Lagarde Signals IMF Role in Europe Rescues May Not Need Cash

The International Monetary Fund doesn’t need to lend money to Spain to help the country tackle its fiscal crisis, Managing Director Christine Lagarde indicated in an interview today.

“Some people say unless you have skin in the game, meaning money, you are not really respected, you are not heard,” Lagarde said in a Bloomberg Television interview with Sara Eisen in Sendai, Japan. “I am not so focused on that as I am on the monitoring. I think we would rather act in our framework, use one of the tools that is frequently used, but as I said we can be flexible.”

The fund is helping monitor a 100 billion-euro ($128.8 billion) bailout of Spanish banks and is co-financing rescue packages for Greece, Ireland and Portugal. While the European Central Bank has said the IMF should be involved in overseeing the economic programs of countries asking the central bank to buy their bonds, the fund’s exact role has not yet been defined.

Spain has been reluctant to ask for a bailout from Europe’s rescue mechanism, which comes with economic measures attached.

The IMF said this week it sees a one-in-six chance of global economic growth slipping below 2 percent. Whether Europe can deal “proactively” with its debt crisis will in part determine the severity of any slowdown, the fund said in its World Economic Outlook report. The Stoxx Europe 600 Index slipped 0.3 percent at 7:22 a.m. in New York today on signs China is yet to reverse its slowdown.

Fiscal Discipline

Europe needs to build on efforts including improvements in fiscal discipline, a firewall fund, and efforts to formulate a banking union, Lagarde said.

Nearly three years after the euro-zone crisis erupted, finance ministers from the 17-nation bloc this week started a 500 billion-euro permanent bailout fund known as the European Stability Mechanism that they say will be a financial backstop to prevent future crises.

“It was good cause for celebration,” said Lagarde. “We are seeing yields coming down, probably because investors are seeing that there is a European Stability Mechanism that can now operate.”

The ECB’s offer in August to buy bonds of fiscally struggling countries has driven down interest rates in Spain and Italy and bought European governments time to address the root causes of the crisis.

European Bonds

The yield on Italy’s 10-year bond was little changed at 5.11 percent at 11:25 a.m. in Rome, after it topped 7 percent last year at the peak of the crisis. Spanish 10-year yields were near 6 percent.

The ESM replaces the European Financial Stability Facility, which has committed 192 billion euros of its 440 billion euros to Ireland, Portugal and Greece. The two funds will run in parallel until the EFSF is phased out in mid-2013.

Lagarde said it’s wrong to assume that efforts to help Greece are failing, with the nation drawing “much, much closer” to settling on expenditure cuts and revenue gains needed to close a fiscal deficit. While labor costs need to fall further, the country has made gains in competitiveness, she said.

Europe is not the only concern for the 188 IMF member nations convening in Tokyo for the fund’s annual meeting. Central bankers from Japan and Switzerland expressed discomfort with the value of their currencies, and the Philippines said U.S. Federal Reserve decisions are complicating monetary policy.

Lagarde was in Sendai, a city in the region hit hardest by last year’s earthquake, where she toured the area ravaged by the tsunami and attended a forum on disaster risk management.

“It’s a mixture of both sorrow and huge admiration for what they’re doing,” she told reporters after hearing about reconstruction efforts.

To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Sara Eisen in New York at seisen2@bloomberg.net

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

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.