Transcript

Transcript of a Press Briefing on the International Monetary Fund’s World Economic Outlook, Global Financial Stability Report and Fiscal Monitor Updates

June 17, 2011

Webcast of the press conference

MR. MURRAY: Hi, good day. I’m Bill Murray, Chief of Media Relations at the International Monetary Fund in Washington. I’d like to thank you all for joining us here today at Bovespa. I’d also like to thank Bovespa for helping us put together this briefing on the World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor, the principle economic surveillance documents that are produced by the International Monetary Fund.

We are live. We are on the Online Media Briefing Center, and we’re also webcasting live on the Fund’s website, so I would also like to thank everybody watching us for joining today.

Let me introduce our participants, and then we’ll have some brief opening remarks by our lead speakers, and then take your questions. From my right, Rupa Duttagupta of the Research Department; Olivier Blanchard, our Economic Counsellor and the Director of the Research Department; José Vinals, our Financial Counsellor and the Director of the Monetary and Capital Markets Department; Carlo Cottarelli, Director of our Fiscal Affairs Department; Phil Gerson of Fiscal Affairs; and Chris Walker of the Monetary and Capital Markets Department. Olivier will have some remarks, José, and Carlo. Olivier?

MR. BLANCHARD: Thank you, Bill. Good morning to all of you. Let me start with a headline. “Despite a mild slowdown, the global recovery continues. Downside risks, both old and new, are, however, increasing.” These are the themes that I’m going to divvy up in the next few minutes.

Let me start with the forecast. So our world forecast is roughly unchanged from last April, namely it’s 4.3 percent for 2011 and 4.5 percent for 2012, though it’s down by .1 percent from our April forecast for 2011 and it’s unchanged for 2012. Now as usual this figure hides very different performances for advanced economies on the one hand and for emerging and developing economies on the other. So for advanced economies, we forecast them to grow at 2.2 percent for 2011 and 2.6 percent for 2012. That’s down 0.2 percent for 2011 and it’s unchanged for 2012. Our forecast for emerging and developing economies is 6.6 percent for 2011 and 6.4 percent for 2012, so much higher than for advanced economies. Relative to April, this is up by 0.1 percent for 2011 and down by 0.1 for 2012, so relatively small changes to our forecast at the global level since April.

Now there are two advanced countries that have seen larger downward revisions. The first is Japan, not surprisingly, where we now predict negative growth for 2011. What happens here is that the disruptions from the earthquake have been stronger than we anticipated, and they account for nearly all the decline. We expect these problems to go away over the course of the year and the economy to rebound more strongly in 2012. So our forecast for 2012 has been revised up.

Now the second is the United States where we have revised our forecast down by .3 percent for 2011 and .2 percent for 2012. Now it’s too early to tell, but we see this slowdown of the U.S. economy, which was quite visible in the first and the second quarter, as more of a bump in the road than something more worrisome. There are clearly a number of special factors, the effect of other prices on disposable income, which have played an important role. But assuming that oil prices are going to stay roughly stable, which is what the markets seem to predict at this point, we think that spending by consumers and firms should remain steady in what is, however, very clearly a very weak recovery. This has been a longstanding forecast of ours. The recovery in the U.S. is a very weak one.

More generally, there are breaks to growth, which are very obvious, in advanced economies. Fiscal consolidation is needed and is happening, but it weighs on demand in most countries, slowing growth. Continuing weaknesses in the financial system in particular on the capitalized banks are slowing down bank lending. By contrast, if you turn to emerging market countries, some of them are clearly facing the risk of overheating. And while they are in most cases tightening policies as they should, many of them will need to do more over the coming year.

Now let me turn to -- I’ve talked about the baseline -- let me turn to the risks. There are very clear risks to the recovery, and they are more to the downside than three months ago. I shall focus on three such risks and leave a fourth one, which is on the financial side, to my colleague, José Vinals, who will divvy up at more length. So let me take each of these three risks in turn.

The first and obvious one comes from airy fairy Europe, and it’s clearly today the most visible one. In the best of cases, improving competitiveness and returning to fiscal health in some of these countries will be a long and painful process. It will require strong policies, namely fiscal consolidation, structural reforms, and policies which protect the most vulnerable. It will also require -- so policies on one side -- on the other side it will also require help and outside financing, both official and private. It’s clear that these countries cannot get out of the hole alone. The stakes are very high; failure to commit and implement policies or failure to deliver on financing, hold the risk of triggering disorderly financial and sovereign defaults. Contagion through various channels to the rest of Europe then holds the risk of derailing the European recovery and perhaps even the world recovery.

