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

WHEN: TODAY, TUESDAY, JULY 3RD

WHERE: CNBC’S “SQUAWK ON THE STREET

Following is the unofficial transcript of a FIRST ON CNBC interview with IMF Managing Director Christine Lagarde. The remaining portion of the interview will run on CNBC’s “Closing Bell with Maria Bartiromo” 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=3000100634.

All references must be sourced to CNBC.

BARTIROMO: I'M WITH MADAM LAGARDE. GREAT TO SEE YOU. THANKS FOR JOINING US. I WANT TO START WITH THE REPORT YOU'RE RELEASING ON THE U.S. ECONOMY. THERE ARE STILL CONSIDERABLE RISKS. TELL ME HOW YOU CHARACTERIZE WHAT'S HAPPENING IN THE U.S. RIGHT NOW.

LAGARDE: I WOULD CHARACTERIZE IT AS TEPID RECOVERY WOULD BE MY TWO WORDS ASSOCIATED WITH TWO MAJOR DOWNSIDE RISKS. SO THE FIRST DOWNSIDE RISK IS THE DOMESTIC ONE, THE ONE THAT POLICYMAKERS CAN ADDRESS IF THEY WANT TO. THIS IS CLEARLY THE DEBT CEILING AND CLEARLY THE FISCAL CLIFF. BECAUSE IF THOSE RISKS MATERIALIZE, OR IF THE THREAT OF IT GROWS, THAT COULD REALLY NUMBER ONE ERODE CONFIDENCE. NUMBER TWO, IF THEY WERE TO MATERIALIZE, IT COULD CONTRACT THE U.S. ECONOMY THAT WE SEE GROWING IN 2012 AT ABOUT 2% AND 2.3% IN 2013. BUT IF THESE RISKS WERE TO MATERIALIZE, IT WOULD REDUCE THAT GROWTH TO ALMOST NOTHING. THE SECOND DOWNSIDE RISK IS THE RISK COMING FROM THE OUTSIDE. THAT IS THE EUROZONE. DETERIORATION OF THE SITUATION IN THE EUROZONE AREA WOULD BE A RISK TO THE U.S. RECOVERY.

BARTIROMO: I WANT TO ASK YOU, OF COURSE, ABOUT THE EUROZONE, WHICH YOU HAVE BEEN SHOWING SUCH LEADERSHIP ON IN TERMS OF THE SOLUTIONS THERE. ON THE FISCAL CLIFF, VERY FEW PEOPLE ARE EXPECTING ANY AGREEMENT ON CERTAINLY THE FISCAL CLIFF AND DEBT CEILING ISSUES BEFORE THE ELECTION. ARE YOU SAYING THEY NEED TO FACE THIS NOW BEFORE THE ELECTION, IF NOT WE WILL SEE A DETERIORATION IN ECONOMIC GROWTH?

LAGARDE: IT WOULD BE FAR BETTER, FAR BETTER THAT IT IS ADDRESSED EARLY ON AND BEFORE WE GET CLOSE TO THE RISK. WE THINK THAT THE DEBT CEILING RISK IS LIKELY TO MATERIALIZE VERY EARLY IN 2013 AND I'M SURE THE TREASURY DEPARTMENT CAN USE CERTAIN TOOLS AND MECHANISM TO PUSH THE DEFICIT CLIFF A LITTLE BIT INTO 2013. IF THERE WAS AN AGREEMENT EARLY ON, IT WOULD BE A SERIOUS CONFIDENCE BOOSTER FOR THE U.S. ECONOMY.

BARTIROMO: MADAM LAGARDE, LET ME MOVE ONTO THE EUROZONE, SEEMS ANY HEADLINE COMING OUT OF EUROPE REALLY IS MOVING MARKETS ALL OVER THE WORLD PARTICULARLY IN THE UNITED STATES. YOU HAVE SPOKEN FOR A LONG TIME ABOUT THE NEED TO PROVIDE BAILOUT MONEY FROM THIS EMERGENCY STABILITY MECHANISM, THE ESM FUND DIRECTLY TO THE BANKS RATHER THAN GOING THROUGH GOVERNMENTS. WHY IS THIS SO IMPORTANT? TALK TO US ABOUT WHAT CAME OUT OF THIS LATEST BRUSSELS MEETING WHICH SEEMS TO HAVE STABILIZED MARKETS. IS THAT WHAT IT WAS? BECAUSE MONEY IS GOING DIRECTLY TO THE BANKS?

