issues, in particular. And then, paragraph 7, on growth in the medium term, structural reforms, and further liberalization of the economies.
On global imbalances, paragraph 8, where the notion of shared responsibility is spelled out trying to define what the United States, what Europe, what Japan, what emerging Asia should do. What emerges from this first part of the communiqué is a, I would say, mixed view, positive in the sense that the turbulence has been successfully countered by timely and determined action of central banks. And, in the sense that the prospects for the global economy remain good. But, mixed in the sense that the turbulence has revealed a number of problems that may be deeper than the specific episode that triggered the tensions. There are developments in the financial system which are like genies which moved out of the bottle and are hard to follow, to understand. There is a clear need for supervisory bodies, but even for the very financial institutions which create these new instruments, to understand better what their creatures are doing out in the market. And this is clearly reason for concern. And, also, in the macro sense, the anxieties that may exist as to the link between this turbulence, the general conditions of very abundant liquidity around the world, and the existing imbalances and the process of correcting them.
But, I would also say that all these are problems that are being experienced in a condition in which the sense is that economies are strong, and more resilient than they have been in past periods of financial tensions.
I move to the second part of the communiqué, which deals with implementing the medium-term strategy of the Fund. Paragraph 10 is devoted to the quota and voice reforms, paragraph 11 to the income model, and paragraph 12 to surveillance, 13 to policy advice to emerging market economies, 15 to Bank-Fund relationships. Of these various issues, the first two covered by paragraph 10 and 11 were those on which most of the discussion in the morning and over lunch has concentrated.
On quota and voice, you will find a text which I think shows clearly how much progress has been made after Singapore, and in my view, allows to consider now very likely that in April, conclusions should be reached on this important topic.
The key elements of this progress are that on the formula, one can say that the key issues here are the formula, the size of the increase, the question of the shift on whether there should be a shift in total share from advanced to emerging and developing economies. And, how low-income countries would emerge from this exercise. Now, on this, on three of these four items, clear progress is made. It is stated that there will be a shift in influence from advanced to emerging economies. There is an order of magnitude of the size of the total increase, order of magnitude, order of 10 percent, which is a huge increase compared to what seemed to be a big increase, the one achieved in Singapore, less than 2 percent. And, there is an indication that basic votes would be at least doubled. On the formula, which is the most obtuse part of the whole exercise because it is full of parameters, but each party has in mind only one thing, but translates quickly what the parameters means for its own position. There is the important indication that GDP will be the most important variable in the formula, and that PPP should play a role along with a compression factor.
I assume you are more or less familiar with these issues. If not, you will guide the rest with your questions. But, this little set of propositions, I think, was an important success, first because it meant a clear endorsement by the ministers of the work that the Board had done in the past months and weeks, and so it firms up that progress. And, also, it has the merit of consolidating process while leaving unprejudged the parts of the negotiation and the search for an agreement which requires further work. It is very difficult in a negotiation to state intermediate results, but this is exactly what I think the committee has been able to do.
On income, the Crockett report, which was another initiative launched by the Managing Director, was welcomed as the basis for the development of a new income model. Here, the essence is, to my mind, the link between income and expenditures. And, getting to a budget approach in which a new method will be developed for both sides of the budget. It would have been probably very unwise to approach one side without approaching the other. And, I think there will be specific proposals ready for consideration by the IMFC in our spring meeting.
I would stop here, just saying that having attended many meetings of this committee in the very relaxing chair of a back-bencher of a minister, not in the chair, I was pleased to chair a meeting which has achieved very promising results.
MR. DE RATO: Thank you, Mr. Chairman, for those very overly generous words. I want to also express my thanks to the committee, to the IMFC, for a very warm farewell that I certainly don't deserve. Let me welcome Mr. Padoa-Schioppa to his first IMFC press conference, and congratulate him on making the first meeting so productive. He showed that he has a lot of experience and capacity to guide consensus, which is a crucial role for whoever chairs the IMFC.
I would like to add a few points, just a few points, to what the chairman has said.
First, regarding the global economy, as you can read in the communiqué, the global economy is expanding from a solid foundation, held currently in particular by emerging economies and developing countries. Certainly, as I expressed here last Thursday, the recent financial market turbulence remains a cause of concern, and bears close monitoring, and I think what that was expressed today by all participants, and central banks in industrialized nations have acted appropriately by injecting liquidity in the system, and certainly the IMFC welcomes their continued vigilance.
As the chairman noted, the IMFC had a useful discussion on the lessons emerging from the recent turbulence and encouraged the institution working with others to analyze and distill lessons from the current turbulence, to identify and address information gaps, and to provide a forum for discussion and action.
