Christine Lagarde

International Monetary Fund (IMF) Managing Director Christine Lagarde spoke with FOX Business Networks (FBN) Liz Claman about the United States recovery and her outlook on the global economy. Lagarde discussed the Greek bailout and whether it was a mistake for the IMF to bend their rules on exceptional access, saying, “We did not, you know, break any rules; we applied the rules with a specific caveat concerning Greece.” In the case of Greece, she said, “If we were in yesterday’s situation where the Eurozone did not have a firewall, I think we would probably have had to recommend the same thing because having recommended something different might have exposed the whole Eurozone.” Christine Lagarde also spoke about why the IMF is urging the United States to repeal the sequester cuts, saying, “I think it was put in place precisely to be avoided,” though she pointed out there is a recovery underway in the United States that is “much more stable and durable than we had seen before.”

Excerpts from the interview with Christine Lagarde are below.

Christine Lagarde on whether it was a mistake for the IMF to bend their rules on exceptional access in the Greek bailout:

“Those reports are intended to learn from past experience and to avoid a repeat of unsuccessful devises of program and they’re complicated reports because you put today’s binoculars on and look at yesterday’s situation. If we were in yesterday’s situation where the Eurozone did not have a firewall, I think we would probably have had to recommend the same thing because having recommended something different might have exposed the whole Eurozone which was a much bigger gamble than addressing the country program appropriately by the standards. We did not, you know, break any rules; we applied the rules with a specific caveat concerning Greece which was approved by the institution which was approved by the board. The IMF is known to be very rule-driven so anything that we do is approved by the board and we are also known for revisiting what we do and drawing lessons.”

Christine Lagarde on why the IMF is urging the United States to repeal the sequester cuts:

“I think a lot of people thought that sequestration was ill-designed.  And I think it was put in place precisely to be avoided. So what we are saying now is slow down, but hurry up.  What do I mean? Slow down, there’s no need to contract the deficit by 2.5 percent.  It’s very heavy on growth and it really impacts by about 1.5 percent, maybe a little bit more, particularly if it picks up in the second quarter of 2013. We’re also saying hurry up because there are long-term measures that will be critical for the U.S. economy that need to be taken now, particularly concerning entitlements.”

Christine Lagarde on why she believes the nature of the U.S. recovery is changing:

“We believe that there is recovery and that that recovery is much more stable and durable than we had seen before. We forecast the U.S. economy at 1.9 in 2013 and we believe that because of the housing market’s significant improvement in particular there will be a more durable recovery. Yet, it could be better.  And clearly, the unemployment numbers are not where they should be.  They should be lower than that.  And we see the fiscal policy, the difficult cutting, as being too harsh on the economy at the moment.”

Christine Lagarde on the US unemployment rate:

“When the US economy is working at full potential if you will, unemployment should be lower than that which is why we are saying that while the recovery is underway, it has to continue.  It has to be persistent in order to effectively, have a dent on unemployment.”

Christine Lagarde on why the IMF revised the 2014 growth outlook for the U.S.:

“When we forecasted 3 percent, we had assumed that sequestration will gradually be removed and reformatted more intelligently. And we haven’t seen that.  And we feel that we’re not going to see it in the near term, which is why we believe that sequestration will actually impact growth in the United States in 2014, which is why we downgraded slightly, from 3 percent, to 2.7 percent, which is a lot more than this year.”

Christine Lagarde on when she believes the Federal Reserve will begin tapering its quantitative easing (QE) program:

“For our statement that you’ve just indicated to the audience we have to make assumptions and our assumptions are that there will be a continuation of quantitative easing of the Fed until the end of 2013. We believe it was appropriate.  It’s been very helpful.  And we hope that it continues until the end of 2013 given the circumstances.  2014, depending on circumstances, and particularly if unemployment improves and if inflation is, you know, slightly heading up a little bit, then hopefully the monetary policy that has been put in place will gradually unwind over time, with good communication…the monetary policy put in place has actually helped the U.S. economy significantly.  It has given it breathing space.  It has clearly had an effect on the long-term interest rates, which is what was intended. We’re seeing it now in the results. But the Fed has actually outlined two different parameters.  One is the unemployment situation and the inflation target, which are the two objectives pursued by the Fed. For the moment, the unemployment numbers are still quite high.  You know, 7.6 percent, you know, that needs to come down.  And inflation is very well anchored around 2 percent.  Probably the real inflation numbers are lower than that.  It’s about 1.8 percent. So the Fed has still to see results coming in before it gradually phases out. Our recommendation is clearly that the phasing out be done prudently, carefully managed, well communicated.  It has to be appropriate both for domestic purposes, but, also with due regard to what is happening in the emerging market economies.”

Christine Lagarde on whether U.S. financial institutions can withstand any strain that might result following tapering:

“You’re talking about the financial institutions, the big ones, as they’re called.  You know, these financial institutions have been strengthened so much since the beginning of the financial crisis.  They have been significantly recapitalized.  They are under very serious, steady, regular control by the Fed. They’re well supervised and they are operators that will appreciate, understand the movements on the market depending on how the tapering takes place and when it takes place.”

Christine Lagarde on whether she sees any stresses in the Eurozone right now that are worrisome:

“I wouldn’t point to any particular country because clearly it’s an economic region of the world that is under strengthening, re-architecturing and that process is well underway.”

Christine Lagarde on whether she thinks problems in Europe will be a significant drag on the U.S. recovery:

“It’s one of the potential risks on the horizon but that risk was very heavy back a year ago. It has

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