18/04/2016 HARDtalk


18/04/2016

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Welcome to a special edition of HARDtalk from George Washington

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University in Washington, DC. Just how fragile is the global economy?

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Well, the US capital is currently hosting the annual spring meeting of

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the International Monetary Fund. Many delegates to that meeting he

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with me our audience today. I am delighted to say that my guest is

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the managing director of the IMF, Christine Lagarde. Good 2016 produce

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an economic shock big enough to plunge the world back into crisis?

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Thank you very much, and welcome, Christine Lagarde, to HARDtalk.

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Thank you, Stephen. You, right now, seem to be very twitchy, very

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nervous, about the state of the world economy. Am I right? We are on

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alert, but not alarmed. I think that is one of the key points that we

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would like to make, and that I am happy to make with you, because the

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global economy is recovering, there is some growth. We forecast 3.2% for

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2016, possibly 3.5% in 2017. But you are becoming progressively more

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pessimistic, you are downgrading. We have downgraded our forecast, and

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what we see is growth that is too slow and too fragile. You will say,

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compared with what? It is to slow and too fragile to respond to the

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demand of nearly 200 million people who are looking for jobs. It is too

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slow and too fragile to increase the standard of living of people who

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would like to see it grow, and it is too fragile and too slow to continue

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to eliminate poverty around the world in countries that are still

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suffering from poverty. Not only that, you seem to be suggesting that

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without, to quote you, additional measures, to boost growth, market

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turmoil may continue. You seem to be suggesting we are not that far away

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of a replay of 2008. What we are saying is that if policy makers

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don't decide promptly on three categories of measures that I'm

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happy to describe for you, then yes, there could very well be a real

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deterioration of this fragile and slow growth, which really would be

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moving definitely and entrenching what I have coined as the new

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mediocre, where everything that should be highly slow and everything

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that should be low is higher. How secure is the global banking

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system, do you believe? We are talking about the danger of

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something as to Malta was as 2008 happening again, it suggests to me

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that all of the talks and spend about securing the banks and

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ensuring the financial system would never be as vulnerable again, has

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been for naught. I'm not saying we are in 2008 situation, but what I am

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saying is that if that slow and fragile growth is entrenched, then

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dealing with the legacy of the crisis is going to be increasingly

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difficult. The financial sector has changed significantly over the last

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seven years. Measures have been taken to strengthen the banks, they

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have more capital, more of that loss absorbing capacity, in case

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something happens. The authorities are much more concerned about

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supervising them and making sure that if something wrong happens they

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can be dismantled in an organised way, rather than this disorganised

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way that... Their own staff say that nearly 1 trillion euros worth of

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non-performing loans, zombie loans, are on the books of Europe's banks.

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That is what I meant by the legacy of the crisis. If you remember,

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shortly after the financial crisis, the US banking system had to go

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through a massive reorganising and had to deal with the non-performing

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loans. This has not happened everywhere in the world, and there

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are countries and banks in Europe, particularly in some countries of

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the eurozone, not all. Which ones? Daily Telegraph are not going to...

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Don't get me there... In a sense, you are the custodians of the

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capital system. You have a duty to tell us where the vulnerabilities

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are greatest in the banking system today. What I can tell you is that

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the global system and important banks are much more strongly

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recapitalised and have a better resistance level to a crisis, but in

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some of southern Europe, for instance, but also in other corners

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where smaller banks are not as well recapitalised, there is a risk that

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is there. You talk about Europe, so let's stick with Europe. The grease

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problem is nowhere near resolved. It seems to me that the IMF and the ECB

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and the EU now have a fundamentally different problem about what to do

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with Greece. You are at loggerheads. How are you going to figure out how

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to resolve the Greek crisis? Everybody wants grease to be more

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stable -- Greece to be more stable, more solid and more independent. In

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other words, not relying on the IMF or the European stability mechanism

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to have finance. Specifically, we just had from Wikileaks information

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that in March, your crisis management team were talking to IMF

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officials on the ground in Greece, and said that in their opinion the

