Q&A with the IMF’s Christine Lagarde

December 19, 2011

Christine Lagarde took over the International Monetary Fund in July after the arrest on charges of sexual assault of former managing director Dominique Strauss-Kahn (the charges were later dismissed). Since then, Lagarde, the former French finance minister, has been preoccupied with problems emanating from Europe. She has been trying to manage demands from outside the region, and within her own agency , for quicker action from Europe’s slow-moving political machinery. The agency has noticeably tried to step up the pressure on debt-ridden Greece, and Lagarde led a very public push for action to shore up European banks. But the crisis still festers. She sat recently for an interview to review her first months in the job.

Q: The takeover from the previous managing director came with some tumult. You said you felt the agency needed healing. Six months after the fact, were those problems more or less acute than you expected? At a speech not long after your arrival you said the agency did not have the luxury to spend too much time on itself.

A: I was very pleasantly surprised by the willingness and determination of people to acknowledge the good things that had been done prior to me arriving, but also to turn the page and move on with new projects and a new spirit and a new approach. In that sense the healing was not a painful or lengthy exercise. At least that is how I perceived it. We don’t talk about it. Next chapter.

Q: The first weeks, when you held a series of staff meetings, was there any latent anger out there? What was the emotional climate?

A: I perceived it as a relief. Let’s get on with the work. Let’s focus. We have new management in place. We are not going to constantly look at our belly button and wonder if we are sad, angry or frustrated. It is an institution of people with brains and enthusiasm and a sense that we want to do a good job. Provide the best advice. Give the best analysis. Focus on the right program.

Q: People did feel that Dominique Strauss-Kahn had a somewhat autocratic style – known for asserting his prerogative to decide, limiting participation in different staff meetings and keeping the flow of information fairly compartmentalized. What has changed under your management? How do you do things differently?

A: I can’t tell because I was not working and participating in anything under the prior leadership, so I’m not going to pass a judgment on how things were done. What I hear is that I am more team-minded. I work with the group. I tend to elicit views from the other deputy managing directors. I bring the heads of department together much more frequently. That is my way of doing things. I try to bring people together. I hear all the views. I spend the time that is necessary. It is probably more time-consuming than a more autocratic way of reaching decisions, but it is my way.

Q: During the search for a new managing director there was debate about whether you would be able to steer the agency as a non-economist. Have you felt that to be as much of an issue as was made of it at the time?

A: Maybe it is arrogance on my part but I never thought it would be a huge issue. There are so many economists in this place. What would be my additional contribution being an economist [bring], and not necessarily the best of the whole lot? I think I bring another dimension. My way of reaching out, of trying to understand, of having a different upbringing that is based in the law. I have tried to educate myself. I had a background personally that was not that of a PhD, but I can understand what they are talking about.

Q: What’s the most difficult decision you’ve faced on a technical or policy matter?

A: Probably the most sensitive and difficult decisions we took related to countries, such as Greece. We had to revisit a number of the components of our analysis and the framework in which we approved the various tranches of the program. Those were difficult decisions. It required revisiting what we had done before -- updating our targets, updating our list of actions that the country would take. And all of that in the context of the euro zone going through a sovereign debt crisis.

Q: August and September clearly marked a turn in the IMF’s approach to Greece on issues like the possible restructuring of private debt and the lagging pace of reform within the country. Was that your influence or strictly events and data driving the policy discussion?

A: I think it is a combination of the revision of data, the worsening of the economic circumstances surrounding Greece and our collective determination that we had to be forthcoming and perfectly honest about our numbers and analysis.

Q: How much division was there within the agency over the need for deeper private sector losses, or whether Greece should get more money and more time to sort out its problems?

A: There were different views, let’s face it. The whole point about getting together and including everyone at the table was precisely to have all the views brought together in the same room and dissected. To really understand the rationale and the whys and the hows. We went through that, and I think it was a healthy exercise, and we came to final views that were shared. But we came from different positions.

Q: Did you have staff consensus at the end? Were you a mediator through that process or a “decider?”

A: When we all walked into the room, we knew we had to get out of the room with one view – the view of the fund – and we did.

Q: How has your view changed of Europe’s political management? You’ve noted Europe is the epicenter of crisis, but they also have the privilege of living in a democracy, so change and decision-making take time. Having seen it from the inside of the French government and now from an agency that wants things to happen faster, how has your perspective on those leaders changed?

