IMF's Lagarde on Greece: 'Progress', but next few days are crucial

Here's a loosely edited transcript of CNBC's interview with IMF Managing Director Christine Lagarde:

Q: Can I just clarify what we've heard today first. There's going to be no extension to the proposals on the table, so after Tuesday, effectively they die. So Alexis Tsipras has three days here to u-turn?

A: First of all, I would to remind everybody that Greece is under a program with the IMF until March 2016. So what has been discussed today are the European financial arrangements which are due to expire after a previous extension on June 30th. And of course everything is going to depend on the developments in the next few days. But as far as we are concerned, Greece is a member of the euro zone. When they are prepared to talk, and to continue negotiations, we stand ready to do that. we have constantly in the last few days showed a lot of willingness to progress, flexibility in what they can adjust to. And we stand ready to continue to doing that.

Q: Are you willing to provide even more flexibility though even from today, because they are saying already, they are going to meet an ultimatum with an ultimatum of their own. Which is effectively what they're saying that they've done.

A: You know, this ultimatum discussion is a bit over the top because there has been a preliminary position, successive iteration, modifications, movements, and so on and so forth… so I think there has been a lot of progress and we are a point where it has been significantly diluted compared with the previous arrangements. Just to give you an example, the fiscal targets have been significantly reduced. The structural reforms that are so necessary for the Greek economy to transform itself have been reduced as well, focusing on the principle ones… the ones that are more adjusted to the political and economic new situation in Greece. At the same time, we have always advocated a balanced deal. It has to include all the necessary reforms, growth friendly fiscal consolidation on the part of Greece. But also on the other side, a contribution to the financing in the next few months. And assurance, going forward, that they will be sustainable debt… which means most likely, a debt operation. And it's really that sort of balanced approached that needs to happen.

Q: Has your stance been made harder because of euro zone leaders won't agree to looking at further debt re-profiling or debt negotiation at this point?

A: This issue of financing and debt has always been in the background of anything… because we always have to issue debt sustainability analysis.

Q: If we don't see further negotiation from the Greeks, would you agree that a route down towards Grexit would look pretty inevitable here?

A: Let's hope it can be avoided. But clearly the outcome and the way in which the referendum… tonight or tomorrow, in the course of the day will happen… will be critical. As I said, if and when the Greek authorities are ready to resume talks, we certainly stand ready to help.

Q: There's confusion over what they can hold a referendum on now—because the programs, the proposals don't exist after Tuesday. Is that right? Because then it effectively becomes a euro membership referendum?

A: It is a fact that European financial arrangement runs until June 30. And that any development… unless there is a new arrangement, or an extension, will no longer legally exist.

Q: There are reports of panic, of people taking money out of ATMs already… of ATMs being empty particularly around the center of Athens. Do you think capital controls, or at least a bank holiday until this proposed referendum is necessary at this stage?

A: This is a matter which should be discussed between the Greek authorities and the European Central Bank. It's not for us to make decisions in that respect. And I'm sure they will be holding talks to address the situation and I'm sure they have the tools to respond.

Q: We shouldn't under estimate the dangers of these next few days?

A: Any moment of negotiations break up and eventually resumption afterwards are always difficult. And it is a difficult moment for sure.

Q: Many finance ministers have taken great effort to point out in the last few days, coming into these Eurogroup meetings that there won't be a contagion effect. That financially, countries will be protected. What about economic, political contagion at this stage. Are you concerned about the reaction in the financial markets when they re-open tomorrow night and on Monday?

A: You know, I have been around for a long time during those moments of crisis. And certainly the euro area is in a completely different position from where it was back in 2011. Let alone 2008. Whether it's the ESM, the ESFS - the tool box available and validated and endorsed by the court… the European Court of Justice in particular… by the ECB… and the tools and defenses that can be put to good use which were not available in 2011. So that issue of contagion has a completely different dimension. As far as the neighboring countries are concerned, clearly, there has been a debate. There has been precautions taken in vicinity countries.

Q: So you are far less concerned than you were?

A: In 2011? As I said the situation is entirely different. We are in a different paradigm for the euro area.

Q: Are you expecting to get paid, the money, on Tuesday?

