Charlie Rose Talks to Christine Lagarde

What are the IMF and euro zone countries prepared to do for Greece?
No. 1, we're going to do it jointly with the IMF. No. 2, we will ask the Greek authorities to face reality, disclose numbers, be honest about their statistics, and sort out their public finances deliberately, decisively, and facing public opinion.

How much money is involved?
The euro zone group will be in for the first year for 30 billion euros, which is roughly $40 billion, and then the IMF will kick in and finance its part as well. I'm talking about the first year of the program, which is going to be at least a three-year program.

What demands are you placing on Greece?
As Prime Minister [George] Papandreou said back in January, Greece's biggest deficit is the deficit of confidence and lack of trust in the numbers and statistics Greek authorities have released in the past. The Greek government is determined to come clean. [And Greece must] restore public finances because at the moment it is running a deficit in excess of 13% of GDP and a debt-to-GDP ratio in excess of 100%. That has to come down on both fronts. How do they do that? By collecting more taxes and cutting public expenses. It's a set of very harsh measures that are not pleasant for the Greek population, but it has to be done.

Where does Germany stand?
Germany is…the biggest payer because it's the biggest player. Germany's contribution in the first year would be in excess of $8 billion. Our contribution from France would be slightly over $6 billion. And clearly, Germany is concerned, as we all are. But it expresses its [concern], given its own…domestic issues, in a harsh way. Germany is concerned that there is actual delivery by the Greek government, by the Greek authorities, and by the Greek population.

You mean that Greece is prepared to adhere to the austere measures?
Yes. Absolutely. And that's a legitimate concern because…we as lenders need to make sure [Greece delivers]. That's where the IMF also comes in because it has the expertise to monitor implementation of the plan.

If you don't do this, what happens?
The markets will keep attacking Greek finances and the spreads—the way you measure at what rate Greece can borrow—will rise, and people that hold debt will dump what they have. We need to show solidarity…because there is no way Greece is going to be let down.

So what happens if it's not enough?
It will be enough. It has to be enough.

There is a story that some American investment banks helped Greece hide the level of the debt. Is that true?
I've heard the allegations. I know that the SEC has done some investigations in that respect, and I heard that [the situation] was clean under the regulations that existed then. However, I think what the Greece crisis has evidenced is a clear failure on the part of the regulations [governing] credit default swaps on sovereign debt like that of Greece, which can be traded under the counter without any transparency. It's just fully wrong.

There are serious conversations right now in the U.S. Senate about derivatives.
And we're going to have the same conversations in Europe because the European Commission is going to propose in June a draft directive on the use of derivatives that will point in exactly the same direction—transparency, accountability, ability for the authorities to say: "Whoops, stop. It's too much."

Where is the divide between Europe and the United States?
I hope there is no divide because to do a good job we need to have a coordinated approach. That doesn't mean the solutions have to be exactly the same, but they have to be sufficiently consistent so that there are no loopholes, no room for arbitrage by those who want to escape regulations. We need to set the rules properly, discipline people, bring the ethics out of this mess, but at the same time we don't want to kill the economy.

What ought to be the legitimate activity of deposit-bearing banks? Should they be in proprietary trading, hedge funds, that kind of thing?
I think what matters is covering the risks appropriately. And those banks engaged in proprietary trading should have a very high level of coverage. For those in the hedge fund business, same thing. But does it make sense to actually forbid an institution [from engaging in a certain] type of activity? That I'm not sure of.

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