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FIRST ON CNBC: CNBC TRANSCRIPT: CNBC’S MARIA BARTIROMO SPEAKS WITH CHRISTINE LAGARDE, IMF MANAGING DIRECTOR TODAY – PART 2

Steffanie Marchese
Tuesday, 3 Jul 2012 | 2:43 PM ET

When: Today, Tuesday, July 3rd

Where: CNBC’s “Closing Bell

Following is the unofficial transcript of a FIRST ON CNBC interview with IMF Managing Director Christine Lagarde on CNBC’s “Closing Bell” at a special time today, 1PM ET. Following is the link to the video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000100707.

All references must be sourced to CNBC.

MARIA BARTIROMO: FIX THE FISCAL CLIFF HERE IN AMERICA AND OVER IN EUROPE SHE IS IN NO MOOD TO NEGOTIATE WITH GREECE. THAT IS JUST SOME OF THE COMMENTS THAT CAME OUT OF THE CONVERSATION TODAY WITH INTERNATIONAL MONETARY FUND HEAD CHRISTINE LAGARDE EARLIER TODAY. I BEGAN OUR FIRST ON CNBC CONVERSATION BY ASKING WHAT’S BEING DONE RIGHT NOW TO STOP EUROPE’S DEBT SITUATION FROM BECOMING A FULL ON GLOBAL FISCAL CRISIS.

CHRISTINE LAGARDE: INVESTMENTS STRAIGHT FROM THE ESM INTO THE BANKS AVOIDS THE CIRCUIT VIA THE SOVEREIGN AND AS A RESULT IT DOES NOT IMPACT ON THE SOVEREIGN DEBT LEVEL OF THAT SOVEREIGN WHICH IS WHAT THE SPANIARDS WERE SO CONCERNED ABOUT, THAT’S NUMBER ONE. NUMBER TWO; IT GOES DIRECTLY TO THE BANK. I MEAN THEY ARE GOING TO DECIDE HOW IT IS ORGANIZED AND WHETHER THE ESM HOLDS SHARES … OR ANY OTHER INSTRUMENTS THAT WOULD BE CONVERTIBLE INTO THE CAPITAL OF BANKS DEPENDING ON THE STATUS OF BANKS. BUT IT WILL HAVE A MULTIPLIER EFFECT BECAUSE IT WILL CONSOLIDATE THE BANKS, IT HELP THEM TO LEND APPROPRIATELY TO THE REAL ECONOMY. IT'S WHAT THE ESM SHOULD BE DOING WITH ITS MONEY. IT HAS 500 BILLION EUROS OR WILL HAVE AT THE END OF THE PROCESS. IT SHOULD USE THE MULTIPLIER EFFECT THAT IS HIGHEST. CLEARLY, BANKS CAN PRODUCE A GOOD MULTIPLIER EFFECT.

BARTIROMO: DO YOU WORRY THIS REMOVES PRESSURE ON GOVERNMENTS TO CARRY OUT THE ECONOMIC POLICIES, THE AUSTERITY THAT THEY NEED TO, AS THE BAVARIAN PRIME MINISTER HAS ARGUED AGAINST THIS APPROACH?

LAGARDE: I DON'T THINK SO. THERE IS A CLEAR UNDERSTANDING IN ALL EUROPEAN, PARTICULARLY THE EUROZONE AUTHORITIES, THAT THEY HAVE TO BE EXTREMELY VIGILANT ON THEIR FISCAL POLICIES ON THEIR GROWTH POLICIES, AND ON ACCOMMODATING BOTH SHORT TERM SENSIBLE CONTRACTIONS, CONSOLIDATION, RATHER, AND LONGER TERM ANCHORING OF THEIR DETERMINATION TO KEEP THE DEFICIT DOWN AND REDUCE THEIR DEBTS. NOT TO FORGET THAT YOU HAVE QUITE A FEW COUNTRIES IN THE EUROZONE THATARE ON THE PROGRAM WITH THE IMF. WHICH ARE THEREFORE UNDER VERY STRICT CONTROL ABOUT WHAT THEY DO IN TERMS OF FISCAL POLICY.

BARTIROMO: AND OF COURSE AMONG THEM, GREECE. I WANT TO ASK YOU ABOUT GREECE.

LAGARDE: YES, GREECE ISLAND, PORTUGAL.