A: Well, I certainly hope that the bundled payment due to the IMF on Tuesday night, at the latest, will be paid. If they were not paid on Tuesday night, then there is a series of procedures and notifications that I have to initiate. But technically, any country that does not pay on due date is in payment arrears vis-à-vis the Fund. And the consequences are that the Fund cannot disburse vis-à-vis that country until the arrears has been paid. Greece remains a member of the IMF. Greece benefits and alternate seat on the Board… and has access to technical assistance, receives surveyance and services but it cannot receive any payment until arrears has been paid.

International Monetary Fund (IMF) Managing Director Christine Lagarde and German Bundesbank Governor Jens Weidmann chat prior to the group photo of finance ministers, central bank governors, and global financial institution heads during a meeting of finance ministers of the G7 group of nations on May 28, 2015 in Dresden, Germany. The G7 finance ministers are meeting ahead of the upcoming G7 summit at Schloss Elmau in June. (Photo by Sean Gallup/Getty
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International Monetary Fund (IMF) Managing Director Christine Lagarde and German Bundesbank Governor Jens Weidmann chat prior to the group photo of finance ministers, central bank governors, and global financial institution heads during a meeting of finance ministers of the G7 group of nations on May 28, 2015 in Dresden, Germany. The G7 finance ministers are meeting ahead of the upcoming G7 summit at Schloss Elmau in June. (Photo by Sean Gallup/Getty

Q: How quickly will you notify the board. The IMF mentioned the cross-default clauses that are contained within the current deal…

A: You know, everything in due course. For the moment, I hope that payment is made on Tuesday. And if that was not the case, I will call the board very very promptly.

Q: I want to ask you about the attacks that have been made by the Greek government indirectly, directly on the IMF. I quote, "the evil IMF". Are you the "evil" IMF in these negotiations?

A: You know we have tried everything we could to adjust, to demonstrate and implement flexibility as we are allowed to under our policies. We have always been united with the other two institutions - we are together. And our objective is clearly to restore the financial independence, the stability of Greece - to make sure that growth can start again. And that Greece can be sustainable from an economic and financial standpoint. As I've said, it is a balancing act. There has to be measures taken by Greece, there has to be support by the Europeans. And they come in sequence. Measures have to be taken, they have to be implemented. And that triggers a different attitude and a willingness to look at both financing and debt sustainability.

Q: You've, at times last year, asking for adults to be around the negotiating table. Do you hold the Greek government responsible for what seems to be a catastrophic failure in negotiations so far?

A: I'm sure that everyone will be pointing fingers. I have to say that this negotiation process has been very very laborious. Very cumbersome and very frustrating… with last minute documents tabled… and a very time consuming process where no one really knew what the Greek party wanted in terms of reforms and what the red lines were.

Q: A lot of people were saying the Greek government is putting the Syriza party before the Greek people. Would you agree with that?

A: I hope that's not the case for a government.

Q: Is this another situation where we will have European ministers, creditors, the Greek government effectively shifting the damage onto the Greek people again, because ultimately, they are going to suffer here, aren't they? If they aren't in a deal? If the government in the country's not in a deal.

A: In all the changes and the approach that we have taken in the negotiations, we've always said consistently that there had to be social safety net. We've always said that small pensions should be protected. And that's a line that we will continue to hold if negotiations resume. These protective measures have to be embedded in a program that is ambitious for Greece… that actually tackles the vested interest… that touches on the protected territories… that reviews who pays tax… and so on and so forth. And on that front, I would have hoped that this government is determined to adopt that approach.

Q: I want to ask one last question. The IMF… yourself personally have been criticized for being so involved in the Greek situation. For favoring Europe over the amount that's been lent. You've argued time and time again that you have other shareholders to consider. And other interests that has to be considered. Was it worth the economic and political capital that has been expanded here, do you think?

A: Europe and the Eurogroup represent a significant size of the global economy. From all the discussions that I've had around the world – in China, Latin America, and the Middle East, all questions, often, at the beginning of meetings that I've had with leaders, heads of states, pointed to the euro area. Is growth really picking up? Is such and such country really doing okay? Is Greece a country that is going to be coming out of that? So it's hardly surprising that we all spend quite a bit of time and energy… and creativity if we can, within our rules, in order to help that situation. But I'm going to have to go back to Washington promptly because as you've said, there are other members and we have other programs as well. We stand ready to help.