UPDATE 2-Softness in global economy to extend into 2016 as developing world …

1 Oct 2015 | Author: | No comments yet »

CNBC Exclusive: CNBC Transcript: CNBC’s Sara Eisen Speaks with IMF Managing Director Christine Lagarde on CNBC’s “Squawk Alley” Today.

The International Monetary Fund is, in many places, the organization that everybody loves to hate. The IMF voiced concern today about the global economy, weakened by China’s slowdown and facing a potential “vicious cycle” from a looming US interest rate hike. “On the economic front, there is … reason to be concerned.Following is the unofficial transcript of a CNBC EXCLUSIVE interview with IMF Managing Director Christine Lagarde and CNBC’s Sara Eisen on CNBC’s “Squawk Alley” (M-F, 11AM-12PM ET) today. But her comments appeared to be more pessimistic than the global lender’s forecast made in July, just before global financial markets erupted into turmoil over concerns that China’s economy could crash.

Christine Lagarde, the IMF’s managing director, said forecasts to be published by her organisation next week would show activity expanded by less than the 3.4% recorded in 2014 – the joint weakest since the world economy came to a standstill six years ago. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000427506 and http://video.cnbc.com/gallery/?video=3000427498.

Joseph Stiglitz, whose influence is amplified by his Nobel Prize, blames the IMF for causing and then worsening the economic crises it was called on to resolve. Lagarde also pointed to the “sharp deceleration” in the growth of global trade and the “rapid drop” in commodity prices, which is hammering the finances of commodity-exporting emerging market economies.

Ms Lagarde warned there could be a “prolonged period” of low prices for the commodities that are central to the economies of many developing countries. Many of the recent economic gains in Asia, Latin America and Asia “now seem in jeopardy,” said Lagarde, addressing the Council of the Americas ahead of next week’s IMF and World Bank annual meetings to be held in Lima, Peru. Lagarde said potential growth is being held back by low productivity, aging populations and lingering problems from the 2008 financial crisis such as high debt levels. She urged emerging markets to diversify their economies and said some of them might be ill prepared to weather the financial storm that could arise when the US Federal Reserve eventually raises interest rates. She said it will be critical to properly manage the transition in China to consumer-led growth and the pending move by the Federal Reserve to higher interest rates.

Policy makers in emerging markets should keep a closer eye on company debts denominated in dollars as well as to the banks that lent to them, she said. In a speech previewing next week’s annual meetings of the 188-nation IMF and its sister lending agency, the World Bank, Lagarde said that currently global growth is “disappointing and uneven,” with many emerging market nations losing revenue from falling prices of commodities such as oil. The IMF said on Tuesday emerging market firms have racked up debts of $18-trillion and rate hikes in the developed world could spur a rash of corporate bankruptcies. The rate rise, still on the Fed’s track for this year, could drive investors to pull funds from emerging countries into the United States and further strengthen the strong dollar, the currency on which the debt of many companies is based. “Rising US interest rates and a stronger dollar could reveal currency mismatches, leading to corporate defaults — and a vicious cycle between corporates, banks, and sovereigns,” Lagarde said. While she did not reveal specific figures, she said growth was expected to be weaker this year than last year, with a modest acceleration expected in 2016.

This weakness is what forced German Chancellor Angela Merkel to bully her European Union partners into a more coherent response to the ongoing influx of asylum-seekers. High debt, low investment, and weak banks continue to burden some advanced economies, especially in Europe; and many emerging economies continue to face adjustments after their post-crisis credit and investment boom.” Lagarde warned that the slowdown in China would have knock-on effects on countries that rely heavily on Chinese demand for their raw materials. WE DON’T SEE MUCH MOVEMENT ON THE INFLATION FRONT, NOR ON THE WAGES FRONT, SO WE ALSO ARE VERY INTERESTED TO SEE THAT THE INTERNATIONAL SCENE IS ALSO PERCEIVED AS LIKELY TO HAVE DOMESTIC EFFECTS AND MAY HAVE BEEN FACTORED INTO THE THINKING.

It follows, therefore, that the economic health of every country is a proper matter of concern to all its neighbours, near and distant.” That is why the 44 countries in attendance, and the 188 that now belong to the IMF, agreed to “consult and agree on international monetary changes which affect each other…and they should assist each other to overcome short-term exchange difficulties”. It would enhance the potency of monetary accommodation, improve the outlook, and bolster market confidence.” Policymakers in emerging economies should better monitor the foreign currency exposure of their major companies and ensure the resilience of their banks following a build-up in corporate leverage and foreign debt. “At the global level, there is a pressing need to complete and implement the regulatory reform agenda – with a special focus on improving the transparency and oversight of non-banks, or shadow banks.

