Transcript

Transcript of a Press Conference by International Monetary Fund Managing Director Christine Lagarde and First Deputy Managing Director David Lipton

October 11, 2012

Webcast of the press conference

MR. RICE - Good morning, everyone, and welcome to the 2012 Annual Meetings of the IMF and the World Bank. It is a pleasure to see you all here this morning for this press conference on behalf of the Fund.

I am Gerry Rice, Director of the External Relations Department. It is my pleasure this morning to introduce to you the Managing Director of the IMF, Madame Christine Lagarde, and immediately to her right, Mr. David Lipton, the First Deputy Managing Director of the Fund.

We are on the record this morning. I would ask that you keep the questions short so that we can have as many as possible. Please raise your hand and identify yourself by name and affiliation. With that, I would ask the Managing Director to make a few opening remarks and then we will get to your questions.

MS. LAGARDE: Ohayou gozaimasu and good morning. Bonjour. Welcome to the 2012 IMF-World Bank Annual Meetings. Before we dwell into the substance of what we are here for, I would like to thank our Japanese hosts who have been tremendous in helping us prepare for this meeting. We only had the benefit of one-year notice where typically it is more a matter of three years’ notice, but on this occasion the Japanese authorities, the Japanese people, the volunteers, the students, all those who have participated in the organizing of these meetings have been really, really tremendous, and I would like to thank them for that.

It is very nice to be back in Tokyo or shall I say to be back to Tokyo. The last Annual Meetings of the IMF that took place in Tokyo was in 1964, 48 years ago, when the world was clearly a different place and where Japan was on a growth trajectory and on an expansion that really has demonstrated a great creation of value, great innovation, massive changes very often created by the very strong spirit of cooperation and innovation that is so typical of the Japanese population.

I would just like also to say a word about yesterday’s experience. I was lucky to participate with my friend, Dr. Kim, President of the World Bank to visit Sendai to a playground of a school and I was most impressed by the resilience, the courage, and the very, very moving scene of the tragic tsunami, earthquake, and nuclear power disaster that affected the Tohoku.

It is really that courage and that sense of cooperation that is called for at this point in time. If you were to ask me what we expect from these IMF Annual Meetings, we expect action, courageous and cooperative action on the part of our members. I am going to just touch very briefly on what are those actions for the short term and what we would also expect in terms of anchoring for the future.

As you know, for the current situation, some of you may have attended the presentation of the World Economic Outlook by Olivier Blanchard, our Economic Counsellor, and the Global Financial Stability Report by Jose Viñals. We are not expecting a very strong recovery. Recovery continues but it is continuing more slowly than we had expected earlier in the year, and even more slowly than we expected in April. So, we have lowered our forecast and we now expect global growth at 3.3 percent, with advanced economies at 1.3 percent, and with emerging market economies at 5.3 percent. So, you see it is downgraded from our April forecast.

The biggest change compared with what we said back at the Spring Meetings is that this slow down in growth is not only affecting the advanced economies. It is also having a ripple effect on emerging markets and, in particular, in Asia. As noted in the World Economic Outlook numbers that were released a couple of days ago, certainly countries like China, Russia, Brazil are also affected by this down factor.

What is causing that situation? Many factors, obviously, and clearly some tail risks that are looming and that are of great concern, but also something which is probably more difficult to analyze and to pin down but which everybody will tell you matters, which is the degree of uncertainty that really applies in many corners of the world. Whether you turn Europe, to the United States of America, to other places as well, there is a level of uncertainty which is hampering decision-makers from investing, from creating jobs, and from developing values.

There has been some good news since the spring Annual Meetings, because some players have decided to act and clearly right decisions have been made. This has been the case by the central banks, in particular. They have given good strong policy signals lately. Whether it is the Fed, whether it is the European Central Bank, whether it is the Bank of England or the Bank of Japan, there has been some very good news, and that creates a momentum that should be seized as an opportunity because, in and of itself, it will not be sufficient.

