MARGARET WARNER: I sat down with Christine Lagarde this afternoon, three weeks into her tenure at the IMF’s Washington headquarters in Washington.
Madam Managing Director, thank you so much for joining us.
CHRISTINE LAGARDE, International Monetary Fund: My pleasure.
MARGARET WARNER: As we sit here right now, the crisis over the U.S. debt limit and possibility of default still isn’t resolved. You’ve talked about a possible spillover. What are the consequences globally – to the global financial system – if five days from now there still isn’t a deal?
CHRISTINE LAGARDE: Well, you are right that there is quite a lot of concern out there. The global economy is clearly highly dependent on the U.S. economy, because the U.S. economy is the first in the world and it’s a major – it’s a major power in many respects. So to have the lead economy uncertain about its debt ceiling is quite worrisome. And if you were to take it further, clearly there would be – there would be consequences in the rest of the world, not just in the United States.
For example, the dollar has always enjoyed what Giscard d’Estaing, the former French president many years ago, called the “exorbitant privilege” of the dollar, because it was the currency – the reserve currency that most central banks had. Well, clearly, there was a dent in this exorbitant privilege and the confidence that most people have towards the dollar. It would probably entail a decline of the dollar relative to other currencies, and probably doubts in the mind of those people who reserve currencies as to whether the dollar is effectively the ultimate and prime currency of reserve.
MARGARET WARNER: But do you think it could trigger the sort of chain reaction that say the Lehman Brothers collapse did in ’08? Is it that potentially dire?
CHRISTINE LAGARDE: It’s difficult to predict. And if it – if it was to happen – because there are so many counterparties, for instance, that are invested in U.S. treasury bonds – then it would be very, very difficult and very traumatic, I would say. So my dear hope is that political leaders will have the courage and the humility as well to overcome political sensitivity and concerns and doctrines, which are perfectly legitimate, for the sake of the entire country and for the sake of the global economy.
MARGARET WARNER: So is that what’s missing here? I mean, as a European coming here to Washington – you’ve dealt with previous administrations – do you think that’s what’s lacking here is political courage?
CHRISTINE LAGARDE: Political courage is required. And I’m not – I’m not suggesting that it is lacking, but it has to be demonstrated in moments of crisis. I was last week in Brussels, and there was a moment of courage and solidarity amongst the European leaders, members of the eurozone area. It comes in times in crisis. And when it does, it’s quite extraordinary.
MARGARET WARNER: As long as finally people feel the crisis.
CHRISTINE LAGARDE: It – crises are very, very good change agents and change drivers, actually.
MARGARET WARNER: Even if it gives everyone heart attacks. Well, let’s look at Europe.
CHRISTINE LAGARDE: Well, you have to change just before, you know, there is the heart attack.
MARGARET WARNER: Just before the heart attack. Now, in Europe, as you said, there was this rescue – new rescue plan for Greece, how confident are you that that is going to be enough to stem the kind of contagion that you’re all – we’re all fearful of, from one European country to another in terms of debt?
CHRISTINE LAGARDE: What happened on Thursday was a collective determination to, number one, do what it takes to rescue Greece and to rescue it for the long-term. There was this very striking commitment made by the political leaders that they would continue to support the country and any country under a program until that country regained access to market, provided that that country would perform and deliver under the program. That’s a rare commitment, one that was sort of implied but one that they actually all signed up to, which is really very important.
The second thing they did, which was also critical, was to actually agree that this European financial stability fund that was put together a year ago would be flexible and could be used to buy on the secondary market, in case a country – and that goes to your contagion point – in case a country is at risk and needs financial support without really being a country in a situation of being bailed out.
So I think those two components, added to which they also agreed that the private sector would have to contribute, is really game-changer for Europe if they implement.
MARGARET WARNER: If they implement. But right now, the markets don’t seem entirely convinced. I mean, the Spanish and Italian bonds, the yields are going up, as you know, and the cost of insuring them is going up.
CHRISTINE LAGARDE: Markets are always very sensitive to uncertainty. I think what we’re seeing at the moment is this question mark about implementation, which is why I think it is so critically important, not just for Greece but for the euro member countries, to actually deliver on the commitment that the political leaders signed up to on Thursday.
MARGARET WARNER: Do you think that the Eurozone itself is at stake here, that this kind of commitment – where there’s really a very weak economy, nowhere in the league of Germany and France – that in this kind of global, financial situation, it really may be difficult if not impossible to sustain?
CHRISTINE LAGARDE: You’re right, which is why it was so important for them to actually say and write and sign up to: “we will sustain, we will support, we will be there”; it’s also a demonstration that the large euro area members – such as Germany, such as France, for instance, such as the Netherlands – are going to back up the rest of the zone and that they want to stand by the construction – this extraordinary construction of the monetary zone composed of 17 member states.
MARGARET WARNER: Whether it’s in the streets of Europe with the protests you’ve had or here in the halls of Congress, there seems to be a growing public and political backlash to having governments or taxpayer-funded institutions like the IMF, bailing out essentially, ultimately, private investors. How concerned are you that this kind of public discontent could really unravel the consensus that’s underpinned, whether it’s the EU or the U.S. or the IMF, for six decades?
CHRISTINE LAGARDE: Everybody needs to be a party to that and clearly the people have to see that past the period of fiscal consolidation, that other people call austerity, there will be a path for growth, there will be a path for jobs. It’s about making sure that the economic players will be able to create, will be able to employ, will be able to invest in research and development. That’s what we aim at.
MARGARET WARNER: And so as you take this job, you think about the IMF for much of the postwar, the past decades, the three big economies that have supported it – U.S., Europe and Japan – are all in serious trouble. Do you think that collectively there is enough political will, but also financial wherewithal, to actually weather this without slipping back into a global – further global recession?
CHRISTINE LAGARDE: Well, we certainly don’t want a global recession. That’s for sure.
It’s – you know, it’s a turn of the wheel. We had the Latin American countries in difficulty in the ’80s; we had the Asian crisis in the ’90s. At the moment, clearly the financial crisis that started in 2000 – late 2008, we all remember, has had sustainable effects and consequences in all economies but particularly the advanced economies because of the financial contagion.
So lots of jobs have been lost, but countries are in the process of rebuilding. It is going to take time, no doubt about it, and we need to be collectively concerned that we are aiming in the right direction and making sure that the less privileged, the most in difficulties – I’m thinking of, you know, countries like those in the Horn of Africa, at the moment, for instance – continue to have the right level of support. So it’s a balancing act for me here at the IMF as well, making sure that we focus on stability, but that we pay attention to those are most in need.
MARGARET WARNER: Madam Managing Director, thank you so much.
CHRISTINE LAGARDE: Thank you.