Euro Zone: Changing the Rules of the Game

Now, added to that and that makes it even more comprehensive is clearly the fact that the members of the Zone have decided that they together were committed to improving their governance. And that’s a point on which various the leaders of the Euro Zone have insisted. Changing the rules of the game, making sure that there was economic governance, that there was effectively a government of the Euro Zone when it comes to economic and financial matters, and that is also clearly something that reduces the level of uncertainty which the markets have not especially appreciated over the last few months.

Transript of  a Press Conference of International Monetary Fund Managing Director Christine Lagarde following the European Summit

Brussels, Belgium

July 21, 2011

SPEAKER: Hello everyone, and good evening. Thank you for coming to this press conference being held on behalf of the IMF. It’s my pleasure to introduce the managing director of the IMF, Madame Christine Lagarde and let me just mention that Madame Lagarde has already released the statement which you can find on imf.org, on our website. And I believe we have some copies circulating in the room also.

This press conference is on the record. I would ask you to keep the questions short; given the lateness of the hour we don’t have a great deal of time. And could you please identify yourself by name and affiliation when asking the questions. Again, thank you very much. Madame Lagarde.

MS. LAGARDE: Thank you very much, Gerry. And good evening to all of you. [In French.] At the start of this press conference, let me say how happy I am to catch up with some of you again, my journalist friends, photographer friends, with whom I’ve worked for so many years now here in the (inaudible) Council of the Euro Group. Very happy to see you again, very happy to be back in Brussels. All the more so because I was able to meet with some of the heads of government of the Euro Zone dealing with very important issues this evening. Back to English now.

It was a great pleasure to be back in Brussels and to be able to spend quite a great deal of time actually arriving from Washington this morning on the critical issue which I believe has been handled in a very comprehensive fashion and very constructively. If I had to take away two specific characterizations it would be that: comprehensive, constructive. It’s comprehensive in that it addresses both the issue of Greece, again in a comprehensive fashion and also the rest of the Euro Zone.

 Christine Lagarde, IMF Managing Director

If I was to only concentrate on Greece, and I’m sure that you’ve had your ears full of what the overall package for Greece is, but what seems critical to me, number one, the fact that Euro Area member states have agreed to significantly improve the financing terms with Greece by, number one, extending the maturity of the loans that will be granted by the EFSF, and number two, by reducing significantly, again, the interest rate at which such loans will be granted going forward. And that is clearly a major improvement.

It is worth noting actually that these terms and conditions, extension of maturity and reduction of interest rate, will be also extended to the two other countries in the program, which are both Portugal and Ireland. What to me is critical, and that’s really a game changing decision that in my view has been made by the member states, is their commitment, their determination, to provide support to countries under program until they have regained market access, provided that they successfully implement their programs. This is critical because it means that the member states are committed to support other member states under program.

That’s as far as those three countries are concerned. Now, obviously in addition to that, to compliment this comprehensive package, there is obviously the famous PSI which has been negotiated but which has really been the result of the voluntary decision by the financial sector. They have been representative as I understand of the IIF, who’ve been negotiating with the Greece authorities and they came up with a proposal that I’m sure you have had plenty of time to examine and to assess.

So we welcome all that. A comprehensive and constructive package that addresses, number one, the maturity of the loans; number two, the interest rates; number three, the continued support until the country regains market access. And for the very specific case of Greece which is unique in and of itself the fact that PSI is also contributing to the burden. Now this is as far as Greece and other countries under programs are concerned.

The other key element in the view of the IMF is the fact that the member states have decided to make the financing instruments much more flexible. And here I’m clearly thinking about the European Financial Stability Fund; later on the European Stability Mechanism. By introducing the ability to use those instruments to guarantee, to eventually go to the secondary market, to eventually use those instruments as precautionary. Under certain conditionalities this is really, really important and I’m sure will be appreciated by the markets.