A: I wish they could communicate their position with a sense of what the markets and the investors expect – and speak that language rather than the language that political leaders are used to. And I was party to that exercise. What they are doing, which is fundamental, which is transformational for that region of the world, is obviously going to take time. And to a degree it is almost irrelevant as far as some of the investors are concerned or as far as the markets are concerned. The ability to communicate and indicate the timetable would be extremely helpful. And I did not realize that myself when I was minister of finance.

Q: You spoke recently about how the risks of this crisis should be borne globally. What is the proper dispersion of risk for Europe’s problems? If you share the premise of U.S. Treasury Secretary Timothy F. Geithner – that Europe has the capacity to fix itself – why should there be any dispersion of risk?

A: That part of the world can address some of its issues, but it is not going to be a problem that will be exclusively located in that part of the world because the crisis is sufficiently acute that it is going to be felt and we are seeing it in all regions -- by way of deleveraging, by way of reduced trade, by way of reduced commodity prices. It is not as if all the risks are concentrated in one region of the world, within 17 member states of the euro zone. The risks are all over the map. And no country is immune to those risks. So to assume they can sort it out, they can fix it – there are lots of other countries around the world that are going to be in need of support and precautionary instruments.

Q: So, why are we still dealing with this 18 months after the first program for Greece?

Isn’t there sort of a moral culpability here? If you live in a house and there is a small fire and you can put it out yourself, it does not threaten your neighbor. If you don’t, it becomes a big fire and it does threaten your neighbor. Was there a way to end this quickly, early on?

A: We can’t rewrite history. We have to deal with the present and the future.

Q: So, the rest of the world has to make some contribution and have ultimate patience with this process?

A: Everybody is going to have to play their part. The Europeans are going to have to play their part, as well. They have done already a great deal. And they are going to have to implement and deliver. To do what it takes. But it is not to say that the others are going to sit back and relax and wait for it to be fixed. International support, solidarity, needs to be present, as well. And Europe is not the only one to face difficulties. If you look at other places, including on this side of the Atlantic, there are quite a few issues that need to be addressed, as well, to include housing, to include public debt, to include lots of matters – unemployment, you name them.

Q: On that front, do you have a sense of where the fund needs to head? This idea of the fund as a systemic backstop has been discussed a lot. Do you have a working figure for the amount of resources that are needed under the roof here or of other types of flexibility or alternative programs that need to be set up?

A: We have to continue to adjust and see what is expected. I don’t have a number. What is appropriate is that we should have adequate resources. How much that is will depend on circumstances.

Q: Are you worried about the quota (the capital paid in by fund members) debate in the U.S. getting tied into presidential politics? If Congress does not approve it, the quota increase won’t move forward for other IMF members, either.

A: I hope that the United States, in its longstanding tradition, can play an international role, be part of the multilateral dialogue that is necessary and will continue to exercise its leadership. I think it is very important.

Q: Is there anything in the recent conversations you have had with Congressional Republicans that has you concerned?

A: We need to maintain a dialogue. I don’t think there has been enough of that. I am very keen and very willing to do that and be as transparent as possible, to open the books as much as possible, so that the role we play to maintain stability, to allow the various economic partners to continue to interact, will be sustained by a demonstration of cooperation rather than an uncooperative approach. It is very important. The U.S. is the first economic player in the world, and it has to continue to be a leader in the world economy. The best way to demonstrate leadership is to participate, not to withdraw.

Q: Did the government officials jump from crisis management to post-crisis regulation too quickly? Bank recapitalization, new regulations, government austerity measures are now happening during the possible onset of recession.

A: In a way, one of the reasons the U.S. got out of the crisis better than some of the European countries is that they addressed the prudential issues much earlier. And they reinforced the capital, and they increased liquidity, and they got rid of some of the non-performing loans and the toxic assets in a more efficient way.

Q: So, do you fear now that delay on that front in Europe has put bank recapitalization and other efforts in phase with an economic slowdown and an austerity push?

A: If it had been addressed earlier, it would have been easier.

Q: Geithner has not been shy about saying more needs to happen faster. Do you think he understands Europe’s political constraints?

A: He is too smart not to understand.

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