18/04/2016 HARDtalk

Welcome to a special edition of HARDtalk from George Washington

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

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

the International Monetary Fund. Many delegates to that meeting he

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

to eliminate poverty around the world in countries that are still

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

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

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

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

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

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

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

moving definitely and entrenching what I have coined as the new

mediocre, where everything that should be highly slow and everything

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

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

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

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

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

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

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

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

difficult. The financial sector has changed significantly over the last

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

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

something happens. The authorities are much more concerned about

supervising them and making sure that if something wrong happens they

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

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

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

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

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

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

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

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

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

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

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

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

the global system and important banks are much more strongly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

be realistic. We cannot have far-fetched fantasy hypotheticals

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

have real measures that are demonstrated by the Greek

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

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

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

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

saying that without meaningful debt relief as part of the bailout

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

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

which is real measures, which is General equilibrium and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

special chapter which will concentrate on the potential costs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

China, forgive me one microsecond...

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

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

have slightly upgraded the number because we looked at the proposed

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

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

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

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

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

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

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

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

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

being lighter industry and predominantly service driven. It's

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

at the numbers, there is clearly increasing inequalities and we

believe successive inequalities to have sustainable growth on a

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

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

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

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

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

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

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

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

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

so many politicians, business leaders, elites have squirrelled

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

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

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

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

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

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

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

system that actually conduce to that sentiment which were very well

described of some people feeling excluded from the benefit and the

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

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

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

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

going through the state national governments to pay for roads and

hospitals and education, because it is being squirrelled away offshore

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

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

offshore highly secretive tax havens, whether they be in the

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

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

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

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

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

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

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

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

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

undertaken and endorsed by many economies, applies to corporate is

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

should be made universal the automatic exchange of information

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

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

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

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

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

comprehensive and it needs to include the implementation arm of

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

technical assistance on anti- money-laundering, on

counterterrorism financing, we do the assessment and sometimes we have

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

local government in which the institutions have a seat actually

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

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

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

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

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

authorities were these organisations have their seat, would be some

international measures that would apply across the board irrespective

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

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

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

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

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

charge of negligence involving a complicated payment to a leading

French businessman during the time you were French finance minister

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

context of everything you discussed about leadership, integrity, sending

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

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

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

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

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

international community. The court decision has been appealed, the

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

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

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

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

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

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

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

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

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

HARDtalk. Thank you very much. APPLAUSE

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

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