I think that we all recognize that looking at these issues from a multilateral perspective will be important to help ensure that we preserve a strong global financial system and I think this was stressed by many ministers today around the table.
Also, you would see in the communiqué that in our reform agenda, our Medium-Term Strategy, there are many issues mentioned in the communiqué. I think that today's meeting, as you can see in paragraphs 10 and 11, I believe, set very good floors for the next few months, in terms of consensus on two very important questions: the governance of the institution and the income model of the institution. I want to emphasize that the dynamism of the IMF is very well shown in the very deep areas of reform that is contemplated and successfully implemented at the same time, surveillance, reform of quotas and governance, internal issues like income and budget, and also important questions like multilateral consultations and financial sector analysis. I think that shows the very excellent quality of the institution.
I think that, as I mentioned this morning, since the spring meetings, I highlight to the ministers the agreement by very broad consensus of our new surveillance decision. This is the first time that we have a comprehensive policy statement on bilateral economic analysis by the Fund, and I think this is a very important milestone in the efficiency and in the guarantee of evenhandedness of the institution.
Let me conclude by underscoring the commitment of the institution to low-income countries. And, the efforts that we are doing in helping those countries to reduce poverty. I think this is reflected in many instances in this Medium-Term Strategy, and is being endorsed clearly by the IMFC in the communiqué today, and also in the historic decision in Singapore, to guarantee that the voice of low-income countries will have a stronger sound in the IMF in the future. Thank you very much. And, I hand it over to you.
MR. AHMED: At this point, we will take questions. As always, please identify yourself and your affiliation.
QUESTION: Mr. de Rato, since you have only have a couple weeks left and you have this important multilateral responsibility still, and this important post that you hold, and since you have been finance minister of Spain, I wonder if you thought of a parting gift of saying allowed loudly, that Europe should consolidate and the chairs and shares should be combined within the euro zone, and that this would break the deadlock over governance, and in fact give Europe a greater, albeit somewhat smaller, voice in the Fund. I wonder if Mr. Padoa-Schioppa has views on that as well.
MR. DE RATO: That, of course, is a question up to the Europeans, and I have a very strong respect for all the members of the Fund, all the countries, and it is a decision they have to make themselves. What I have seen clearly is that the institution needed to update its governance structure in terms of giving more voice to more dynamic economies and to emerging economies as a whole, emerging and developing economies as a whole. I said only a couple of minutes ago, it was an historic decision in Singapore to enhance the voice of low-income countries. Of course specific questions about specific countries, of course you have to understand I will not position myself.
MR. PADOA-SCHIOPPA: I don't have to say, it is enough for me to repeat it, because I have said it already in the past, orally and in writing, the IMF includes the word monetary, the EU has one money, it should consolidate. Of course, it's difficult for many reasons, one of them being the fact that not all the issues that come on the agenda of the agenda of the IMF or in the competence of the IMF are technically speaking a European, EU competence, according to the European treaties. In fact, not even positions of the member countries, on the IMF issues, are necessarily harmonized as it happens with trade issues, where Europe is the single negotiator on trade matters.
So, it is a complex process. I'm not the only one among the ministers to think that, to think that a move in that direction would be desirable, would, in fact, make Europe more influential. And would be consistent with the fact of having a single currency. But, we did not discuss that today in the meeting.
QUESTION: I refer to paragraph 4. In particular, to the genies which moved out of the bottle. And lessons to be learned. The phrase lessons to be learned always means that something has come pear shaped. I'm not sure whether this is a question which you want me to ask, but I'm going to ask it. Did you discuss or are you discussing or will you discuss the scandal of the massive untaxed, corrupt, off balance sheet transactions which take place, off balance sheet, which we know about, and which are the fundamental underlying cause of the disturbances which are taking place? And, why are you discussing, why do you use the word, the adjective new in respect of the challenges which need to be properly addressed at the end of paragraph 4, when if what I'm referring to is what you are referring to, they are not new?
And finally, when will the Wanta settlement of 4.5 trillion be paid?
MR. DE RATO: I don't know what settlement you are referring to. But what I understand from your question, first of all, there are some new challenges, no question . Some new challenges because of the circumstances that happened in August, have created new challenges by definition, the markets, the liquidity of some markets did not happen before August. And, that is a new challenge, but also, I think, the new challenge has a broader sense, of the new challenges that the new globalization is producing, which is linkages and is also the fact that there are new instruments that have been very useful in spreading risk and reducing the price of risk, but at the same time is clearly that those new instruments pose questions of transparency, pose questions regarding off-balance sheet operations, pose questions of due diligence by investors, pose questions of the rating, understanding of ratings, and just to mention a few.