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only way that the Greece crisis could be resolved is if Greece is

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pushed to another credit event. That is, very close to default. Only

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then, it seems the IMF believes, the European and international mines

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will be focused enough to get a deal. Is that what you believe? We

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are not in the business of soliciting credit events. What we

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see in Greece is common objectives, and we are calling for a test of

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realism and sustainability, so we are saying that the numbers have to

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be realistic. We cannot have far-fetched fantasy hypotheticals

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concerning the future of the Greek economy. Second, we also need to

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have real measures that are demonstrated by the Greek

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authorities, and that will actually restore the Greek economy, and

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third, it is a three legged up a proposal, there needs to be debt

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that is sustainable. If you combine the three you needed that operation

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that will reduce the burden of debt on Greece. The IMF seems to be

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saying that without meaningful debt relief as part of the bailout

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package right now, you will walk away. What is meaningful debt relief

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for Greece mean to you? We are saying one thing, which is debt,

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which is real measures, which is General equilibrium and

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sustainability for the country. So it is not just that, I will come

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back to that, because they know you are interested in debt. What we're

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saying is that he needs all add up. The more measures are taken, the

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more realistic they are, the less restructuring will be needed. If the

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measures are low, poor quality, a lot of debt restructuring will be

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required. There is a trade-off and it needs to be adding up. Currently,

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as envisaged, the debt is not sustainable, and what is required is

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a debt operation. What do you want to see on debt relief? The

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Europeans, particularly Angela Merkel, they are saying no, it is

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all about the Greeks coming up first with more serious pension reform and

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structural reform. Only much later will be talk about the kinds of debt

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relief the Greeks want. What is the IMF say on the central issue? What

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we are saying is that it needs to add up and we cannot have one

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without the other. Does the EU approach work? The reforms have to

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be conducted, legislated, and on a parallel track, which can be

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immediately consecutive to that. The debt must be analysed to make sure

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it is sustainable without package of reforms, and if it is not

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sustainable, which is most likely to be the case, then a debt operation

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needs to be considered. That can take multiple forms, it doesn't have

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the nominal haircut. It could be an extension of maturities, it can be

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an interest rate holiday for a period of time, it can be much

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reduced interest on the principle of the Greek debt. We are very open to

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the modalities of that, but what we cannot compromise on is the fact

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that it needs to add up. A yes or no, then we must move on. Yes or no,

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is it possible the IMF will walk away from the Troika they a lap of

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the Greeks? We will not walk away. Our contribution may vary depending

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on the actions of the Greeks and the undertakings of the department, but

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we will not walk away. Other shocks that we see in 2016, and that you

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have been very strong on in recent statements at the IMF, Brexit. The

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idea of Britain leaving the EU. Your team have said that would cause not

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just to be a national, but regional and global economic damage. What do

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you base that on? Partly preliminary analysis. Guesswork? Partly

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intuition. There is a tiny bit of my personal feeling that comes into

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play, because I love so much the UK that I want them to be with the

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Europeans, of which I consider myself. But we are doing some very

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in-depth technical and analytical work, because as we always do with

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the UK as we do it every other economy, we are going to analyse

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in-depth the status of the UK economy, and we are going to have a

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special chapter which will concentrate on the potential costs

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and benefits of the risk of Brexit. You have just looked about your

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personal, strong view, about Britain and EU, are you comfortable with the

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fact that the IMF is now making statements that clearly play a huge

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political role in an internal, democratic tradition of eight? What

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right does the IMF have two play that kind of role? Clearly embedded

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in the articles of the IMF is our duty of analysing and maintaining as

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much as we can, stability in the global economy. You just talked

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about intuition. No, I said preliminary work that we are doing.