Let me turn to the second risk. It is on the fiscal side, and it’s affecting a large number of advanced countries. Many countries, including the United States, are yet to put in place a convincing medium-term fiscal consolidation plan. Such a lack of adjustment leads markets to worry. Worries lead to higher risk premiums, increasing the cost of borrowing not only for the sovereigns, but also for private borrowers or they force countries into precipitated fiscal adjustments, leading also to sharp decreases in demand. And in both cases, growth can be derailed, and that’s a risk that we face looking forward.

Let me turn to the third and final risk. It concerns emerging market economies. The difference between the strong and the overheating economy is often very difficult to tell in real time. But there are reasons to think that the number of emerging countries may be close to crossing the line. Inflation is increasing beyond what can be explained by commodity and food prices. Credit growth rates and some asset prices are starting to look high relative to historical standards. Some economies with both strong domestic demand and strong capital flows face particularly difficult policy choices. Some of these countries, particularly in Asia, should allow for further appreciation of their currency and a reduction of their current account surplus. Others, particularly in Latin America, have already allowed for substantial appreciation, and the adjustment must take place mostly at the margins. All countries must choose the right combination of instruments at their disposal -- fiscal, monetary, macro prudential -- to slow their economies in time and avoid costly boom-bust cycles.

Let me conclude these introductory remarks. If the global recovery continues, but the road to health is still a very long one, then surely it is no time to relax. Thank you.

MR. VINALS: Good morning to all of you, and let me start by saying that it is a great pleasure to be here in Sao Paulo to present to you our views on global financial stability. And I think it’s fitting that we should present our latest assessment in this city, which is the financial center of one of the leading emerging economies.

Before I go into more detail, let me start by giving you the three key messages that we have in our Global Financial Stability Report update. The first one is that financial risks have increased since our April GFSR. The second is that as a result of that, policymakers in both advanced and emerging markets need to step up their efforts to preserve financial stability and safeguard the recovery. And the third is that we have entered into a new phase of the crisis that I would term the political phase where hard political decisions need to be made because the window for substantial policy action is closing and time is of the essence.

Let me now describe first, what are the key risks? Why is it that financial stability risks have increased? And then I will go into the policy priorities. I think that there are three reasons why risks to financial stability have increased in the last couple of months.

The first one is a string of negative surprises in recent economic data, which is prompting investors to reassess the sustainability of the recovery. While, as Olivier Blanchard has just said, a global recovery remains the most likely scenario, downside risks to this forecast have increased over the past couple of months. And any weakening in the outlook will threaten to stall and possibly reverse improvements in the balance sheets of banks and households.

The second factor behind the increase in the risk to financial stability is that there are increasing concerns about the political resolve to support the adjustment efforts in Europe’s periphery. The lack of a sufficiently comprehensive solution to this problem has led to increased market pressures on some Euro-area sovereigns and has reignited worries about potential contagion, both within and beyond Europe. But these risks are not confined to Europe. In the United States, there are increasing market concerns due to the continued political stalemate over the debt ceiling and the long-term fiscal path. And Japan’s medium-term fiscal adjustment targets have become even more challenging because of the impact of the recent natural disasters.

And the third reason behind the increased risk to financial stability has to do with the prolonged period of low interest rates, which is leading to the buildup of financial imbalances. Accommodative monetary policies remain necessary in advanced economies, partly because of the limited progress that has been made in resolving deeper structural problems. But a prolonged period of low interest rates may lead investors to underestimate risk in their search for yield, and this could promote the buildup of financial imbalances. In advanced economies, the declining cost of debt is prompting some companies and investors to rediscover their appetite for financial leverage. And there is evidence of such releveraging happening in the market for corporate high-yield bonds and leveraged loans. Now the search for yield has also spurred strong capital inflows into some key emerging markets. For example, buoyant falling demand has led to a recent search in international corporate bond issuance, notably from Latin America, and a decline in corporate bond yields.

Let me go now to the discussion of the policy priorities. Given these risks, I think it’s fundamental that policymakers increase their efforts to tackle longstanding financial challenges, and that they do this once and for all. In Europe there is a need to finally cut the Gordian knot of mutually reinforcing exposures between banks and sovereigns, which has fueled worries about potential contagion. And to reduce these contagion risks, policymakers need to act on two fronts. First, pushing for a comprehensive plan to repair the financial system fully; and second, by reducing sovereign risk through determined and credible medium-term fiscal consolidation.

