CNBC'S Maria Bartiromo spoke with IMF Managing Director Christine Lagarde yesterday. A transcript from the interview follows:
Maria Bartiromo: Miss Lagarde, thank you so much for joining us.
CHRISTINE LAGARDE: My pleasure.
Maria Bartiromo: Good to see you again. First, I want to talk about the meeting here and what you're accomplishing at the Tokyo meeting. But let me begin on the most recent downgrade of the global economy. Tell me where we are and what has happened in the last few months.
CHRISTINE LAGARDE: We have revised a downward forecast for 2012 and for 2013. And it's been sized downwards. But I just want to point out that the economy is growing. The global economy's growing. We've revised downwards, but it is still growing at 3.3%. And next year we forecast 3.6%. So, a little bit of an uptick from each year's rate of proof.
When that happened essentially is that in addition to the what we call the tailor risks that we have, which was the euro zone with the uncertainty of policies, with the sovereign debt hanging over some of those countries, and the U.S. fiscal cliff and debt ceiling, which are also two uncertainties that are looming in the background, we have had an effect now on the emerging market economies.
Six months ago, we didn't truly expect either Brazil or India or China or Russia to, you know, slow down compared with the reasonably fast pace at which they were growing. So, we chose two things– that the advanced economy reduced activity is having an impact on the emerging market economy, and some of those emerging market economies are having their own domestic issues to grapple with as well.
Maria Bartiromo: Yeah, because, I mean, Brazil at one point was growing 7%–six percent–and now this last quarter was very weak. It's interesting, because these nations really were the engine of growth for the world. So, take those out, and you have this further spiraling.
CHRISTINE LAGARDE: Right. It's when some of them are most disappointing. To look at China, for instance, we heard the Chinese representative on at the meeting this morning indicate that they firmly believe that they will reach 7.8%, which is okay pointing to descent from the initial growth forecast of 8%, but it is still a very significant growth rate for a country such as China.
Maria Bartiromo: Let me ask you about the most recent meeting with officials in Greece. Because afterwards it was clear that the differences remain going into a very important moment, they said, if they run out of money at the November. What is the next step here? Are you prepared to offer a further bailout?
CHRISTINE LAGARDE: There's a process going on as we speak. We have a team on the ground– fund the IMF. They're members of the European Commission, members of the European Central Bank. And they're working hand in hand with the Greek operatives to identify, number one, the fiscal consolidation measures that are needed, number two, the structural reforms, what programs have been made. They're looking at the financing of the program as well. And– also, they're looking at the debt burden on the country to see whether this whole thing can actually work properly as is.
Maria Bartiromo: When will we know if Greece gets that next tranche of bailout money?
CHRISTINE LAGARDE: I think we will know as soon as they reach conclusion of the review, which should be, you know, in the next few days, couple of weeks. I don't exactly– it will take what it will take, because they really have to go into the details of the fiscal measures, both for 2012, 2000 and 13 and 2014. It's a three-year program that we are talking about.
Maria Bartiromo: And what's the sense that you are willing to give them more time, that you are sort of easing up a bit on the sharp austerity? Are you changing your stand?
CHRISTINE LAGARDE: We have consistently said that given the very major adjustment that Greece has made, about 14% of GDP in the last– three year– since the first program had started– they need a little bit more time to continue the adjustments. More needs to be done, what needs to be done at a sensible pace and a pace that they can deliver on.
The key thing, you see, is that country be back on track, the country be able to react with market. If we put upon them obligations that they simply cannot deliver on, because it's just too hard and too much– the program is not going to be credible. So, our position is that we would rather have a program that is difficult but credible rather than a program that is going to be so difficult that it is not credible.
Maria Bartiromo: And just unrealistic. I guess there's a balance to walk growth and stimulus versus austerity.
CHRISTINE LAGARDE: I don't think we're talking about growth or stimulus at the moment in Greece. For the moment there is still, you know, tax consolidation to be had and structural reforms to implement. And there is also privatization to complete. And there is also revenue to collect. That's really what is on the agenda.
Maria Bartiromo: The report out of Citi back in the July, that put a 90% probability that Greece actually will leave the euro zone– what is your take on that?
CHRISTINE LAGARDE: I think they've come to 60%, haven't they?
Maria Bartiromo: It has gone down, for sure, since July. But there's still an overwhelming majority, that they believe that Greece will leave the euro zone.
Maria Bartiromo: What do you think about that?
