Bloomberg News

Lagarde to Defend IMF Credibility in Euro-Area Talks on Greece

November 17, 2012

International Monetary Fund Managing Director Christine Lagarde said she’ll defend the IMF’s credibility in talks on Greece this week, signalling a potential clash with euro finance chiefs over Greek debt sustainability.

Lagarde cut short a visit to Southeast Asia yesterday to return to Europe for a meeting with euro-region finance ministers in Brussels on Nov. 20. With the two sides deadlocked over the timeline for reducing Greek debt levels, Lagarde said she was approaching the talks feeling “patient and resilient.”

Speaking in an interview in the Philippine capital Manila before leaving for Europe, Lagarde said she’ll seek to “operate independently” while sticking to the fund’s rules, suggesting no retreat from her position in the negotiations. Maintaining the “solidity of our advice” on Greece will be just as important as ensuring the country’s program works, she said.

Lagarde took issue last week with European governments’ decision to push back a debt reduction target by two years to 2022 against the fund’s recommendations, raising questions over whether the IMF would keep financing Greece. Agreement on how to reduce Greece’s debt to sustainable levels is key to disbursing the next tranche of aid under the bailout that euro nations co- finance with the IMF.

“We never leave the table,” Lagarde said in the interview when asked about dropping support. She declined to answer a question on whether the IMF has room for maneuver in the negotiations.

‘Solid Program’

The IMF’s goals are to achieve “a solid program for Greece that convinces investors today that it will stand tomorrow, and the reliability, credibility, quality of the advice we give and that we lend to the Europeans,” Lagarde said. “I’m always desperately optimistic and I’m always trying to be constructive, but I’m guided by the two objectives.”

The IMF target is for a reduction of Greece’s debt to 120 percent of gross domestic product by 2020, from a projected peak of 190 percent of GDP in 2014. European officials at a Nov. 12 meeting agreed to postpone the 120 percent target to 2022, while rejecting a write off of official debt. The Nov. 20 meeting was called to reach a final deal.

The fund’s credibility rests on the quality of its advice, according to Lagarde. While the IMF accounts for less than a third of the 240 billion euros ($305 billion) pledged for Greece since 2010, the participation of the fund, with its experience in shoring up distressed economies, has helped give investors confidence in the packages for Greece, Ireland and Portugal.

“It’s not our billions of dollars that really matter on this occasion,” Lagarde said. “It’s the solidity of our advice that we are lending to the program.”

Debt Write off

European Central Bank Governing Council member Jens Weidmann said Nov. 16 that Greece may need a second debt write off after policy makers in Athens enact economic reforms. Lagarde, who has suggested that Greece may need another debt cut, declined to comment on Weidmann’s suggestion.

Greece has already undergone the biggest sovereign restructuring in history after getting private investors to forgive more than 100 billion euros of debt in March. German Chancellor Angela Merkel’s chief spokesman said last month that imposing losses on European taxpayers who have lent to Greece is “out of the question.”

In Malaysia on Nov. 14, Lagarde said for Greece the IMF wants “a real fix, not a quick fix and that means clearly a debt that is sustainable as quickly as possible.” At an earlier press conference last week, she stuck to the IMF’s recommended target date of 2020 and acknowledged the disagreement with euro finance chiefs.

Officials including Italian Finance Minister Vittorio Grilli and his German counterpart, Wolfgang Schaeuble, have since expressed confidence an agreement can be reached.

Fiscal Cliff

Lagarde said that officials she met in Malaysia and the Philippines talked to her less about Europe’s debt crisis than about the U.S. They were concerned about its ability to avoid the so-called fiscal cliff, the combination of $607 billion in automatic tax increases and spending cuts that threatens to throw the country into a recession next year without an alternative agreement by lawmakers.

Treasury Secretary Timothy F. Geithner said in a Nov. 16 interview on Bloomberg Television’s “Political Capital With Al Hunt” that he’s confident an agreement on averting the fiscal cliff can be concluded within weeks after White House talks between President Barack Obama and congressional leaders.

“I think the several weeks will be necessary for people to come to common sense, to practicalities and to get away from their campaign positioning,” Lagarde said in reference to Geithner’s comments. A “sense of practicality will prevail.”

To contact the reporter on this story: Sandrine Rastello in Manila at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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