Now, added to that and that makes it even more comprehensive is clearly the fact that the members of the Zone have decided that they together were committed to improving their governance. And that’s a point on which various the leaders of the Euro Zone have insisted. Changing the rules of the game, making sure that there was economic governance, that there was effectively a government of the Euro Zone when it comes to economic and financial matters, and that is also clearly something that reduces the level of uncertainty which the markets have not especially appreciated over the last few months.

So all in all, it was a long afternoon, no doubt about it. But it was all worth it and I believe that with this constructive and comprehensive package, which reduces the level of uncertainty, we go away with a much more solid view of the confidence that the Euro Zone members have in their own destiny.

Now, clearly the International Monetary Fund is going to participate in that process. This is not a done and final deal. As you know, the IMF has its rules and clearly there is no new program unless and until that program has been requested by the country in question. Greece as not yet at this point in time requested a program. It is also indeed subject to the review by the Board of the International Monetary Fund. So I’m not going to tonight give you the estimate of how much, under what terms and conditions, beginning on which date because it’s a matter that will be reviewed, determined, in conjunction with the Board and as we are able to assemble the various components of the financing packages that will result from the PSI as has been proposed by the International Institute of Finance and negotiated with Greece.

But it’s clearly the intention of the International Monetary Fund to be an active participant in this program going forward with a view to clearly restoring growth, making sure that Greece can return to market and that there is a significant improvement of that sustainability.

So voila. I’m sure you’ll have a few questions and then we’ll all be happy to go and have something to eat.

QUESTION: Can you tell us -- give us a measure of how much that sustainability of Greece has improved, your -- the figures in the last IMF report were sort of worried and worrying, and indeed, if I remember correctly, suggested that a mere reduction of interest rate would not make that much difference to the debt sustainability there, for how much has actually been achieved for Greece tonight.

Secondly, will the IMF participate in this great lowering of the interest rate down to about 3.5 or 4 percent, or will it maintain its own interest rates on its loans to Greece?

MS. LAGARDE: Well, the IMF operates at its usual calibrated interest rates, so it is not a party to the interest rate reduction program that has been put together by the Euro Area members, there’s no question about it. What really is critical to me at this point in time is not so much by what -- tens or hundreds of percentage points the debt sustainability analysis is improved. And I’m sure it improved but we will be proceeding to appropriate calculations. What’s really important to me tonight is the fact that the member states have determined that they will continue to financially support countries under program until they regain market access.

And as you know because you are a good journalist belonging to a good magazine that we all read very carefully, and I’m sure that you properly informed one of the components taken into account by the Fund and by the Board of the Fund, is return to market. You know, we have two key objectives: its stability, return to market. And by the same token obviously we measure the debt sustainability. But the debt sustainability is definitely improved and what matters to me tonight is the fact that the member states are determined to continue support until the country under the program regains access to market.

QUESTION: Thank you Madame Lagarde. I know you said that there has been no request from Greece yet to the IMF. The European heads of state and government however have lumped you into the program already. Can I ask you –

MS. LAGARDE: I kind of suspect that that will be coming but at this point in time; today, tonight, there has not yet been such a request.

QUESTION: Very good.

MS. LAGARDE: But I’m sure it will be coming shortly.

QUESTION: But can I ask you as a matter of principle, there’s been some discussion that because of the amount invested by the IMF in the Euro Zone, that this 1/3, 2/3rds ratio perhaps should be tilted stronger towards the Europeans and away from the IMF because the IMF is overcommitted in Europe. Can you address that issue?

Secondly, I have forgotten my second question. Oh, I’m sorry, if I can ask -- in the last report on the Fifth Tranche there is a second -- the discussion of PSI and whether it’s a beneficial thing. Now the IMF does come out in support of PSI in that -- my understanding is that report was largely compiled before you took your current job. Can you discuss in your own view whether PSI is a good thing for Greece or is it something to be -- that you would personally not have pursued?