Where should we see action? Certainly, in Europe and more specifically in the Eurozone, which is still at this point the epicenter of the crisis and where most urgent action is needed. Action has already occurred: the European Central Bank with its LTRO earlier in the year and, more importantly, with the outright monetary transaction. Decisions have been made by the euro area members. Whether they have decided to strengthen their fiscal discipline, to associate it with sanctions, to make it much more cohesive and coordinated, or whether they are designing a European banking supervision system and hopefully a European banking union, this is gradually happening, but more needs to happen and faster.

In the United States, there are major risks related to the fiscal cliff and the debt ceiling, risks that are probably not yet completely factored in the various anticipations, but as we get closer to the end of the year, those risks are becoming more threatening. Here, too, decisive action is expected.

Certainly there are challenging economic prospects in other regions. Emerging markets need to keep a close watch on vulnerabilities, whether they are domestic vulnerabilities or external. Low-income countries also remain vulnerable, not least because of the high food prices, not on all foods but on certain foods certainly as well as to the danger of more people falling back into poverty. In these areas, we need action to lift the veil of uncertainty. Many of us have debated what actions are needed. Many of us understand what needs to be done, but it actually needs to happen.

Now, looking at the future, let me touch on four key policy areas where, again, we believe that there can be solid anchoring going forward. First of all—and that is a continuum, not something that is for the medium term—is the completion of financial sector reform. This has been in the making for a few years now and it is still in process. The job is not completed. If you ask some of the supervisors around the world whether the financial sector is safer that it was five years ago, many will say no, not yet, and we tend to concur with that. So, that is No. 1.

A lot has been done. Regulations are again formulated, not yet necessarily at the secondary level. There are variations, discrepancies, including in the Basel III definition of capital, for instance, and that needs to be sorted out.

Second policy where we expect action is countries should deal with the legacy of high debt. We need credible, medium-term strategies to bring down debt, which today is, in many of the advanced economies, at levels not seen except in wartime.

Third, support job-rich growth. I think it goes without saying that the unemployment rates that we see in advanced economies, in particular, and among young people are terrifying and unacceptable. So, focus must be on creating the conditions for growth that are more inclusive and that are, more importantly, likely to create jobs.

Fourth, face up to the fundamental issue of global imbalances. This is not a new scene. One might assume that it is fading away. It is being addressed a little bit, but it is also being addressed because of the conjunctural status of things. So, it is not going away and it needs to be addressed, because when growth picks up, these imbalances are likely to widen again.

Final point. As I mentioned, action in the short term needed and expected from the membership, and we will spend the next few days, together with David, the management team and the staff, we will try to identify for them where it would be most helpful because it can be a positive sum game, and it is not a competitive race. It is a cooperative effort.

Second, identify how we can anchor the economy for the future.

The third point that I wanted to make is what is most needed is cooperation.

The task of securing sustained recovery has become more complex. It involves multiple players and they are all playing a single game, but that game is becoming more and more complicated. We have seen the emergence of new actors, new players. Some of the traditional ones are playing a different role. Central banks, for instance, Supreme Courts. This is, as I said, a cooperative game but can be a positive sum game if it is played properly.

Now, at the center of that, what can the IMF do? We have a big agenda as well. It includes new approaches to lending; better, more effective surveillance that embraces not only the bilateral traditional review that we organize but also the multilateral expertise that we bring in order to enrich that surveillance; and we also want to improve our technical assistance.

We will be actively discussing those issues with the 188 members of the organization. One issue is obviously that of governance. As you know, we have the 2010 Reform under way that is due to be completed at the time of the Annual Meetings in 2012. We are almost there, almost there because of the three thresholds that we had to hit. Two are largely exceeded. We are short on one.

We are working extremely hard in the membership to make sure that we can get as close as possible to that third threshold, because that reform will actually help the Fund be more representative, more inclusive, will bring emerging markets to the Top Ten members of the Fund, and it is important that we actually deliver on that commitment that was made back in 2010.