CHRISTINE LAGARDE: It is good that those numbers are changing, because it shows that people are very attentive to what is happening on the ground. My sense is that there is a renewed political commitment of the euro partners to try to find solutions to keep the monetary zone together. But, you know, that commitment has to be accompanied by appropriate measures taken at the national level, measures implementable at the institutional level and, you know, financial commitment on the part of the partner.
Maria Bartiromo: You have complimented the ECB's effort and of course, central banks around the world providing stimulus. But when is it too much? What is your opinion in terms of all of this free money and stimulus that are– that is coming from so many central banks around the world? Can you keep doing that or do you need fiscal policy at some point to replace some of the monetary policy changes?
CHRISTINE LAGARDE: See, I think that one cannot replace the other. And it works both ways. The monetary policy by the central banks will not replace fiscal policies by the government. They have to, you know, go together. And clearly both in the U.S. and in a euro zone– central bankers are saying, you know, "We've done our bit. Where are you, governments, with your fiscal measures?" And that's what's needed–
Maria Bartiromo: Well, what would you like to see in terms of fiscal measures in Europe? For example, take Spain. A lot of people feel that Spain has worsened while Italy has actually stabilized a bit. What can you tell us about the nations in India right now, the most struggling only from Greece?
CHRISTINE LAGARDE: First of all, I would say that most of them are taking effective fiscal measures in order to consolidate their fiscal dilution. And ultimately, in the medium and long-term– you know, redress and reverse, they– their debt trajectory, which is currently climbing to stabilize the debt and then to go into a reduction of the overall debt.
So, they're doing that job in the main– not all of them– but they are essentially doing, I think, quite a bit. It has to be credible. That's our key concern. It shouldn't be just the numbers for the numbers, which is why we're saying that they should focus on the measures rather than the numbing on target.
What is more needed in Europe and in the euro zone in particular is for governments to deliver on the commitment for, say, more Europe banking union, fiscal union, maybe political union, as the chancellor has indicated. That's what, I think, the Central Bank is expecting. That's what the partners are expecting and was mentioned, actually, earlier this morning.
Maria Bartiromo: What about the banks? You have said the IMF has said that Europe's banks may need to sell as much as $4.5 trillion in assets for 2013 if policymakers fall short. Can you characterize the capital right now of the European banks?
CHRISTINE LAGARDE: I wouldn't go into the technical details of the capital and every bank in Europe. I think the banking supervisory committee of the Basel Committee has done its job. There is really clear scrutiny applied by the super policies on the ground at national level. And that's what needs to happen.
Maria Bartiromo: In terms of France, what do you make of the latest policy there in terms of rates– tax rates up to 75% on the highest earners? Is this appropriate?
CHRISTINE LAGARDE: I'm afraid I'm going to disappoint you, because hate to take up questions on France for, you know, this reason.
Maria Bartiromo: Because it's your country.
CHRISTINE LAGARDE: Correct.
Maria Bartiromo: It does seem a little aggressive from a policy standpoint. Do you think we could see that kind of tax rates in other countries? I mean, this is a real debate. I understand you don't want to criticize or comment on something going on in France. But you have to be thinking about this.
CHRISTINE LAGARDE: Well, what we say is that, you know, deficit reductions come two way– you reduce the public spending or you increase the revenue, meaning you increase the tax. Our sense is that– and our studies actually show that by reducing public spending, you generally reduce deficit in a more efficient way. As far as revenue's concerned, it's often more efficient to have a large base and the small rates, other than a very high rate and a very small base. But those are general terms that, you know, are not country-specific.
Maria Bartiromo: These are the issues we're dealing with in the United States every day. So, what's your take on the fiscal cliff in the U.S.? You have been very vocal in terms of warning that this is– has real implications. What is your take on where we are in the U.S. and that fiscal cliff?
CHRISTINE LAGARDE: The IMF has been warning for quite a while about the uncertainty risk associated with a fiscal cliff and the debt ceiling– both of them. This uncertainty's going to increase as we get closer to your end. And it's a concern because, you know, investors households, people who want to buy a house, make an investment, hire people, would like to know what the environment is going to be like and what the fiscal deficit– momentum and process will be in 2013, and more importantly, going forward, so that they appreciate exactly what environment they will be in, what tax rates will apply, what loopholes will survive or not.
Maria Bartiromo: Increasingly, we hear executives, managers of businesses say they're just going to sit on the money because they don't know what's to come. So, do you think after the U.S. election we'll have more clarity? I mean, when will things loosen up?
CHRISTINE LAGARDE: As soon as possible would be desirable is all I can say.
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