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Suffice to look at the numbers. Our forecast has been slightly

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downgraded for the UK, and if you look at the overall assessment of

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all economist is about the UK economy, it is slightly lower than

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where it used to be. If you look at the value of the Sterling, it is

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also slightly lower than where it used to be. Let's look yonder

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Europe, China. This is an extraordinary statistic. China's

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exports fell 21% in February for 12 months before that. People around

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the world are losing faith in China's ability to drive the global

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economy. How worried are you about China? Our job is not to look at the

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latest stock market movements, or the most recent numbers. We have to

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look at trends and fundamentals. Structural issues like the 282% of

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GDP's worth of debt that they reckon China has accrued. China is deeply

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indebted and highly vulnerable, and it is your job to make sense of that

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for the world economy. Absolutely, which is what we are doing. On

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China, forgive me one microsecond...

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First of all, let's start with big numbers. The growth of China 2016,

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we forecasted 6.5%. And surely it's one of the few countries where we

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have slightly upgraded the number because we looked at the proposed

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measures under the plan that has just been approved -- actually it's

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one of the few countries. Some of the structural reforms which we have

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been advocating are clearly endorsed by all the authorities now. We've

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been saying for a few years that state owned enterprises must be

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restructured, must be reformed. This is definitely the project that the

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authorities have embarked upon. So good news. SPECint. It is an economy

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that is going through a massive transformation -- second. It's

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moving from being vastly export driven to being much more focused on

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its domestic market. It's moving from being heavy industry based to

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being lighter industry and predominantly service driven. It's

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clearly moving in terms of opening to the rest of the world,

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particularly in relation to the capital account, in relation to its

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supervisory capacity and in relation to mix in strange rate regime. We

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see all that as transformational -- its exchange-rate regime. Difficult

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to manage but manageable. Let's move away from significant potential

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shocks facing the world economy in 2016 and look at the health of

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global capitalism today. I've called you the custodian of capitalism,

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global capitalism, I'm not sure if you like that phrase, but this is

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what one of your key staff said, the economic counsellor, he said,"

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Stagnant pay, rising inequality created a sense that the rewards of

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economic growth are being creamed off by mobile elites, the owners of

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capital, leaving the majority behind". That's a deeply worrying

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diagnosis of the way capitalism works in the world today. Well I

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highly respect Maurice up slope's views. I hope so because he works

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for you. He is the chief counsel of the IMF. Look at our research, look

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at the numbers, there is clearly increasing inequalities and we

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believe successive inequalities to have sustainable growth on a

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long-term basis. We are clearly advocating this issue of successive

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inequalities be addressed and there are numerous ways to do that. If I

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may interrupt, because it is so timely and so topical, one of the

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key ways you might show willing to address the degree to which there is

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one rule for the rich in the world today and something entirely

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different for the rest of us is to address the problem of tax

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avoidance, tax evasion, call it what you will. The Panama papers have

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revealed so much. Were you surprised by what they revealed? What is

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needed... Were you surprised, I want to know whether... When we learned

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so many politicians, business leaders, elites have squirrelled

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away money for 1-way two reason or another in offshore havens like

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Panama and islands in the Caribbean, did that surprise you as

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director of the IMF Grosjean it did a bit, but I haven't seen the

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documents, I haven't looked at them and I can't comment on the

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illegality of it all. Irrespective of that, which needs to be addressed

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per tax authority in each country, and I hope it does, but irrespective

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of that we need to understand why there are so many loopholes in the

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system that actually conduce to that sentiment which were very well

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described of some people feeling excluded from the benefit and the

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outcome of growth and success, because that is just not right.

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Here's a figure, Boston Consulting Group reckon private wealth booked

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in offshore centres grew by 7% in 2014, this is going back a bit, to

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reach $11 trillion. That's money that isn't being taxed, that isn't

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going through the state national governments to pay for roads and

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hospitals and education, because it is being squirrelled away offshore

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and tax is not being paid. Is it in your view time to get together with

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national governments, leaders around the world, to close down the

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offshore highly secretive tax havens, whether they be in the

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Caribbean, the Channel Islands, statelets in Europe, wherever they

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may be? I remember in 2010 when I was Finance Minister for France, and

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together with the president at the time we launched that campaign. And

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it was a very difficult one of trying to eradicate some of those

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tax havens. Thus far it has to be said it's been a total and utter

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failure. No, I disagree with you and I'll tell you why. Many governments,

