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IMF Deputy Outlines European Bailout Package, What’s Ahead for Spain, Portugal

May 10, 2010 at 12:00 AM EDT
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Gwen Ifill talks to John Lipsky, first deputy managing director of the International Monetary Fund, about the $1 trillion aid package to steady Greece and insulate other eurozone countries from a spreading debt crisis.
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GWEN IFILL: Now: the rescue plan to stop a financial crisis from spreading in Europe.

Leaders of the European Union decided to throw heavy ammunition at the problem today, with a nearly trillion-dollar safety net for Greece and other countries in the Eurozone. It comes in the form of loans, debt guarantees, and additional cash to the money markets. The International Monetary Fund was a key part of the deal, promising more than a quarter of that amount.

For more on the plan and its intended effect, we turn to John Lipsky, the deputy managing director of the IMF.

Welcome.

JOHN LIPSKY, first deputy managing director, International Monetary Fund: Good evening.

GWEN IFILL: So, tell us, what was the IMF’s role in brokering this deal?

JOHN LIPSKY: Well, the IMF was instrumental in forging a program of fiscal adjustment and structural reform for Greece that was approved by our executive board on Sunday morning and by the European — the European finance ministers on Sunday evening that will provide a total of 110 billion euros to Greece.

Beyond that, the European authorities agreed on a new stabilization mechanism that could provide aid to other euro area countries that were in financial difficulties, in support of an adjustment program. And the IMF has — has agreed to — for its members to help provide part of the funding in any future program as well.

GWEN IFILL: We have watched Greece go through what looks like slow-motion financial collapse for the past several weeks. I guess there are two ways of looking at this, either that it took so long, or that, in the end, there seemed to be some great urgency. Which is it?

JOHN LIPSKY: Well, both.

It took awhile, but, eventually, things became quite desperate. There was, first of all, a lack of a clear mechanism by which the European or the — the fellow members of the euro area currency zone could provide aid to a fellow member.

Secondly, there was controversy among the fellow members whether the IMF, an international institution, should be involved. But, as things progressed, financial markets lost confidence in the — in the situation. The Greek authorities lost access to financial markets with debt payments coming due.

And, at that point, a decision was made to go forward as a partnership. So, when it was — that decision was made, things moved very quickly to a successful conclusion.

GWEN IFILL: We saw the markets respond to that today. But how does — how does anyone know how these governments who would benefit from this deal be held — how would they be held accountable for getting themselves out of the debt that got them in this place in the first place — this position in the first place?

JOHN LIPSKY: Yes, certainly.

Well, in the case of Greece, for example, there was — the Greek authorities had developed a very ambitious adjustment process program that would involve very stringent deficit cuts on the budgetary side, reforms to their economy, to their labor markets, to their pension plan, and to other measures that would increase economic efficiency that will take place over the coming three years.

But the most difficult measures were front-loaded and have already been taken by the Greek authorities, approved by the Greek Parliament. Now, for the balance of the program, there was a discussion and an explicit agreement with the Greek authorities, the IMF, and the European community on specific measures and benchmarks that will be part of the program and will — will calibrate the progress going forward.

And additional funding will be provided, along with these benchmarks being hit. So…

GWEN IFILL: But even…

JOHN LIPSKY: Yes. Please.

GWEN IFILL: Pardon — pardon me.

Even if these benchmarks are a hit, does that solve the problem or does it just buy more time to stop the problem from spreading to other European countries?

JOHN LIPSKY: Well, hopefully it does both.

For one, the financing that was provided, the $110 billion, was designed explicitly to give the Greek authorities some breathing space to institute these very difficult and — these difficult measures that, over time, will produce improvement in the Greek economy. In the long run, they’re going to be — they’re certainly going to be successful.

The — the phasing of the disbursements were designed, of course, to make sure that the actions are actually fulfilled and the program is put in place. Together, these measures have helped to provide assurance to the rest of — to the European neighbors and to the international markets, but that was augmented by very substantial additional measures that were announced this morning, early this morning, European time, and that will be supported by the IMF, as we discussed already.

GWEN IFILL: In speaking to reporters today, you used an interesting phase. You talked about the architectural ambiguity of the monetary union, which I took to mean — tell me if I’m wrong — that there is some underlying problem with the euro that needs to be addressed.

JOHN LIPSKY: Well, what — the euro is a very interesting experiment, in the sense it’s 11 years old, but when it was founded, it was quite novel., the idea that there would be a single currency among a group of countries, a single central bank that would operate on behalf of those countries, but no central government.

Now, the question, the ambiguity was always, well, how would you coordinate — first, how would you coordinate fiscal policy, budgetary policy among the various countries, and, secondly, how — what steps would be taken to ensure increased integration of these economies, which, after all, was the ultimate goal of currency union?

One of the aspects that was uncertain is what aid, what financial support would countries provide to each other within the currency union. That ambiguity has been given a lot more clarity with the agreement announced this morning.

GWEN IFILL: Well, when the euro is doing well, everyone is doing well. But when one economy begins to fail as spectacularly as Greece seemed to, then we have been watching other dominoes get ready to fall.

How worried are you about Portugal and Spain, for instance?

JOHN LIPSKY: Well, the — it was announced this morning by the European authorities that Spain and Portugal will be announcing new economic stabilization measures in the coming days. And, hopefully, these measures will be adequate to the challenges to reduce debt, to make — to improve the competitiveness of these economies, and to improve their prospects going forward.

GWEN IFILL: Well, tell me, if it possible to even ask this final question, which is whether it is possible that extending more credit can help countries whose basic problem is their — is their debt load.

JOHN LIPSKY: Oh, for sure.

The bedrock of the reforms in the euro area — remember, the goal of currency union is to form a stronger, more effective and efficient economy. The bedrock is going to be the fiscal — the reduction of deficits, the — ultimately, the reduction of debt as a percentage of the overall economies, and improvement in the structural performance, in the efficiency of these economies.

These will depend, more than anything, on the actions of each individual country. But now there is a framework of support, if there are problems and a process to monitor progress going forward.

GWEN IFILL: OK.

John Lipsky, deputy managing director of the International Monetary Fund, thanks a lot for joining us.

JOHN LIPSKY: Thanks, Gwen.