When Christine Lagarde Talks, Everyone Listens


Ayanna Nahmias, Editor-in-ChiefLast Modified: 01:14 AM EDT, 27 September 2012

Christine Lagarde Headshot, Photo by IMF

WASHINGTON, DC - Christine Lagarde, the International Monetary Fund, Managing Director is arguably the most powerful woman in global finance next to German Chancellor Angela Merkel.

Merkel is noted for her role in trying to resolve the Eurozone debt crisis, as leader of Europe's biggest and most robust economy. Merkel has also been named by Forbes magazine as the most powerful woman in the world.

Since the global economic slowdown, various countries have struggled to retire debt in the face of increased jobless rates, volatile financial markets, and decreased GDP.

Therefore, when Lagarde announced that the IMF is set to cut its forecast for global growth next month, the news was greeted with trepidation by the United States and other governments including China.

At issue is the growing lack of confidence in the ability of European policymakers to attack head on the crisis affecting the Euro Zone, as well as an increased unwillingness by countries with strong economic growth and low debt, like Germany, to support the bailout of countries that refuse to implement effective austerity measures.

In fact, the S&P 500 fell for a fifth straight trading day on Wednesday as protests in Spain and Greece over euro zone austerity measures raised fresh concerns over Europe's ability to get its debt crisis under control. The possibility of countries with stronger economies defecting from the euro zone in favor of a return to their national currency also contributes to continued market instability.

When Lagarde announced that the IMF is cutting its global growth projection for 2013 to 3.9 percent although it left its 2012 forecast at 3.5 percent in July 2012, it was widely viewed as a lack of confidence in Europe's ability to resolve the euro zone crisis.

In particular it was viewed as a tacit indictment of government officials inability to effectively address the economic downturn in their respective countries. The failure of these countries to implement austerity measures to reduce their debt has adversely affected the economies in the rest of the world.

In fact, Lagarde stated that she believes the euro zone crisis poses the greatest risk to the world economy followed by the looming U.S. fiscal cliff which she believes also presents a "serious threat."

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Published: 27 September 2012 (Page 2 of 2)

"We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months," Christine Lagarde said.

"Markets briefly rallied after the European Central Bank's decision to launch a conditional bond-buying program for troubled states. ECB President Mario Draghi introduced a program to buy European nations' debt on a potentially unlimited scale — with major conditions. The most important at the moment is that a country must formally request the assistance and agree to financial conditions from the international lenders." (Source: Seattle Times)

This model is similar to the U.S. Troubled Asset Relief Program which was enacted by President George W. Bush in 2008. The TARP program purchased assets and equity from financial institutions to strengthen the financial sector and stave off a severe financial downturn unseen since the Great Depression. However, it remains to be seen if the ECB’s approach will prevent the euro zone from slipping into deeper recession.

Lagarde said that the IMF supports Europe moving to a banking union which will prevent nations from being dragged down by sickly banks. The euro zone is currently weighed down by the faltering economies of Portugal, Greece, and Spain; and in the case of the latter, Lagarde believes that it appears headed toward a bailout like the one that Ireland received after rescuing its banks.

Despite this, Legarde does support the idea of giving Spain and Portugal more time to implement budget and other reforms. But she also expressed caution and was wary of Italy and France, two of Europe’s biggest economies, sincerity in charting a path to substantive economic and budget reforms.

Lagarde said structural reforms and fiscal adjustments are going to be unavoidable in crisis-hit euro zone countries, and that continued austerity measures must be more steadfastly enforced as a prerequisite for receiving future bailout funds.

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