BARTIROMO: TODAY, WE HAVE GREECE'S NEW GOVERNMENT SAYING IT WILL PRESENT ALARMING DATA ON THE RECESSION, ON THE UNEMPLOYMENT NUMBERS, TO INTERNATIONAL DEBT INSPECTORS IN A BID TO RENEGOTIATE THE TERMS. ARE YOU POISED TO RENEGOTIATE THE TERMS FOR GREECE?

LAGARDE: I'M NOT IN A NEGOTIATIONS OR RENEGOTIATIONS MOOD AT ALL. WE ARE IN A FACT-FINDING MOOD. I'M SURE THEY WILL HAVE EXCELLENT NUMBERS TO SHOW IN VARIOUS DIRECTIONS. I'M VERY INTERESTED IN SEEING WHAT HAS BEEN DONE IN THE LAST FEW MONTHS, IN TERMS OF COMPLYING WITH THE PROGRAM.

BARTIROMO: IN TERMS OF THE PROGRAM AND REALLY THE PLAN TO DIRECT BAILOUT MONEY TOWARDS THE BANKS, THIS PLAN HINGES ON THE CREATION OF A NEW INSTITUTION, FDIC TYPE REGULATOR. WHAT WILL THAT LOOK LIKE? WHEN ARE YOU EXPECTING SUCH AN INSTITUTION TO BE IN PLACE?

LAGARDE: THE EUROPEAN LEADERS HAVE ASKED THAT THE INSTITUTION BE PUT IN PLACE BEFORE THE END OF 2012. SO THERE IS NOT A LOT OF TIME FOR THEM TO PUT IT TOGETHER. THE GOOD NEWS IS THAT THEY ARE USED TO WORKING TOGETHER, BECAUSE THE -- I THINK OUT OF THE 17 CENTRAL INSTITUTIONS, 14 ARE ALREADY WORKING IN AN SUPERVISORY FUNCTION. SO THEY KNOW EACH OTHER, THEY WORK TOGETHER THEY HAVE ADDED AUTHORITY AND THE CIRCLE IS ENLARGED TO 17. IT HAS TO BE PUT IN PLACE RAPIDLY. ITS AUTHORITY NEEDS TO BE DEFINED QUICKLY. BUT WHAT'S CLEAR TO ME, TO THE IMF, IT SHOULD HAVE BINDING AUTHORITY OVER THE NATIONAL SUPERVISORS.

BARTIROMO: WHAT MORE NEEDS TO BE DONE? IT SEEMS THE SOLUTIONS ARE COMING SLOWLY, OF COURSE, I RECOGNIZE THESE THINGS TAKE TIME. I WANT TO TALK TO YOU ABOUT THE ECB BUT IN TERMS OF BANKING SECTOR IN TERMS OF THE ESM MONEY GOING TOWARDS THE BANKS, WHAT ELSE NEEDS TO BE DONE IN TERMS OF CREATING THAT CONFIDENCE YOU'VE BEEN TALKING ABOUT SO MUCH TO STABILIZE MARKETS?

LAGARDE: DIRECT INVOLVEMENT FROM ESM INTO THE BANKS, UNDER WAY, BANKING UNION, THAT’S CLEARLY THEIR TARGET. IT'S NOT ENOUGH. WE THINK THAT FISCAL UNION IS THE NEXT STEP THAT THEY NEED TO EXPLORE. ONE STEP AT A TIME PROCESS IS ANNOYING, IT'S DISCONCERTING. WE WOULD LIKE MORE TO HAPPEN MORE QUICKLY BECAUSE THAT'S THE SPIRIT OF THE TIME, TO MOVE FAST AND ABSORB AND DIGEST BEFORE WE HAVE EVEN SWALLOWED. BUT THAT’S THE WAY EUROPE IS BILLED AND HAS DEVELOPED OVERTIME. IF THEY DO THAT BANKING UNION BEFORE YEAR-END, AND IF THE NEXT STEP IS TO PUT IN PLACE FISCAL UNION, WHICH AT THE END OF THE DAY SHOULD GIVE RISE TO COMMON FISCAL POLICY, AGREED UPON OBJECTIVES, MAYBE ONE DAY ONE SINGLE DEBT AGENCY FOR THE WHOLE OF THE EUROZONE, MAYBE ONE OF THESE DAYS, ONE SINGLE MINISTER OF FINANCE FOR THE WHOLE OF THE EUROZONE, WELL, THAT WOULD BE -- THAT WOULD BE TERRIFIC. IT'S NOT GOING TO HAPPEN OVERNIGHT. IT WOULD CLEARLY TAKE THAT MONETARY UNION TOWARDS A MUCH MORE UNITED TERRITORY.