So, those are my expectations for the meetings. We have worked long and hard over the years to prepare ourselves to be in a position to provide better services, better surveillance, to be fully equipped financially to respond to the demands of our membership. We really want, together with our members, to go through what needs to be done, what action needs to be taken in order to make sure that recovery is really here for the longer term and is sustainable.

So, with that, I think I am going to take, together with David, a few questions.

QUESTION - I have a question concerning China and Japan. Recently, political tensions between China and Japan are emerging. Could you kindly show me your view of the impact of such tension on the global economy? It is my question.

I am sorry that I have to raise a little bit a politically incorrect related question. The Chinese Financial Minister and the Governor of the Central Bank are reported not to come to the Annual Meetings in Tokyo and I am afraid that such action is not helpful for cooperation of the global economy.

MS. LAGARDE - Our concern is that they will be missing a great meeting, because really Tokyo is at its best. The colors are beautiful; the trees have the most beautiful colors you could think of. The meetings are extraordinarily well-organized. We have a lot of substantive issues to discuss, great debates, great seminars organized. So, I think they lose out by not attending the meetings, and they will be missing something great.

Now, as I think I have already said, countries in this region are very important to the global economy. Where is the highest growth? It is in this part of the world. So, economic players and partners in this region are very critical for the global economy, and certainly at the IMF where we encourage cooperation, where we are a forum for dialogue. We hope that differences, however longstanding, can be resolved harmoniously and expeditiously so that, from an economic point of view, cooperation can continue and can be beneficial not only to the Asia Pacific Region, but also to the global economy, because we are all very closely interconnected.

QUESTION - I want to ask Madame Christine about the agreement with Egypt. I think it takes a lot of time and I think you promised me in Washington that this meeting will finish in Japan. Now we are in Japan. What is the problem now? Is the problem with the IMF or with the government in Egypt?

MS. LAGARDE - Thank you very much for your resilience. That is exactly what we need.

As you know, I visited Egypt at the end of August. We had very good discussions with the President, the Prime Minister in particular, and members of the government, as well as the Governor of the Central Bank. We are due to return to Egypt in the course of this month to pursue discussions. As you will have noted, one of your authorities indicated that he was hoping for closure of our discussions in the middle of next month.

So, fingers crossed. Let us hope that we can do that expeditiously. I am very confident that we can discuss productively, reach agreement, and help Egypt as much as we can and as much as we are trying to help in the region, in Jordan, in Yemen, in Morocco, where our support is useful and can rally the support of other financial institutions that can support the growth and the recovery of those countries.

QUESTION - I was wondering what your assessment and expectations are after the Eurogroup meeting ahead of the EU Summit about Greece, where the country stands and what the prospects are.

MS LAGARDE - What I can tell you is that the work continues. We have a team on the ground fully committed, working very hard day and night, weekends included. They are going to continue doing that in order to resolve any differences, in order to address all the chapters of the Greek program.

As you know, we are at the stage of a review where we clearly have a list of items for fiscal consolidation purposes. We also have to review the structural reforms that Greece has committed to implement. We also have to look at the financing and the debt situation of the country.

From our perspective, all four chapters have to be looked at and we will spare no time or effort to actually do as much as we can in order to help Greece. Our purpose is to make sure that Greece is back on its feet, that it can one day return to markets, that it does not have the need for constant support, and that is what we are completely targeted for. We want to help the country and to help it stand on its own.

QUESTION - I would like to ask some questions about the research that appeared in the World Economic Outlook about fiscal multipliers; first of all, which countries you think are particularly exposed to these large fiscal multipliers. Secondly, given that you are now expecting austerity to have a far more detrimental impact on growth, how will your policy prescriptions for the Eurozone and elsewhere change?

MS. LAGARDE - I think you have had already part of the response from Olivier Blanchard, who is our Economic Counsellor, as you know, and who is the author of the World Economic Outlook. Just for the record, there is no difference between Olivier’s views and my views because we actually talked them through. What he gave you as a response is absolutely fine by my standards.