There are new things. New things because of the change in the global environment because of the credit crisis of the summer, and there is new things because the markets have innovated in such a way in the recent years that this test that the markets have produced, have endured, is producing new questions, no question about it, that we are facing new issues. At the same time that we also face new opportunities.
QUESTION: May I ask Mr. de Rato if he would be kind enough to either tell us now or agree to give us in writing afterwards a list of the signatories and the signing date of the central bank gold agreement, and also to say whether he believes that the IMF will meet its target of 500 tonnage sale of gold for this-year, pursuant to that agreement?
MR. DE RATO: First of all, the IMF doesn't have any target this year, as far as I know. And, I don't think I will have missed that issue.
It is true that in the Crockett report there is a reference that part of the new income model could be a selling of up to 400 tons of gold, and that if that was agreed, something that has not yet been agreed, that will be done by the IMF, that is the advice of the Crockett group, that should be done by the IMF getting itself in conjuncture with the agreement of the central banks in the sale of gold. All that has not yet happened and that is part of paragraph 11 when we talk about the income model. If the income model will or will not include this, is something that I still don't know, and nobody knows. Even if it does include, how it will be implemented, that would depend on how the markets are, the Crockett report says very clearly and I think the Board also agrees, that whatever decision the IMF makes on gold, it should do it in a way that it doesn't affect the markets, it doesn't go against the markets, and it doesn't influence badly the functioning of the markets. And, that makes all the sense, because one of the third holders of gold in the world is the IMF. The IMF is not interested in disturbing the markets. All that is conditional. You will have to wait until the Board gets an agreement, hope it will get it soon, and then you will have to wait until it does implement it. If it does implement it following the Crockett advice, which I think is good advice, but if it decides to do so, then it will get in contact with the central banks, and, well, see what are the plans of the central banks in selling gold in that specific year and how can the IMF needs be fit the into that. But all that is too soon to say.
You have to ask them. I don't know. That is an agreement between central banks. As far as I know, it is public. Everybody knows about this agreement, because it has been on for years.
QUESTION: Regarding the quotas and voice question, you have reached the agreement today that you would have a target to increase the total quota by 10 percent. And you have also specified that you would desire to increase the overall percentage share of the emerging and developing economies taken together. But, of course, within that 10 percent you could have quite different shifts in relative voting rights between the industrialized economies and the developing countries. Some proposals I have seen, for instance, within a, the bounds of another 10 percent increase, would only result in perhaps a 2 percent shift in the percentage of voting power from the industrialized world to the developing world. I would like to ask Mr. de Rato for a personal view, of whether you believe that an adequate transfer of the shift of the percentage of voting power would be about 2 percent, or whether you would seek to see something more ambitious come out of the final agreement?
MR. DE RATO: First of all, I want to say that today there has not been any final agreement. Today, we are in an interim moment in which the committee takes stock of some issues that have been temporarily agreed, but as you know very well, and as the chairman reminds all of us this morning, in this negotiation, nothing is finally agreed until everything is agreed. So, what we see today is advances that countries agreed conditionally that they will come to a final total agreement in a few months.
You are asking me to prejudge what will be the decision of --
QUESTION: I'm asking for your personal view on this.
MR. DE RATO: What I think would be desirable is for the IMF to find a consensus to modernize its governance and that consensus was starting to be defined in Singapore, today I think in Washington it is more clearly defined. I think that consensus includes certainly that there will be an increase in the voice of emerging economies, and developing countries as a whole. How that will come about, it is up to the countries to agree. And I can assure you that whatever they agree, if that consensus occurs, I will be happy.
QUESTION: I wonder if you would reflect or comment on the communiqué of the Group of 24 of the developing countries, which seemed to suggest that the world economy is endangered more by regulatory problems in the advanced countries. They seem to suggest that it is the IMF that dropped the ball, and that the regulatory bodies in the advanced countries that overlooked problems that were emerging, after the advanced countries were lecturing them, the developing countries, about their practices. Did you read it that way, did you hear comments to that effect in your meetings, and what are your thoughts?
MR. DE RATO: Whatever the G-24 said is very clearly stated. I'm not going to make an interpretation of that.