MS. LAGARDE: I’d fully stand by the report that I had the honor and privilege to present to the Board, okay? And I forgot what you’re first question was. Now that’s a joke, I know what your first question is. [Laughter.] You know, 1/3, 2/3, it all depends on what basis you start from. And I think that that’s exactly the discussion that we will be having if and when Greece requests for a new program. Because there is clearly still disbursement to come with, as you said, approved the disbursement of the Fifth Tranche. We had so far dispersed roughly 18 billion Euros. There is still 12 to come.

And as far as the new program is concerned, I’ll wait to see exactly what the request will be but we will be proceeding in accordance with our standard practice, which does not necessarily mean to say that it will be 1/3 or that it will be a little less or a little more. It will be a matter of overall appreciation by the Board and by the Management as to the solidity of the program, and we have good reasons to believe under the current terms of the communiqué that has been released by the Euro group that it is solid.

QUESTION: Madame Lagarde, can I -- are you happy with the range of banks that have agreed and signed up to the IF statement? There aren’t any American banks, there are a couple of big U.K. banks that haven’t signed up. And secondly, can you just address this -- I mean do you consider this to be selectial temporary default? Are you worried about what the credit agencies might -- their view on this?

MS. LAGARDE: I’m happy and not worried. That’s by natural temper that I’m so. It’s not for me to characterize. People will determine; it’s not my job to do so. And as far as the banks are concerned, from the list that I have seen that was showed to me by the Greek Prime Minister, there are a lot of those banks that we know are holding Greek government bonds. Now if more are prepared to come and to join the group the better, but I think that it’s important to have the key players included in that commitment and undertaking. That seems to be the case. But if more are coming, you know, the merrier the better.

QUESTION: Madame Lagarde, can I ask you two questions? One, as a European, do you consider that the decision to allow the stability from going to the secondary market is a step towards Euro bonds, which is considered by many as the final solution for all this? And second question, did I understand well that the European Central Bank will be able to ignore a possible definition as selective default of some of these measures in accepting collaterals from the Greek debts when they are guaranteed by the stability fund?

MS. LAGARDE: I think it is a question that you should have addressed to the person just before me. As you know, the European Central Bank is very keen to be independent and would not stand for me to be the spokesperson for the Bank. So I would not dare to go into those territories.

Now, if you look at the -- I don’t know if you had a copy of the communiqué that was released by the Euro members, but as far as the secondary market, it’s on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement.

So it’s not as if it was a Euro bond. It’s very, very much constrained under particular conditions and circumstances. So I think it’s good -- a good element of flexibility, but it’s obviously constrained under particular conditions which in my view do not qualify the ability to purchase on the secondary market as a Euro bond.

QUESTION: In French, if I may. What leads you to think that if there were to be contagion after a selective financial default might have been (inaudible)? If there were a contagion do you think that dying (inaudible) would hold? Might there not still yet be a missing part?

MS. LEGARDE: Well, we’re still ever optimistic. I think the important thing today in the meeting was the collective determination here and there, concerns were expressed about different positions, citizen views, parliament, but over all there was a very strong collective commitment to build together.

Now, (inaudible) contagion -- well first of all we’re talking about intervention capacity of the European Central Bank, but you should have asked Mr. Trichet about that. And the other type of (inaudible) is the EFSF’s increased capacity for intervention, increased flexibility. Although I hope it doesn’t come to that.

Final Question?

QUESTION: Good evening, Madame Lagarde. Many politicians and journalists of both pointed out that this is not a magic bullet, this is not the big bang, this is the start of a process. As somebody who knows both sides, did you sit there this evening and look at your former colleagues and say, My God, I think they’ve finally got it.

MS. LAGARDE: They’re my new colleagues, if I may say, because I was very humbly a minister of finance and I was clearly admitted thanks to President Van Rompuy and President Junker, and President Barroso’s invitation in the circle of the heads of the Euro Zone. But as I just mentioned to your colleague in French, there was definitely a collective determination.

They were all together driven by the desire to keep it together and to make sure that they had the tools to actually resist. That was a bit of a first, if I may say, yes. Thank you.