And we still have another major upgrade ahead of us – the resolution framework for systemic, globally active financial institutions remains inadequate.” She argued that the risk of raising rates prematurely — and damaging the U.S. and global economies — outweighed the risk of waiting too long and allowing inflation to creep up. This is not because the challenges are easier, but because the international community of practice, led by the IMF, provides a level of support that simply does not exist in other areas.

In exchange for its support, the IMF typically requires countries to address the imbalances, not only so that they can repay the money, but also for their own good, so that they can restore their creditworthiness. To be sure, the IMF inevitably makes mistakes, partly because the questions and issues it must address are constantly changing, so that it never knows whether the current state of thinking is adequate to new challenges. With the collapse in the price of oil since then, the economy has gone into a tailspin: GDP is contracting at a record pace, inflation is in excess of 200%, the currency has plunged to less than 10% of its previous value, and massive shortages have emerged.

Venezuela has tried to finance itself with the help of the China Development Bank, which does not impose the kind of conditionality that IMF bashers dislike. Instead, the CDB lends on secret terms, for uses that are undisclosed and corrupt, and with built-in privileges for Chinese companies in areas like telecommunications (Huawei), appliances (Haier), cars (Chery), and oil drilling (ICTV). DOLLARS, FOR INSTANCE, ARE GOING TO, YOU KNOW, FEEL THE CONSEQUENCES OF THAT CHANGE OF INTEREST RATES GOING FORWARD, AND THERE WILL BE INCREASED VOLATILITY.

IT’S ONE THING WHERE WE SAY TO THE POLICYMAKERS, THROUGH THE GOVERNMENTS OF THOSE COUNTRIES, WATCH OUT, LOOK INTO THAT, AND MAKE SURE THAT THERE IS – THERE ARE PRECAUTIONS TAKEN, AND YOU HAVE A SYSTEM IN PLACE, INCLUDING THE JUDICIAL, THE LEGAL SYSTEM, AND THE SAFETY NET THAT IS ARE IN PLACE TO ADDRESS THAT POTENTIAL RISK. A LOT OF INVESTORS HAVE BEEN TAKEN A BIT BY SURPRISE IN THE COURSE OF THE SUMMER BY WHAT THEY SAW, BUT THAT IS EXACTLY WHAT WAS EXPECTED, WHAT WE REGARD AS NECESSARY AND HEALTHY. LAGARDE: IF YOU LOOK AT THE EVOLUTION BOTH IN TERMS OF METAL PRICES, OIL PRICES, FOOD PRICES – LESS SO FOOD, BUT ON THE OTHER ONES, THERE’S A VERY STRONG CORRELATION BETWEEN THE GRADUAL SLOWDOWN OF CHINA AND THE – NOT JUST RECENT, BUT THE DECLINE OF COMMODITY PRICES OVER THE LAST FIVE YEARS.

SO IT’S, AGAIN, GOING TO BE WHERE IS THE IMPLEMENTATION, HOW QUICKLY, AND AS FAR AS THE IMF IS CONCERNED, WE ARE PREPARED TO ENGAGE, YOU KNOW, UNDER CERTAIN CONDITIONS. LAGARDE: WE ARE TALKING ABOUT DEBT RESTRUCTURING, WHICH IS NOT A CUT, BUT IT IS A RESTRUCTURING – MATURITY, INTEREST RATES, THAT SERVICE FRANCHISE FOR A PERIOD OF TIME. WE’RE FACING ANOTHER LOOMING SHUTDOWN DEADLINE IN THE NEXT 12 HOURS AND POTENTIAL DEBT CEILING ONE COME NEXT FALL LATER IN THE FALL OR EVEN IN THE WINTER. AND I’M JUST WONDERING WHETHER ECONOMIC KEY PLAYERS ARE NOT GETTING USED TO IT, WHICH WOULD BE A PITY BECAUSE I THINK, YOU KNOW, POLICYMAKERS ARE PLAYING A ROLE IN BUILDING CONFIDENCE, REMOVING UNCERTAINTY, GIVING PREDICTABILITY TO A SYSTEM.

WHEN WE SEE AN ECONOMY THAT IS, YOU KNOW, AT THE MOMENT, LEADING THE GLOBAL CHARGE BY HAVING A REASONABLY GOOD GROWTH, IT’S A PITY NOT TO LEVERAGE THAT. I THINK MANY OF THEM ARE DOING SOME RIGHT THINGS, BUT IT NEEDS TO BE UPGRADED IN VIEW OF THE URGENCY AND IN VIEW OF THE SIZE OF CHALLENGES THAT WE ARE FACING.

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