Concerning the financial system, so far there has been progress. But this progress has not been sufficient to strengthen bank funding and capital positions to the extent desirable in some European Union countries. And for this reason, the forthcoming stress tests by the European Banking Authority will be a decisive opportunity to enhance transparency and to address the risks posed by undercapitalized banks. On the sovereign side, political resolve must be found to address medium-term fiscal adjustment needs in several advanced countries, not only in the European Union, but also in the United States and Japan, which have yet to take decisive action in this area, as Carlo Cottarelli will discuss more in detail later on.

In short, when it comes to financial systems and sovereigns, advanced economies need to aim for an orderly de-leveraging. In emerging markets, in contrast, the focus needs to be on achieving orderly re-leveraging. And they should do so by guarding against overheating and the buildup of financial imbalances, which take the form of too-rapid rates of growth in credit, rising inflation, and surging capital inflows for example. And corporate leverage is also rising in emerging markets, and weaker firms are now accessing international capital markets. And this is something which could make corporate balance sheets more vulnerable to external shocks. With strong domestic demand pressures as well, especially in emerging Asia and Latin America, macroeconomic policy measures, like monetary policy and fiscal policy, are needed to avoid overheating, accumulating financial risks, and undermining policy credibility. Macro-prudential tools, and in some cases a limited use of capital controls, can play a supportive role in managing capital inflows and their effects. However, these macro prudential or capital flow measures cannot substitute -- and I repeat, cannot substitute -- for appropriate macroeconomic policies—like monetary and fiscal policies.

Let me conclude. Policymakers continue to face potentially large shocks that could impact on the financial system at a time when its resilience is not yet assured, and when there is less room for maneuver to counter these shocks through traditional fiscal and monetary policies.

Moreover, in increasingly gridlocked political systems, policymakers may find it progressively harder to take substantial policy action to address sovereign and financial risks. So, let’s not be mistaken, and I come back from where I started, we are now in a new phase of the crisis, which is a political phase, where tough political decisions will be needed and where time is of the essence. Thank you.

MR. COTTARELLI: Thank you very much and thanks to all of you for being here today. I would like just to summarize the main news in our Fiscal Monitor update and I would like to start from the advanced economies, which, as you know, have been -- their fiscal accounts have been hit harder in the last two or three years.

Now, as you know, most of these economies were planning to tighten fiscal policy, some of them significantly this year, and the good news is that the bulk of these fiscal adjustments is actually proceeding on schedule. Most advanced economies, especially Canada and the largest European countries, are indeed making good progress in reducing their budget deficits. In some cases they are actually going a bit faster than expected like in Germany and in Italy where we have revised down the project deficit for 2011.

Given the fact that there is evidence that the recovery in Europe is proceeding, these countries should continue with their fiscal adjustment effort.

Now, you know, of course, there’s a lot of financial market pressure on some European countries. I’m talking about, of course, Greece, Ireland, Portugal. Their fiscal accounts are in a particularly difficult position. In Greece and Portugal, in particular, downward revision in growth and other factors are implying the need for additional fiscal adjustment measures.

Now, moving to the United States, for the United States what we see is that the revenues are coming in a bit faster than expected, the spending is proceeding a bit more slowly, and as a result of this, we have revised down the projected deficit for this year, for 2011, by about 1 percentage point of GDP. Now, of course, the deficit -- the projected deficit remains very high, on the order of 10 percent of GDP for the general government, that is the federal government, the states and local governments, but it is somewhat lower than what we were projecting earlier, which is good news for this year and it’s also good news for next year because the outcome this year, if confirmed, will allow achieving more easily on a smoother path, the target for 2012.

What remains missing in the United States, however, is a political consensus on a credible medium-term fiscal adjustment plan, and by credible I mean something that’s clear not only in terms of targets, but also in terms of tools to achieve those targets, so this political agreement, something endorsed by Congress, is still missing, which involves some risks for the future: the risk that interest rates start reflecting a risk premium, which would have negative impact on the U.S. economy and probably for the world economy too.