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not all, but many governments at the time endorsed the project and said,

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we need to deal with this. And what is called BEPS, which is funny, not

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so funny, bass and regime and project shifting project has been

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undertaken and endorsed by many economies, applies to corporate is

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in the main and that's an area where it needs to be made universal, and

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should be made universal the automatic exchange of information

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between countries. But the problem is everyone has to be part of it. If

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you have little holes in the system, well, creative thinkers and tax

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optimisers, and there are plenty of those, and they have great minds and

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great imaginations, will find ways through those holes. It needs

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leadership. It needs global leadership. It needs to be totally

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comprehensive and it needs to include the implementation arm of

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it. I'll tell you, we are doing a lot of work in that area when we do

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technical assistance on anti- money-laundering, on

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counterterrorism financing, we do the assessment and sometimes we have

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crucifying reports, but nothing gets done. You're saying you're trying to

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do work at the IMF and you talk about the need for global

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leadership. Let me ask you a personal question. We need to think

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outside the box. I'm going to talk in terms of your box, how much tax

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do you pay on your summary? Like all IMF staff members, and all World

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Bank staff members, we are tax exempt, that's taken into

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account... But I do pay tax, don't worry. Your salary is tax-exempt, I

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no, it's not because you insisted it be that way, it's always been that

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way, but if you're to be a leader on this, and it sounds like you have

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the passion and you want to be a leader, that has to change. Don't

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you have to take a stand and say, it's not acceptable to be a leader

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and to send a message that says, I want everyone else to pay tax but I

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don't. You should pay tax, shouldn't you? First of all I do pay tax in

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France. Not on your IMF salary you don't. On other matters. You get a

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very substantial tax-free salary. This is an easy little fight to

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pick. I'll tell you why. All international staff people are tax

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exempt. Wherever located in the world. It is to avoid under the

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pressure and under the authority of local tax people they be asked to

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move in One Direction or the other, and this tax independence if you

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will is backs, factored into the determination of compensation. I'm

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not arguing for it, I'm not that it's been around for 70 years, many

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more years in other institutions. Otherwise you fall prey to what the

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local government in which the institutions have a seat actually

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decide to do against you. I wonder whether you can see my point that

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there is a bit of a... At least a perception problem with leaders such

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as yourself preaching the message that tax avoidance has to end, and

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yet... The only thing that would be compatible with the principle which

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is critically important, that there be no pressure applied by the local

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authorities were these organisations have their seat, would be some

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international measures that would apply across the board irrespective

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of the local authorities. That's precisely the point that is wrong

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about taxation, everything is global except tax, tax is local and

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sovereign. You've just been reappointed to a second term at the

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IMF, clearly the membership are satisfied with the job you're

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doing. But right now a French court has ordered you to face trial on a

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charge of negligence involving a complicated payment to a leading

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French businessman during the time you were French finance minister

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under the administration of Nicolas Sarkozy. It strikes me in the

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context of everything you discussed about leadership, integrity, sending

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the right messages to the world about... You know, the best that

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Bible cap can be, but it's very difficult for you to continue in

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this job when you might be summoned to a trial in Paris -- global

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capitalism. It's not and I function very well and I'm very grateful for

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the trust that has been expressed to me by this unanimous support of the

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international community. The court decision has been appealed, the

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matter will take its course, that lawyers are doing their job, I know

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there's nothing wrong that the lawyers. You said not so long ago

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that you need a skin as thick as an old crocodile to do this job. Your

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skin's in great shape! What did you mean, what did you mean by that,

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skin as thick as an old crocodile? Over the course of time you have to

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learn how to grit your teeth and smile. Don't let the bustards get

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you! And that's what I mean by having a thick crocodile skin. But

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the nice thing is you can take it off. We have to end, we're out of

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time, but Christine Lagarde, thank you very much for being on

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HARDtalk. Thank you very much. APPLAUSE

:24:12.:24:18.

Rather unusually, I'm just about to show you a satellite image

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containing not a monstrous storm, a really weak weather front.

:24:50.:24:52.

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