Ahead of the IMF’s spring meetings next week, agency analysts have been warning that household debt — in particular, mortgages that are in default or that exceed the value of the borrower’s home — is dragging down growth in developed countries at a time when the global economy is struggling to revive.
In general, however, Lagarde’s remarks were upbeat. Offering a broad review of the world economy, she said that conditions have been improving and that she was ready to scale back appeals made during the winter for hundreds of billions of dollars in new money to help the IMF address global financial challenges.
Lagarde, who earlier this year warned of a possible “1930s moment” of renewed economic turmoil, now says there is “breathing space” thanks to a rebound in the U.S. economy and progress in alleviating Europe’s financial problems.
But the difficulties caused by massive household debt continue to bedevil many countries, and the effect of American indebtedness is being felt around the world. If the world’s largest economy could reduce household debt — spurring increased consumer spending and helping mend the housing market — the benefits could be global.
In a report released this week, however, the IMF said U.S. steps to tackle the problem have had limited effect. The agency recommended wider efforts to reduce the value of mortgages rather than rescheduling or refinancing them.
“Fannie and Freddie have to be part of the equation,” Lagarde said, wading into a vigorous U.S. policy debate. “U.S. households have to be able to unload a bit.”
The issue is being hotly debated among the Treasury, Congress and the Federal Housing Finance Agency, which oversees Fannie and Freddie. The Obama administration and congressional Democrats have urged a review of the policy.
But the FHFA has opposed reducing mortgage principal— the actual amount owed on a loan — on the grounds that the benefits were not clear and that the initiative could cost taxpayers money.
At the Brookings Institution earlier this week, FHFA acting director Edward DeMarco remained skeptical that principal reductions would provide greater benefits than other programs that Fannie Mae and Freddie Mac are pursuing to avoid mortgage foreclosures.
“This is not about some huge difference-making program that will rescue the housing market,” DeMarco said.
In her remarks, Lagarde offered several reasons for economic optimism.
“The U.S. is probably beginning to turn the corner, and actions taken by the Europeans have led to a little bit less stress,” said Lagarde, who has been using a cane since her surgery to repair knee damage that became apparent after a recent swimming workout.
She highlighted other bright spots, including a sharp drop in China’s current account surplus, which is an indicator of its trade and financial relations with the rest of the world.
That surplus has been running at about 10 percent of China’s annual economic output. But the figure is expected to drop to 3 percent this year, potentially good news for the United States and other exporting countries. Lagarde said this is a sign that China is beginning to move away from its traditional emphasis on exports.
She also said she was “reassessing” her recent call for IMF member nations to pony up perhaps $600 billion to bolster the fund’s crisis-fighting ability.
Less may be needed — though she did not specify an amount. The United States, the IMF’s largest shareholder, opposes the increase.
“Some of the drama that we envisioned has not materialized,” she said. “We are reassessing.”