If we move to the advanced countries in the Pacific area, however, we have actually revised up their deficit, for Japan, for Australia, for New Zealand, but this is primarily reflecting the very serious natural disasters that have hit these countries. For Japan, in particular, the April Fiscal Monitor already reflected an additional supplementary budget of three-quarters of a percent of GDP. A further supplementary budget is now expected and this will raise spending by about 1 percentage points of GDP. As a result of this, this year and next year, we project Japan to have the largest fiscal deficit in major advanced countries, which, again, underscores the need for Japan to fully clarify a medium-term fiscal adjustment plan. In this respect we do see some progress, particularly on identifying measures on the revenue side, like increase in VAT. VAT rate is very low in Japan and we see an increasing VAT as important -- a significant increase in the VAT rate would be a significant step in reducing fiscal deficits in Japan over the medium-term.

Turning to emerging economies, the message in a way is not very -- has not changed very much with respect to our April issue of the Fiscal Monitor. Many emerging economies are experiencing faster growth, in some cases fueled by favorable conditions, what we call tail winds, strong capital inflows, strong asset prices, and for commodity exporters, high commodity prices, which are also effecting in a positive way their fiscal account.

Some of these countries are making good progress in tightening fiscal policy, however, in some other economies deficits remain sizable, especially in India, but also other countries like Turkey, Mexico, Brazil, even if these countries, we believe, are operating at close to full capacity. So, in our view, for a number of emerging economies, further tightening of fiscal policy would be useful. It would be useful, also, to overachieve some of the targets that have already been set, for example, by saving all the additional revenues that may come from faster than projected growth.

Let me, because we are in Sao Paulo, let me just say also a few more words about Latin America. There is certainly much to be pleased about fiscal developments in Latin America and how Latin America has weathered the crisis, the recent financial crisis very well. A great deal, indeed, has been done in the region over the last several years to reduce vulnerabilities and to strengthen fiscal institutions and also through improvement of the structure of public debt. As a result of this, contagion from advanced countries has been limited and has been certainly much more intense than had been experienced in previous episodes of world weakening of economic activities.

Nevertheless, it is important that we sound a note of caution. In the Fiscal Monitor update, for the overall deficit for Latin America we are presenting data for the last 30 years in the Fiscal Monitor, and if you if you look at the past, the overall deficit for Latin America remains, for example, higher than where it was in the middle of the 1990s and there’s not much difference for the average -- for the historical average of this 30-year period.

In addition, if we compare the level of public debt in Latin America with other emerging regions in the world, you see that Latin America still has higher debt -- public debt to GDP ratios than, for example, emerging Asia and also emerging Europe.

In addition to this, many countries in the region are facing important spending pressures arising, for example, from what has been called an infrastructural gap. There are several studies by IDB showing there is insufficient infrastructure spending in Latin America and also we project health care and pension spending over the next 20 years in the region to increase by 3 percentage points of GDP. So, these are areas of increased pressure of spending that will have to be accommodated by creating appropriate fiscal space, and this is another reason why we think fiscal caution is still very much needed in this region. Thank you very much.

MR. MURRAY: Okay, great. Thank you, Carlo, thank you, Jose and Olivier. We’re going to now take questions both from people here in the audience and from those that are submitting via our Online Media Briefing Center. We have microphones around the room, just wait for the microphone. Thank you.

QUESTION: I would like to ask Mr. Olivier a question. This week our finance minister, Guido Mantega, bragged about the fact that Brazil’s credit default swap is lower than the United States credit default swap. Nowadays rates are 49.7 for U.S. and 41.2 for Brazil. I would like you to comment on that, and what does it mean for Brazil? And if I can ask also Mr. Vinals, another question, when you say that now we are entering a new phase of the crisis, the political phase, we see clearly that there is a disagreement between the European Central Bank and the government of Germany about how to solve the debt crisis in Greece, so in your opinion, which of the two positions make more sense?

MR. BLANCHARD: The fact that you gave about the CDS spreads is clearly good news for Brazil, not so good news for the U.S. It shows, on the one hand, that indeed fiscal policy in Brazil has been very responsible, as Carlo just said, and that Brazil is getting the benefits of that policy. For the U.S., one has to realize that there is a bit of false drama coming from the need to increase the debt ceiling, which is introducing uncertainty and increasing the spreads for the time being. Something will happen, something will be done, whether it will lead to the kind of credible medium-term fiscal plan that we hope for and that Carlo talked about is unclear, but I suspect that the CDS spreads will come down.

But the short of it is, yes, I mean, that’s part of a more general trend that we have seen, that emerging market countries, among them Brazil, have been quite responsible in their policies and are now getting -- reaping the benefits of these policies.