BARTIROMO: AND ONE OF THE BIGGEST RISKS FOR COUNTRIES LIKE SPAIN AND ITALY ARE THE ESCALATING COSTS, IN TERMS OF BORROWING COSTS. IS THERE A ROLE THE IMF CAN PLAY IN TERMS OF BEING A POLICEMAN, IN TERMS OF KEEPING RATES AT A PRACTICAL LEVEL. I RECOGNIZE THESE ARE MARKETS AND YOU LAUGH BECAUSE YOU KNOW --

LAGARDE: I WISH. I WISH I COULD DO THAT.

BARTIROMO: YES. HOW DO YOU KEEP LOWER RATES FAST ENOUGH TO AVOID THIS NEGATIVE SPIRAL THAT KEEPS HAPPENING AND CAN YOU REALLY EXPECT SPAIN AND ITALY TO PAY 7 AND 8 PERCENT IN BORROWING COSTS AND REALLY EXPECT CHANGE?

LAGARDE: IT’S A SUPPLY AND DEMAND ISSUE. THE BEST THING TO ACTUALLY ENCOURAGE RATES GO DOWN IS TO RESTORE CONFIDENCE SO INVESTORS ARE PLEASED AND HAPPY WITH THE RISK THEY ARE TAKING WHEN THEY BUY A 10 YEARS BOND ON ANY COUNTRY. NOW CENTRAL BANKS CAN PLAY A ROLE. OBVIOUSLY, THE ECB DID PLAY A ROLE DURING A PERIOD OF TIME, NOT JUST THROUGH THE LONG TERM REFINANCING SCHEME BUT ALSO THROUGH THE S&P. IT HAS HELPED. THE BEAUTY OF THE ECB IS IT DOES THINGS WITHOUT ANNOUNCING THEM. I'M NOT SUGGESTING THAT I COULD PROMPT THE ECB TO DO SUCH THINGS. IT'S ONE OF THE TOOLS THAT THEY HAVE AVAILABLE.

BARTIROMO: YEAH AND OF COURSE THE ECB MEETING THIS WEEK. WHAT WOULD BE MORE EFFECTIVE? LOWERING INTEREST RATES OR EXPANDING THEIR ASSET PROGRAM, THEIR ASSET PURCHASE PROGRAM? WHAT WOULD YOU LIKE TO SEE HAPPEN ON THURSDAY?

LAGARDE: WHAT THEY ARE GENERALLY VOCAL ABOUT IS THE INTEREST RATE MODIFICATION. THAT IS TALKED ABOUT. WE BELIEVE AT THE IMF THAT THE ECB HAS ROOM AVAILABLE IN TERMS OF TRADITIONAL MONETARY POLICY AND COULD POSSIBLY USE IT. WE'RE NOT SURE THIS IS THE BEST CHANNEL AT THE MOMENT, BECAUSE, YOU KNOW, THE -- GERMANY DOES NOT NEED LOWERING OF THE INTEREST RATES SET BY THE ECB BUT ITALY AND SPAIN DO. SO YOU CAN'T ASSOCIATE WHEN YOU DO THAT KIND OF -- WHEN YOU USE THAT KIND OF MONETARY POLICY INSTRUMENT. ON THE OTHER HAND, THE ASSET PURCHASE PROGRAM IS MUCH MORE SELECTIVE AND CAN BE USED IN A MORE JUDICIOUS WAY.

BARTIROMO: IT SOUNDS LIKE IF YOU'RE REALLY TARGETING A REAL SOLUTION HERE, THE ASSET PURCHASE PROGRAM EXPANSION WOULD BE THE WAY TO GO.

LAGARDE: IT'S MORE SELECTIVE.

BARTIROMO: IT'S QUITE EXTRAORDINARY TO ME, ACTUALLY, GIVEN WHAT'S GOING ON IN EUROPE, THAT THE U.S. LEADERSHIP HAS NOT BEEN MORE VOCAL IN TERMS OF TALKING ABOUT THE FISCAL CLIFF. I DON'T THINK PEOPLE ARE EXPECTING AN AGREEMENT ON THE FISCAL CLIFF WHERE ALL THE TAX CUTS WILL EXPIRE AND THE SPENDING PROGRAMS WILL EXPIRE. I DON'T THINK THEY'RE EXPECTING AN AGREEMENT BY THE ELECTION WHICH LEAVES US ONE MONTH BEFORE THE END OF THE YEAR FOR THESE THINGS TO REVERSE.

