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(Correcting a reference to Greek Prime Minister Lucas Papademos in the second paragraph.(Correcting a reference to Greek Prime Minister Lucas Papademos in the second paragraph.) Dan )
Tell me how the second bailout for Greece came down. What were the hurdles?
The Greek parliament and political leaders had to sign up for tough structural reforms that are not popular but are going to be necessary to restore Greece to competitiveness. It has been growing far too slowly. And that is something the Greek people are going to be working on for some years.
Are they convinced they can achieve this politically?
The European finance ministers and the IMF have been very engaged with [Prime Minister] Papademos and the political parties to not only put forward a set of reforms but get them passed in parliament ahead of time and remain committed to them. They also reached agreement on a voluntary bond exchange, which will significantly reduce Greece’s private sector debt. I think it was on the basis of a strong set of structural reforms that Europe came together in support of Greece.
Can you have this kind of austerity and still have growth?
European leaders are grappling with the challenges of supporting growth at a time when several of the countries are also trying to get their fiscal deficits down to more sustainable levels. If you look at Europe going into the crisis, what really stands out for most of these countries is the extent of internal imbalances that arose during the years leading up to the crisis. That has changed. The private market’s pulling back. And what is going to be vitally important is for countries like Italy and Greece and others to grow on the basis of more competitive private sectors. Those are the reforms they’re putting into place.
What worries you about it?
The political dynamics are inevitably slower than the market dynamics. In the monetary union there’s monetary integration. But the fiscal side still sits with 17 national parliaments. The other thing is that Europe is just so important in the global economy. It’s a huge trading partner of ours; our financial sectors are interconnected. So we have to make sure that the risks emanating from Europe are well-managed. The key reforms that we’re talking about have got to be about growth and an overarching fiscal compact. The steps taken [on Feb. 21] get Greece on a sustainable course. Mario Draghi and the European Central Bank have taken steps to ensure that the banking system has the requisite liquidity and capital buffers. The final thing is the firewall—protecting the larger economies from spillovers as some of these countries work through their reforms.
Does the U.S. have a say?
We do have significant influence through our majority shareholding in the IMF. And since it is engaged as a central partner in these reforms, we stay very engaged as well.
Did the IMF play a large part in this?
Christine Lagarde has been very much at the negotiating table. And we want the IMF in there. They have an unparalleled track record of bringing credibility and technical advice to make reforms hang together and to help restore countries to growth. The other thing that we bring to the table is a President who has navigated the biggest financial crisis we’ve seen in decades. President Obama has a good sense not just of the economic requisites for financial crisis firefighting but also how you build political support for moving forward on reforming the financial system, making sure that the banks are carrying enough capital. This is of course something that the Europeans are just now undertaking.
Can we find international standards for dealing with this?
What has been remarkable is that we have worked in parallel. As Congress was working on the reforms under the Dodd-Frank Act, we worked on getting conforming agreements internationally. At Basel we got the same capital and liquidity requirements that our banks are now coming into conformance with. Those have been adopted in other major financial jurisdictions.
When you report back to Secretary Geithner and the President, do you say, “We got the firewall that was necessary for the U.S. and its economic recovery”?
The piece of the European crisis response that is still a work in progress is that firewall. They’ve made a lot of progress on it. They were going to assess the size and strength of it in early March. We think that will be an extremely important signal to send to international markets to help restore confidence.