MR. VINALS: On the question that you ask on the different views that there may be between different European authorities concerning the best way to solve the Greek crisis, let me just mention that certainly the private sector involvement issue is on the table and that this is something where there are ongoing discussions. And what we hope is that at the end of the day there would be an agreement on how to combine a number of elements which are fundamental to solve the Greek issue in a lasting manner.

One of these ingredients is for the Greek authorities to basically carry on with the economic program that has been agreed with them and that needs to be implemented. So the first condition is endorsement by the Greek authorities and implementation of this program. The second condition is that there is a need for assurances that the program will be fully financed. There is also a discussion on private sector involvement. Now there are different views on the table, but I think that all parties involved recognize that the stakes are very high and that one needs, at the end, to complete the puzzle by making all the pieces fit and I am very hopeful that we will find an agreement that will provide a good solution to this problem.

MR. MURRAY: Thank you, Jose. Any further questions in the room? This lady here in the front.

QUESTION: Hi. My question is to Mr. Blanchard. I would like to know, besides Japan, the biggest change you made in your projections was on the Brazilian GDP for this year and next year. I would like to know the reasons that you slowed your projections and if you think that our policy to fight inflation has to do with it.

MR. BLANCHARD: Good. I shall let Rupa answer.

MS. DUTTAGUPTA: You’re right, we are projecting Brazil’s real GDP growth now to slow down from 7.5 percent last year to about 4.1 percent this year, and this is a little less than a half percentage point of revision downward. Now, there are two factors behind this revision, one is as expected, we are seeing some slowing in the momentum of high frequency forward-looking indicators, for example, industrial production and so on after the very strong growth after the crisis in 2010. Also embedded in the projection is the assumption that macroeconomic policy tightening that has already started will continue, and we actually welcome the authority’s intention to bring inflation down to 4.5 percent, which is the midpoint of their target range, by the end of next year. And similarly, fiscal policy, as Carlo mentioned, is ongoing towards a tightening phase.

So, all of those assumptions, basically, underlie both GDP and the inflation projection whereby even though currently for this year inflation is projected to be around 6.5, a little bit more than 6.5 percent. By the end of next year we project it to fall down sharply to 4.5 percent.

You asked about risks, we still see risks on the inflation, on the upside, because high frequency indicators on the demand are still very, very strong. Credit growth is still very strong at close to 20 percent, and output has already reached pre-crisis levels, so given these upside risks we do see scope for if there is over performance on fiscal to use it to reduce these upside risks on inflation.

MR. MURRAY: Thanks, Rupa. The gentleman in the center here.

QUESTION: Mr. Vinals, forgive me for coming back to Greece one more time. You said you were hopeful that a solution would be found. Do your hopes have any sort of timeframe? Do you think a solution might be found before the -- a decision has to be made in the next trench of aid to be released?

MR. VINALS: Well, certainly we are very much hoping that all the pieces fall in place so that we can continue to go along with the program. And the Fund is ready to help, but for that, there are some conditions that need to be met. One is that, as I said, the Greek authorities continue to endorse the program that has been already agreed with them. There has been some uncertainty given the political developments in Greece, but we very much hope that the new government will continue to strongly endorse this program, and the other condition that we need is that there will be full financing assurances. On this we are hopeful that progress will be made and that the forthcoming meetings of the Euro Group will give the green light to these.

And of course we will have to submit all this to our Board for a decision, but as I said before, I think that all the players know that the stakes are very high and everybody is working very hard in order to put in place the conditions that would lead to a successful conclusion to the negotiations which are now underway.

MR. MURRAY: Thanks, Jose. Another question in the room? Gentleman in the back there would be good. Thank you.

QUESTION: Hi. Please, Mr. Blanchard, how serious do you think the risks for a double dip recession in the U.S. are as of now? And if I may have another question, to what extent do you think should private creditors be involved in helping to plug the Greece problem? Thanks.

MR. BLANCHARD: On the second part of the question, I think Jose has already answered. On the first, the probability of a double dip, we see it as very, very small. Whenever growth slows down a little bit in the U.S., the word double dip appears. This was the case a year ago and we said we didn’t see any double dip in the cards, and we were right. I think that’s the same thing this time, which is that behind the day-to-day news there are consumers (inaudible) firms and we think that consumption spending and investment spending will continue at a decent rate. The result of this is that we maintain our forecast, which is that this is not strong enough to have a high growth rate, to decrease unemployment very fast. We’ve said this for a while. It continues to be true, but it is strong enough, I think, to avoid any chance of a double dip.

