International Monetary Fund Managing Director Christine Lagarde defended the lender’s role in Greece and said the nation has made progress even as it needs to deepen structural changes to its economy.
“When I look back to the initial program and the achievements of the Greek economy and the Greek population, it’s impressive,” Lagarde told reporters in Washington today. “There is still a lot that the country can do.”
Greece’s budget deficit will narrow to 7 percent of gross domestic product this year and 2.7 percent next year, the Washington-based IMF said in a July 16 report. The IMF had forecast in April that Greece’s deficit will be 7.2 percent this year and 4.6 percent in 2013.
Lagarde also praised Spain, saying, “When we look at what Spain has already done, and is committing to do, there’s not much more that we would be asking from Spain if it was in a program with the IMF.”
Spain sought a European bailout for its banks in June of as much as 100 billion euros ($123 billion) as the government lacked the financing to shore up its lenders. Prime Minister Mariano Rajoy is fighting to keep enough access to markets to fund the deficit, and has called for the European Central Bank to buy Spanish bonds and for European Union nations to take steps to bring down borrowing costs.
The Spanish government will introduce debt ceilings for the 17 semi-autonomous regions, Budget Minister Cristobal Montoro said yesterday after a meeting with the regions’ finance chiefs.
Lagarde said all policy makers should be in “crisis-management mode,” and she hopes the region’s leaders will “indicate what vision the Europeans have for their euro zone. Not for the next three weeks, but for the next years, so that bondholders who buy a 10-year bond from Spain or Italy know exactly what Spain and Italy will be in 10 years’ time.”
On the U.S., Lagarde said that “there are serious questions concerning the U.S. economic future, particularly as a result of the potential fiscal cliff.”
She was referring to the more than $600 billion in higher taxes and reductions in spending that will take effect at year-end unless Congress acts. The nonpartisan Congressional Budget Office has said the economy would shrink by 1.3 percent in the first half of next year if the higher tax rates and automatic cuts are kept in place.
Greece has been told to overhaul its banks after lenders sustained losses on their holdings of Greek government bonds in the country’s debt swap, the biggest sovereign restructuring in history. The country obtained a 130 billion-euro ($160 billion) bailout from the EU and International Monetary Fund in March, which earmarked 50 billion euros for recapitalizing the banks.
“The IMF never leaves the negotiation table,” Lagarde said when asked about the lender’s role in Greece. “Will the IMF lose its credibility in the process? I will do everything I can to avoid that.”
Lagarde also reiterated the IMF’s view that “more can be done” on monetary policy by the ECB. She noted that the central bank, which holds a policy meeting tomorrow, has already acted, including cutting the benchmark interest rate to a record low of 0.75 percent on July 5 and taking the rate on overnight deposits to zero to help spur growth in the region.
ECB President Mario Draghi said July 26 that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”