The IMF's "Containment Strategy" For Europe: Fingers Crossed
Yesterday, IMF head Christine Lagarde appeared on Bloomberg TV where in addition to confirming that she is the second coming of 'Kill Bill' ...
... had some words of clarity on the IMF's strategy vis-a-vis Europe. To wit:
"The latest numbers that we have received, in particular from Germany, are encouraging, whether it's manufacturing, whether it's service activity, whether it's exports. That is heading in the right direction, but it needs to be sustained over time. And I'm crossing fingers for the eurozone..."
Well, Europe may not be fixed, and things are about to break as soon as Merkel is re-elected (hours ago Greek Proto Thema finally put the first estimate of the third Greek bailout at €10 billion. This number will rise dramatically before a Cyprus-style Bail In is instituted) but at least the IMF's "containment plan" for Europe is clear. All we can say is that it does not involve a voodoo doll of Jens Weidmann and lots and lots of pins.
Full interview from Bloomberg TV
Lagarde on what the biggest takeaway is from the Fed conference:
"First of all, I think it's a very good meeting. It's a forum where central bankers in particular can talk to each other, and it goes straight to one of the points that I made during my speech earlier today which is that there has to be coordination. Unconventional monetary policy has played a major role in helping economies avoid the precipice, but clearly it's not something that can last forever. And unconventional monetary policy has to be gradually withdrawn over time at the time, and that will be decided by central bankers according to, I hope, very specific measurements, but it has to be coordinated."
On the lack of coordination with the Fed making a move to taper when Europe, Japan and others are going the other way:
"Well I would disagree with you because we don't think - that all central banks will phase out from unconventional monetary policy at the same time. We believe that, for instance, in Europe and Japan there is a lot more to be done, and central bankers will probably have to continue unconventional monetary policies. In the US it's a different story because the recovery is clearly underway. Whether it's enough, whether it's solid enough, sustainable is another story. And it's for central bankers to decide on the basis of measurements we hope whether it's now time or not to withdraw from unconventional monetary policy."
On the impact of a move by the U.S. on the rest of the world:
"Yeah, we do monitor that very carefully. And it's a fact that since May 22 when Chairman Bernanke announced that it might be considered eventually without much more by way of clarification or specifications, markets immediately jumped on that news and there was consequences on emerging markets, which is why we advocate clarity, proper and well-channeled communications, proper measurements of the reasons, the criteria, the indices that will be used for the eventual tapering."
On whether tapering hasn't been clear enough from the Fed:
"No, I wouldn't say that. I would say that going forward because the signaling effect matters almost more than the actual implementation, the signal has to be very clear. Markets are this unknown quantity which needs to receive very clear signals. They need the clarity of when things will happen, how they will happen, on what basis. And that needs to be properly articulated."
On how messy it could get for emerging markets:
"Well I would hope that we can learn from the '90s and that the tapering that will ultimately take place will take into account what we learned from those days. Emerging markets are not one single region. They're not one single group of countries. What we are seeing is a great differentiation between those countries that have strong fundamentals, that have had good economic policies, that have conducted reforms, and those that are much more hesitant, which have been more loose on reforms. And it's a very strong signal that external factors matter but that fundamentals of each and every economy is key as well to its stability."
On whether Europe has really turned the corner:
"We are all globally on a path to recovery. Still fragile, not yet strong enough and with this very strong support from the unconventional monetary policy, including in the eurozone. Let's not forget that the European Central Bank has been a strong support for the European recovery. The latest numbers that we have received, in particular from Germany, are encouraging, whether it's manufacturing, whether it's service activity, whether it's exports. That is heading in the right direction, but it needs to be sustained over time. And I'm crossing fingers for the eurozone, but I wouldn't necessarily draw the conclusion that it's over, we are out of the woods and nothing needs to be done. There is still a lot of work to be done."
On whether she would support the ECB lowering rates:
"We have consistently said so, that the European Central Bank still have room to maneuver. But we've also consistently said that for it to be effective, the banking system needs to be unclogged and liquidity as well as instruments need to - to move fluidly within the system, which is not yet the case. So that's what I mean by more work to be done, particularly on the banking system."
On whether Egypt could use more money at this point given the recent events there:
"We have been working with Egypt ever since I think last August, and actually before that. We are still in touch at the technical level and we are very keen to support the Egyptian people in this transition period. But clearly not all the ingredients are on the table. There needs to be global political endorsement. There needs to be enough stability for the policy commitments to be delivered. That is not yet the case, clearly. So we remain available, but it's clearly now for the country to come to the table with those ingredients that I just mentioned."
On how the IMF continues to play a prominent role in the global economy given that we are on a path towards recovery:
"I think the IMF will continue to be prominent if it really focuses on its members needs. When I was in the private sector, I used to say client first. Here it's members first. And while we have played a significant role with the euro area members lately because they were hit by the crisis, I believe that the emerging market economies may want to use some of our precautionary instruments, as they do actually. When I look at our balance sheet, some of our largest commitments are to countries such as Mexico, such as Poland under precautionary lines which they don't draw on but which are available there for security purposes. I think that going forward, this is very likely what we will have to do."
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