MR. MURRAY: Okay, thank you. Any additional questions here in the room?

QUESTION: Please, Mr. Blanchard, I would ask you to tell something more about your outlook about the Middle East economy, the developments there.

MR. BLANCHARD: Do you want to take that?

MS. DUTTAGUPTA: Sure. For the Middle East, our forecast for real GDP growth is pretty much what you saw in the April WEO. So we see real GDP growth to be a bit above 4 percent --at 4.2 percent this year and 4.4 percent next year.

But that said, there is a lot of uncertainty in the region because of the ongoing unrest. So downside risks around the growth are certainly high and overall risks point downward on the net.

However, some of the mineral and commodity exporters in the region have actually performed better than we previously expected.

MR. BLANCHARD: Let me add something to this, which is that there is clearly a group of countries which is facing a very substantial challenge. These are the commodity importers with a social and political unrest. There are clearly very large issues there, but there are also now macro and fiscal implications. And these countries are facing the need to give subsidies to counteract the increasing food and oil prices and they also have to respond to the demands of the population. And this implies that many of them will be running fairly large deficits in the short run and may well need help at some point.

MR. MURRAY: Thanks, Olivier. I’m going to turn to the Online Media Briefing Center and this is a question on the Global Financial Stability Report. The question is, “Global Financial Stability Report shows concern about some periphery countries in Europe because their debt and lack of support for their reforms. Is Spain among those countries you are concerned about?”

MR. VINALS: I think that Spain has been taking measures over the last year to be very firm on fiscal consolidation and to start putting in place a number of structural reforms in labor markets. Very importantly, the crucial process of financial reform is underway in the sector of the cajas, the savings banks. What really is key is that at times of market uncertainty there is a strong push to continue with these programs to enhance the credibility of the Spanish economy. This means to enhance its growth potential, its fiscal position, and to complete the reform of the financial system. There is a need to continue to very strongly pursue all of these measures to reassure financial markets of the solidity of the fundamentals in the Spanish economy.

MR. MURRAY: Okay, thanks, Jose. I’m going to take one additional question from the Online Media Briefing Center. Some of these questions really would be best directed to our European Department and the Greece mission team, but I’m reading it for the record. Nevertheless, we can maybe comment on it here.

“Did the IMF underestimate the danger of political risk in the Greece program? Was the demanded adjustment too much too fast? And is it reasonable to expect such a deep adjustment in the absence of independent monetary policy?” Olivier.

MR. BLANCHARD: I think we all knew going in that this was going to be a painful adjustment and this is a country, which has to improve competitiveness, which has to do a major fiscal consolidation. And we knew that the program was going to require sacrifices. We made sure, to the extent that we could, to protect the groups which were most affected by the crisis, by the slump, but we knew that all along there would be pain. The Greek government was ready to do what was needed. It’s still trying very hard to do it. Again, as Jose said, we actually agreed on a set of policy measures with the government. The government now has to convince the country -- the parliament first, but the country -- that these are needed. There is basically no alternative to taking these policies.

MR. MURRAY: Thank you, Olivier. I will take some more questions from the audience, but let me go back to the Online Media Briefing Center. Some of these I don’t think we can comment on, but it’s some that’s regarding the U.S. and it’s factual.

CBS Market Watch is asking, “Could you comment on J.P. Morgan Chase CEO Jamie Dimond’s argument that banks are being crushed by regulation? And stepping back, is the credit channel still impaired in the U.S.? Is that a factor in the disappointing growth?”

MR. VINALS: I don’t think that banks are being crushed by regulation. First of all, because many of these regulations are still in a design mode internationally and they have not been implemented in most countries. As one can remember Basel III, which is the key regulation to enhance the solidity of banks, is going to be put in place over time and we ought to be completing it in 2019. Moreover, the international and domestic regulators have been very careful, both in the United States and Europe and elsewhere, to achieve a balanced mix in the regulation which enhances the safety of banks, but, at the same time, allows banks to continue effectively and efficiently performing the tasks of financial intermediation. So I certainly think that it’s not true that regulation is crushing banks.

