IMF’s Lagarde: ‘There Are Clouds on the Horizon’

IMF managing director says U.S. must forcefully address housing issues

International Monetary Fund managing director Christine Lagarde spoke with Bloomberg Television's Margaret Brennan and said that she expects more contributions on top of the $320 billion raised and "I look at this pot of money as an umbrella…there are clouds on the horizon."  In reference to Spain, Lagarde said that, "if there's a need, the IMF has to be there for all members."

Lagarde also said that the U.S. must address housing issues "forcefully" to help the American economy and that whatever can be done to help households "is going to be of help to the entire U.S. economy."

Lagarde on whether $320 billion in pledges is the final ask:

“It is not the final ask. Is a step on the way and we are looking for a much more critical mass for the end of the week. We have the spring meeting going on now.  It will begin officially tomorrow. I hope to get to more than that.”

On where the IMF has other commitments from:

“I have currency commitments from the euro zone, from Japan, from the Nordic countries, from Switzerland. There will be a few more that will be announced today but I will leave it to them to announce. I have more bilateral meetings coming up all day this afternoon and tomorrow and I hope to increase the pot.” 

On how the IMF prioritizes the reserves against the pressure on countries to reduce spending:

"It has to work from all angles. I look at this pot of money as an umbrella. There are clouds on the horizon, whether it is unemployment or slow protracted growth or whether it is bank deleveraging, and we need to protect against that.  Countries have to take measures. They have to really combine fiscal consolidation in the medium term. They have to make sure that growth picks up and it takes hold and that jobs are being created.  All sorts of measures have to be taken. As managing director of the IMF, I am in charge of improving the stability and I need to have that umbrella available in case the clouds break into a nasty rain." 

On whether the IMF would participate in aiding Spain:

"There is no such need at the moment as I understand.  I hope that through the combined efforts that the Europeans will be able to support the efforts undertaken by the Spanish government. They are taking really serious measures for the labor market and fiscal consolidation as well. They are determined to take control of the provinces' budgets, which was an issue and they have announced that they want to strengthen the Spanish bank capitals. The Europeans have done quite a bit, whether it is national measures with new governments or the ECB playing a much more significant role or whether it is a euro firewall which they put in place at the end of March. The tool box is much bigger and I hope they can address the Spanish issues together with the Spanish government.  If there's a need, the IMF has to be there for all members…If there is appropriate burden sharing and proper risk mitigation. The IMF never loses money and always pays back as creditor. I have to make sure that the tradition survives."

On how the IMF separates banks that have taken on sovereign risk:

"Ideally, it would be helpful, for instance, the EFSF and this new mechanism they are putting in place, the ESM, would be capable of investing directly into the capital of banks, bypassing the sovereigns. Then you cut the link between sovereigns and banks. That can be in a bad situation a bit of a vicious link.  Our suggestion is that they could be direct investment under very secure terms and with a strong European supervision, with a strong European backstop, with a resolution, legal system, that is in place. There is work to be done." 

On the effect of the trillions of dollars of liquidity that has been pumped into the markets:

"I would not question the appropriateness of the LTRO, the long-term refinancing scheme that was put in place by the European Central Bank. If they had not done it, we will have faced a liquidity crisis of serious magnitude. This refinancing program that offered liquidity at cheaper rates for a few years was just right. Now, it should not stop the banks from doing what they have to do, which is to clean up their balance sheet when necessary, consolidate when it is necessary, and certainly recapitalize where needed in accordance with the Basel III principles. All of that needs to be done. Liquidity is not a check for complacency. The work needs to be done deep down under the skin of the balance sheet of each and every bank and I'm sure the ECB is also going to encourage that."

On how the U.S. should handle housing:

"It is a question of revisiting the mortgage terms and conditions and making sure that the much improved financing terms available today are also made available to homeowners. How this is done, it is a political debate and what role does the government play? It is not for me to comment on which political route it should take, but I am looking at the economic consequences of millions of households having their mortgage underwater. Many of them wanting to either move or to take a new mortgage and not being able to do it. Households are a key category of economic agents in the United States. So what can be done to help them go in the direction of renewing their mortgages on better terms and taking out new mortgages, I think it will be of help to the entire U.S. economy, which is why we have insisted the housing issue needs to be addressed forcefully and steadily."

On whether the U.S. government has been forceful enough in dealing with banks and mortgage holders:

"I think what is important from an economy point of view is that the households be repositioned to take new mortgages or benefit from the appropriate terms. I don't think the point is to make sure the banks make their commissions. The appropriate chemistry needs to be very well fine-tuned. Again, I am not a legislator. Sometimes I wish I was and sometimes I am happy I'm not, but the economy consequences, I know them."

On the U.S. tax debate:

"For investments to be made, for entrepreneurs to decide to invest and buy new machines and equipment, to move to new premises and enlarge a business and employ, they need predictability. They need to understand what is the short-term, medium-term, long-term perspective for their business. For the environment in which they will operate. A medium to long-term anchoring of what the fiscal policy is going to be and what the tax measures will be is going to be important."

On unemployment among youths and whether there is a lost generation being created in Europe right now:

"Yes, it is a big worry for me. I happen to have two young men who are my sons, and I worry about them like any mom or parent would worry about their children finding a job. Is even more acute in countries like Spain or the Arab Spring countries. In the United States, it is an issue as well. Whatever we do, we have to focus on growth that actually produces jobs. Very often, people think there's a conflict between solid consolidated fiscal situations, strict budgetary rules and growth, and therefore jobs."

Lagarde on how she'd describe her legacy at the IMF:

"Well I can tell you that I am not unemployed. Neither is the team. We have loads and loads of work. It has been a roller coaster ever since I started. Problems arise every day and solutions we have to invent and I am blessed because I have a fantastic team around me working really hard on trying to help the economic community and the community at large." 

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