As far as our surveillance, I just want to put to you two examples. If you have the patience of going to our GFSR of April, and you read it you will see that in April, we were already very clearly stating our worries about the subprime segment of the United States market and the credit liquidity deterioration; the increased use of leveraged loans as part of financing also poses risk to intermediaries; the wider market for structural products, particularly asset-backed securities collateralized debt obligations, may start to see a deterioration, and other consumer credit markets could experience losses. So, of course, I'm not arguing with the G-24, or with any Gs, but that was said by us already in the April 2007 Global Financial Stability Report.
Later, on that, just to put to you an example, in the G-8 meeting in Germany, I, of course, in the name of the Fund, made the clear statement that we were worried about the complacency and the quality of some of the deals that were being done at that time in the markets.
Of course, we have been following in our bilateral surveillance with the developed economies, the United States, the euro area, and others, these issues on different occasions.
That is not to say that, as we have expressed, there is not a thing that we have to learn from what we have seen in recent months. And, I think that the process of learning started very soon here, and I encouraged you to look not at the April GFSR but the September GFSR, to say what are the lessons that we're drawing. And we have really identified four areas of reform.
Information and transparency, the incentive structure on the markets, the role of rating agencies and rating methodology, and the relevant parameter of risk consolidation across products for banks. And I think very clearly we have, before and after, been vigilant and outspoken on these issues, and we will continue to do so.
QUESTION: Perhaps Mr. Lipsky can comment on this, because this is with an eye toward the future.
One number: 416 trillion.
I'm going to repeat that number. 416 trillion.
That is the number given by the Bank of International Settlements in their last report, on the estimated value of the number of derivatives that have been written. Most of those counterparties expecting payment, should they be realized, in dollars. Am the Fund be studying that question and talk about the transparency of that market in the future, and is it of greater concern to the Fund than it has been in the past?
MR. LIPSKY: I'll be happy to respond. I think there is some simple direct responses. First of all, the derivatives market is not new. It has existed in various forms for decades. It has been growing rapidly. It has been, the growth in the use of derivative instruments has been part of the broader phenomenon of securitization of financial markets, and has been part of the globalization of financial markets. The underlying logic of securitization is to allow investors and borrowers to more accurately control risk exposure, leading to broader dispersion of risk, and at least theoretically, if designed correctly, should help to produce greater efficiency in financial markets and enhance stability.
Now, in the case of all market innovations, eventually face market tests. And, we, for example, 1987, 1994, 1998, there have been various forms of market strains that have involved innovative markets. Those innovations that are useful pass the test. But, inevitably, innovations bring challenges for market structure, market practices, market regulations. We at the Fund will be actively cooperating with regulators and other institutions in following the development of markets in general, derivative markets in particular, to make sure that they produce the benefits that they intend, and that the risks that could be inherent are minimized by accurate design, by accurate practice, and by adequate legal and regulatory structures.
QUESTION: A question for Mr. Padoa-Schioppa. You apparently have changed the date, the deadline for the reform, the quota reform, to the spring meeting instead of the annual meeting of 2008. I just wanted to know if it is because the governors were a bit impatient on the way the medium-term strategy was implemented or if there was any other reason?
MR. PADOA-SCHIOPPA: No. I think it was always thought that in order to finalize formally the agreement, say, at the annual meeting in September or October, the essential elements of the agreement should be defined in the April meeting. This is the way I read the reference to the spring meetings.
I don't think there is a change in schedule.
QUESTION: We now understand the IMF's position, your position is the dollar is undervalued right now. The Fund generally says that the dollar is potentially overvalued in the medium term.
Looking at right now, and listening to the discussions that you have heard over the past couple of days, is there any stomach for, if you like, putting a floor under the dollar, whether through intervention or through talking it up?
MR. DE RATO: First, it is not that I think the dollar is undervalued right now, and it is overvalued in the medium term. It is what I see, and is not only what I think, and what the Fund sees is that the dollar has depreciated in the last three years, and if you look at nominal references, you could see that very clearly, but in the medium-term equilibrium measure, which is the one the IMF analyzes the dollar is overvalued.
So it is true that the dollar has depreciated and I think you can find that out very quickly, but from our measures, the dollar is still overvalued and if you look at the references of the future markets, you will see that the markets are also betting right now that the dollar is overvalued, and expect a further depreciation.
As for the dollar, the dollar is a currency which value is fixed by the markets. In that respect, of course, the markets can behave differently than economic analysis, they do sometimes. But, right now, also, what we have seen is a relatively orderly movement of the dollar, in the direction that our analysis sees and also in the direction that the markets are predicting. And, also, a direction that is consistent with fundamentals. That is what we see regarding the dollar.
MR. AHMED: Thank you all very much. We bring this to a close.
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