The set of options which I think he went through last night as well is, No. 1, the fact that time is of the essence, meaning that instead of frontloading heavily, it is sometimes better, given circumstances and the fact that many countries at the same time go through that same set of policies with a view to reducing their deficit, it is sometimes better to have a bit more time. That is what we advocated for Portugal; this is what we advocated for Spain; and this is what we are advocating for Greece, where I said repeatedly that an additional two years was necessary for the country to actually face the Fiscal Consolidation Program that is considered. So, that is one component.

Second, something that we have stated and that Olivier, I am sure, has indicated is that, in the circumstances and given the multiplier reassessment that we have produced, we do not think it is sensible to actually stick to nominal targets. We think it is much more appropriate to actually apply the measures and to let the stabilizers operate. Now, as far as countries are concerned, clearly that applies to pretty much all countries that, particularly in the Eurozone, are applying that policy mix.

QUESTION - [THROUGH INTERPRETER] Sub-Saharan Africa has been spared some of the difficulties of the world, but is still suffering from shock waves. Have you considered that and what recommendations do you offer to sub-Saharan Africa?

MS. LAGARDE - [THROUGH INTERPRETER] Thank you. You are quite right. The sub-Saharan African countries are less affected and currently have growth rates which are quite impressive  which make many other countries envious. Recommendations in terms of macroeconomic policies are certainly to maintain and reconstitute leeway in budgetary provisions to prepare for any difficulties or shocks if the situation worsens or if the sub-Saharan economies meet external shocks, in particular.

I would also point out here now that what we call the PRGT, the Poverty Reduction and Growth Trust, a financial reserve which has been set up to face the demands of developing countries in terms of concessional lending, this PRGT is replenished on a long-term basis. We had some fears about financing after 2014, but the institution as a whole voted in favor of replenishing the reserves of the PRGT by allocating to the fund the gold sale profits realized when the Fund made its gold sales a couple of years ago. We are ready to handle problems as they arise.

QUESTION - Madame Lagarde, given the risks that you see on the horizon, how would you assess the speed at which Eurozone leaders are implementing their latest decisions? I ask this in the context of the new ECB program. A lot of investors are starting to doubt whether the OMT program will even be tapped in the next three or four months. Do you think they are wrong and do you think it is a problem for a program like that not to be used in the coming months?

MS. LAGARDE - As with the case with the Eurozone, there is good news and bad news. The good news is the fact that this European Stability Mechanism that had been discussed and in the making for the last months has now been christened and is in operation as of Monday. They had their first Board meeting. A President has been appointed for the next five years. Capital is being released. That is the good news.

In terms of speed, the bad news is that, for it to actually operate, there will be a legislative and often parliamentary process that will be needed for the fund to effectively work. So, it is going to be a matter of parliamentary process, procedure, and practicalities, but that is the way euro instruments eventually work because they require the support and the consent of 17-member states that operate with their parliamentary institutions. It is a tradeoff between financial efficiency and democracy, on the other hand.

QUESTION - The European Central Bank called on the Fund to participate in the design and monitoring of programs that would be related to [?] interventions. Do you see the role of the Fund as similar or different to the work you have done in previous programs in the Eurozone? Would it be your advice to Italy and Spain to apply for such a program, although, of course, you would say it is the government’s decision, but what is—

MS. LAGARDE - You have given the answer.

QUESTION - But what is your advice? The job of the Fund is to give advice.

MS. LAGARDE - Seriously, it is for the members to decide what they need to do, what they want to do. In the context of the Eurozone, they often do that after consultation with euro partners, which is quite legitimate.

Our role is already different on the ground. Within the Eurozone we have three countries under programs and one in discussion. Three countries under programs are Greece, Ireland, and Portugal. The one in discussion is Cyprus. We also have standard financial arrangements that we have had in other parts of the world.

But in the case of Spain, for instance, in relation to the financial sector restructuring, the Fund is engaged and was engaged in the design and monitoring of the financial sector program. We will be sending a team on the ground for the first monitoring of the Spanish financial sector restructuring.