LAGARDE: IT WOULD BE IDEAL IF AN AGREEMENT COULD BE REACHED, EVEN FOR A SET OF TEMPORARY MEASURES, NOT FOR LONGER TERM, NOT ON SUBSTANCE BUT AT LEAST FOR AN EXTENSION. BECAUSE IT WOULD REMOVE THAT UNCERTAINTY. IT WOULD CONSOLIDATE CONFIDENCE, WHICH IS SO NECESSARY. BUT I SUPPOSE MOST PLAYERS, BECAUSE OF THE DIFFICULTY TO COOPERATE, LET'S CALL IT THAT WAY, ASSUME THAT THERE WILL BE A FEW TRICKS USED BY THE TREASURY -- NOT TRICKS, BUT TOOLS USED LEGITIMATELY TO PUSH OFF INTO EARLY 2013, THE CRITICAL TIME, SO THAT THE COUNTRY'S PAST THE ELECTION AND MORE SERIOUS THINGS PERHAPS CAN BE DECIDED. BUT FROM OUR POINT OF VIEW, REMOVING UNCERTAINTY AS EARLY AS POSSIBLE, SO THAT THE THREAT IS REMOVED, WOULD BE FANTASTIC.

BARTIROMO: IT SEEMS THAT YOU AGREE WITH THOSE WHO SAY, LOOK, IT'S NOT ALL ON THE CENTRAL BANK. WE NEED FISCAL CHANGE IN TERMS OF REALLY MAKING A DENT IN TERMS OF WHAT'S HAPPENING IN THE WORLD TODAY.

LAGARDE: YEAH. A LOT HAS BEEN DONE IN TERMS OF MONETARY POLICY AND WELL DONE. I'M SURE CHAIRMAN BERNANKE MIGHT HAVE A FEW TOOLS HE CAN USE BUT HE HAS USED A LOT OF IT. I'M NOT SURPRISED HE'S TURNING TO THE POLICY AUTHORITIES, THE POLICYMAKERS TO SAY, WELL, YOU KNOW, OVER TO YOU NOW, WHAT IS HAPPENING?

BARTIROMO: DO YOU WORRY THAT WHAT'S HAPPENING FOR THE EUROPEAN BANKS IS GOING TO BE IMPACTING THE U.S. BANKS NEGATIVELY? AND HOW IMPORTANT IS THAT REDIRECTION OF CAPITAL GOING INTO THE EUROPEAN BANKS? DOES THAT AVOID PERHAPS AN ACCELERATION OF THE CRISIS IN THE U.S. AND THE U.S. BANKING IMPACTS?

LAGARDE: I THINK A LOT OF WHAT WE CALL SYSTEMATICALLY IMPORTANT INSTITUTIONS, INCLUDING THEY LARGE AMERICAN BANKS THAT WERE EXPOSED INTERNATIONALLY HAVE TAKEN STEPS TO REDUCE EXPOSURE. THAT IS CLEAR. A LOT OF FUNDS COMING FROM THE U.S. HAVE BEEN WITHDRAWN AND SORT OF TAKEN BACK HOME, IF YOU WILL. THAT EXPOSURE TO SAVE THE EUROZONE HAS SIGNIFICANTLY DECREASED OVER TIME. WHAT IS HAPPENING SAY IN THE UK AT THE MOMENT WITH THIS BUSINESS PRACTICES THAT ARE NOT APPROPRIATE, THAT, I THINK, SHOULD BE A CLEAR SIGNAL TO ALL SUPERVISING AUTHORITIES ALL OVER THE WORLD TO BE MAYBE A LITTLE BIT MORE INTRUSIVE AND MORE INQUISITIVE IN THE WAY THEY'RE SUPERVISED. BECAUSE THAT'S A CLEAR SIGNAL THINGS ARE HAPPENING DESPITE THE GOOD WILL AND DESPITE THE EFFORTS AND DESPITE THE QUALITY OF SUPERVISORS AND CENTRAL BANKERS AND HAVE NO DOUBT MERVIN KING IS DOING A TERRIFIC JOB, BUT, STILL, THERE ARE THINGS ARE HAPPENING THAT SHOULD NOT HAPPEN.

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