As to the statement of whether the credit channel is impaired or not, we are seeing a very different evolution if we look at the credit that is given to small- and medium-sized enterprises and to bigger corporations. Bigger corporations are able to finance themselves in capital markets and they’re do so to an increasing extent. On the other hand, credit is not flowing as much as would be needed for small- and medium-sized enterprises, and this is something which is a concern going forward. But I don’t think that regulation has much to do with that. I think this is due to other factors.

MR. MURRAY: Thank you, Jose. Any other questions here from the audience? Gentleman over there on the right.

We’re going to just take a few more questions and then we’ll have to wrap up. Thanks.

QUESTION: Good morning. I wanted to ask Mr. Blanchard if he could clarify what do you mean by private financing for Greece? How do you envisage the private sector helping out with this (inaudible)?

MR. BLANCHARD: Well, again, I’m going to repeat what Jose has said. At this stage, there is a discussion about PSI, private sector involvement, between the members of the troika (phonetic) of the Greeks and ourselves. And there are many options on the table. I hope that we converge on one which is such that it makes the Greek program sustainable and that we can move on.

MR. MURRAY: Thanks, Olivier. Final question? Gentleman there.

QUESTION: Good morning. I’d like to ask Mr. Vinals a question. Sir, you said that even the current level of leverage of some economies and current (inaudible) you recommend a limited use of capital flows (phonetic). Which capital flows do you recommend and how do then be -- should be applied?

MR. VINALS: Each country is a different world and there is no one size fits all. Different policymakers in emerging markets are confronted with the different intensity of the challenges posed by capital inflows. But let’s not forget that capital inflows are not exogenous in the sense that they are determined by things that happen abroad. These capital inflows are also very much a function of things that happen at home. And let me give you just one example.

This is purely illustrative. I’m not referring to any particular country, but if you are in a situation where you would have to do more fiscal consolidation, to be tougher in terms of fiscal policy and you don’t do that, and if the economy is growing very strongly, this is going to mean that monetary policy will have to be tighter, interest rates will have to be higher and then you attract more capital flows. If you have a more balanced policy mix where fiscal policy does fully its job, then you take steam out of the economy, interest rates are lower than otherwise and, therefore, you lower the pressures of capital flows.

So you have to try to do as much as you can on the traditional macroeconomic policy mix in any case. Of course, that may not be enough and you may want to have a package where you complement this with other measures. And that is something which will vary from country to country.

But I would like to add one thing. The issue of capital flow in emerging markets is not just cyclical. It is very likely something structural and, therefore, one should not lose sight that in addition to any short-term measures on the macroeconomic policy side, on the macroprudential policy side, on the capital control side, there is a need to put in place financial reform policies. That is, structural financial policies to enhance the solidity of the domestic financial system, and to enhance its capacity to intermediate higher levels of capital flows, and to be sufficiently robust to withstand potential reversals on capital flows. Because, as we know, capital flows may be strong, but volatile and could change if there is a shift in global market sentiment.

MR. MURRAY: Great. Well, it looks like we do have one more question here. Let’s see if we can sneak that in before we wrap. Thank you.

QUESTION: Going back to the situation in Spain, Mr. Vinals, I see that, well, you have stressed the important to continue with the ongoing problem of forums in Spain, but I would like to know if there is something that is not going on this moment and you would recommend to the economic authorities in Spain what should be done that’s not on the table right now. Thank you.

MR. VINALS: Well, what I would recommend is that in addition to finalizing the structural transformation of the financial system as soon as possible, which I think is in the cards, and in addition to do whatever it takes to meet the fiscal commitments because markets now are zero tolerant to deviations from these commitments, that Spain, which is a country that needs to grow, pushes with full force structural reform, having a very ambitious labor reform and also extending reforms to other sides of product markets in order to enhance competition, to enhance the competitiveness and the productivity of the economy. When you are in a monetary union and you don’t have your exchange rate, the only way that you can succeed is by having a very competitive and very productive economy, and that’s the key to long-term growth. That’s something which is fundamental for Spain as for other countries in the euro area, but for Spain it’s a particular challenge because unemployment is 21 percent.

MR. MURRAY: Thank you, Jose. Again, I want to thank everybody for joining us today. Thank you, Bovespa, again for hosting us. We’re very happy to be here. Thank you, Olivier Blanchard, Jose Vinals, Carlo Cottarelli, and the teams from the Research, Monetary and Capital Markets Department, and the Fiscal Affairs Department.

Again, thank you all. If the press have any follow-up questions, send an e-mail to media@imf.org. that’s media@imf.org. We’ll try to get you a rapid turnaround answer.

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