We are flexible, but when we monitor, we want to know that what we monitor is something that we are comfortable with, that makes sense from an economic point of view, which means that we want to also participate in the design. Typically, it is easier for us to operate within our established framework, which is what we have to do anyway, and it can vary from a standard SBA to the, as I said, design and monitoring function that we have in relation to the Spanish financial sector restructuring. Anything within that range is a possibility.

QUESTION - You mentioned some innovations of IMF strategies. What are these new strategies for low-income countries, especially in Latin America? How exposed to United States risks in food prices?

MS. LAGARDE - First of all, let me observe that Latin America is doing quite well. If I look at programs in place, we have precautionary programs in that part of the world, but not much else. What we want to continue doing for the membership is to provide as much technical assistance capacity-building as we can, particularly for those countries that are either emerging or in the process of expanding and consolidating their financial institutions, in particular.

It is along those lines that we will be defining our strategy and better coordinating what we provide in terms of technical assistance, in terms of training, and in terms of capacity-building, because I see very much the activity of the Fund as being sort of three lines of business, if you will: Our lending capacity, our surveillance activity, and this whole set of services that we provide in technical assistance training and capacity-building. We want to strengthen that and make it more efficient for the membership.

QUESTION - Welcome to Japan, Madame Lagarde. It is nice to see you again. Last time when you came to Japan back in July it was rainy and now I am glad to hear that you are enjoying the beautiful autumn weather in Tokyo.

One of the biggest progress for the Japanese government to host this meeting is to send a message to the world that the Japanese economy is recovering. Eighteen months ago the Japanese people faced a tragic event, as you saw in Sendai yesterday. What is your sense of the recovery of the Japanese economy and also the status of the reconstruction efforts in the Japanese society in the context that the IMF just cut the growth estimate of Japan?

Second is about regional coordination. On top of the China and Japan issue, Japan also has a dispute over the island with Korea. The Japanese government just decided not to extend currency swap agreement with Korea in the midst of this global crisis. What is your assessment on those decisions?

MS. LAGARDE - Thank you very much for your warm welcome and your hospitality. I have to tell you an anecdote, actually. On Sunday morning I was lucky to stop by in Paris and I could go and say hello to my son. We went to the marketplace in Paris and suddenly somebody ran after me and I turned around. It was a Japanese gentleman who said to me, “Are you Madame Lagarde?” I said, “Yes.” He said, “You are most welcome in Japan. I know you are going to be there in two days.” So, it goes across the Japanese community and it was very, very nice.

Yes, we have seen clearly reconstruction under way and economic recovery at a very significant rate, in the last year in particular. What has been most impressive is the way in which the country was able to cope with a major shift in its energy policy, and how by sheer determination, invention and cooperation, you were able to actually close the gap that resulted from the shutdown of the nuclear power plants. So, that in and of itself is impressive and I would not be surprised if the degree of innovation and different approach to the consumption of energy was to actually trail further down in the years to come and actually produce more efficient growth for Japan.

So, yes, we reduced our forecast for Japan, as we did for most countries really around the globe. Given the structure of Japanese growth that is strongly driven by exports, the fact that there is slow growth around the planet has an impact, obviously, on Japanese growth.

You mentioned the issue of the currency swap with Korea. I would make the same point that I did in relation to China. These partnerships are critical. They important for stability. Certainly, we would hope at the IMF that longstanding differences concerning territorial matters could be resolved smoothly so that economic cooperation can take over and contribute to the stability of the world and of this part of the world as well.

QUESTION - I would like to hear your advice on the Chinese economy. As you know, the IMF has downgraded Chinese GDP growth to 7.8 from 8 percent. So, what advice can you give to the Chinese Leaders in coming forward?

MS. LAGARDE - Well, I think the first advice I would give is be a partner in the global economy, full-fledged. Second, focus on the domestic market, which is clearly an engine for growth that China should activate and is planning to activate. When I say domestic market, I would divide between investment and consumption. Clearly, the focus going forward should be on consumption, because investment has already been well taken care of in the last couple of years. I would stop there.

MR. RICE - Thanks, everyone, and, again, welcome to the meetings.