LAGARDE: I THINK IT'S ONE VERY GOOD REASON FOR THE MOVEMENT THAT WE'VE SEEN ON THE MARKETS ON FRIDAY AND AGAIN ON MONDAY. THE FACT THAT THE EUROPEAN STABILITY MECHANISM THAT HAS BEEN SET UP BY THE EUROZONE PARTNERS CAN NOW INVEST DIRECTLY INTO THE CAPITAL OF THE SPANISH BANKS. IT'S NOT YET IN THE CAPITAL OF ANY BANK THAT IS IN NEED OF RESTRUCTURING OR RECAPITALIZING. IT'S BEEN IDENTIFIED AS THE SPANISH BANK IN PARTICULAR WITH THE ASSOCIATION OF THE SORT OF NO SENIOR CREDITOR STATUS ASSOCIATED WITH THIS. I THINK IT'S A COMBINATION OF THESE TWO THAT HELPED SPAIN ENORMOUSLY. BUT THE DIRECT INVESTMENT FROM THE ESM INTO BANKS, WITHOUT GOING THROUGH THE SOVEREIGN, IN OTHER WORDS WITHOUT LENDING TO THE COUNTRY WHERE THE BANKS ARE LOCATED, I THINK IT'S A MAJOR IMPROVEMENT, BECAUSE IT REALLY CHANNELS THE FUNDS DIRECTLY TO THE BANKS WHERE THE NEEDS ARE, WHERE THE RISKS ARE LOCATED WITHOUT ANY CONTAGION POTENTIAL CHANNEL VIA THE SOVEREIGN.

BARTIROMO: I GUESS IT'S TELLING CREDITORS AND INVESTORS THAT THEY HAVE THE FULL SUPPORT OF THE EUROZONE, THE BANKING SECTOR HAS THE FULL SUPPORT OF THE EUROZONE AVOIDING BANK RUNS. WOULD YOU LIKE TO SEE THIS APPROACH PUT ON ALL EUROPEAN BANKS, NOT JUST SPANISH BANKS.

LAGARDE: YES, ABSOLUTELY.

BARTIROMO: DO YOU THINK WE'LL GET THERE?

LAGARDE: MY RECOMMENDATION, OUR RECOMMENDATION HAS BEEN THAT THE ESM BE ALLOWED TO ACTUALLY DO THAT IN ANY RESTRUCTURING OF BANKS NEEDED ANYWHERE IN THE EUROZONE. WE THINK IT'S A GOOD USE OF THAT COMMON POT OF MONEY. IT AVOIDS GOING THROUGH THE SOVEREIGN. IT DOES NOT AFFECT THE DEBT CEILING OF THOSE COUNTRIES, AND IT'S A GOOD MULTIPLIER, BECAUSE IF YOU INVEST IN THE CAPITAL OF BANKS, NUMBER ONE, YOU RESTRUCTURE THEM. YOU MIGHT DEAL WITH THE MANAGEMENT. YOU MIGHT DEAL WITH THE STRATEGY. YOU CERTAINLY HELP IN PROVIDING CREDIT TO THE ECONOMY.

BARTIROMO: HOW MUCH CAPITAL WOULD YOU SAY THAT THE SPANISH BANKS NEED RIGHT NOW?

LAGARDE: WE HAVE SAID IN OUR REPORT THAT THE NEEDS ARE IN THE RANGE OF $40 BILLION EUROS. THE SORT OF ALLOWANCE THAT WAS GIVEN BY THE EURO PARTNERS TO SPAIN IS $100 BILLION EUROS. SO THEY HAVE PLENTY OF ROOM TO MANEUVER ABOVE WHAT WE THINK IS NECESSARY AND WHAT WILL BE CONFIRMED OR INFIRMED BY AN INDEPENDENT AUDITOR'S REPORT THAT WILL BE RELEASED LATER ON IN THE SUMMER.

BARTIROMO: THIS PLAN OF COURSE HINGES ON THE IDEA WE WILL HAVE AN OVERSEER OR REGULATOR OVERSEEING THE BANKING SECTOR IN EUROPE AN FDIC TYPE INSTITUTION. WHEN DO YOU EXPECT THAT TO BE IN PLACE?

LAGARDE: THAT WAS TIT FOR TAT. WE AGREE WITH THE DIRECT INVESTMENT BY THE ESM INTO BANKS PROVIDED THAT THERE IS A COMMON EUROPEAN SUPERVISION WITH A CLEAR ROLE FOR EUROPEAN CENTRAL BANK. THAT WAS THE REQUEST OF GERMANY IN PARTICULAR. AND IT'S TERRIFIC THAT FROM A STRICT MONETARY UNION, THE EUROZONE IS ALSO MOVING INTO A BANKING UNION WITH ONE SINGLE SUPERVISOR WHO WILL HAVE THE AUTHORITY TO CHECK WHAT THE NATIONAL SUPERVISORS ARE CONTINUING TO DO ON A DAY-TO-DAY BASIS. BUT THAT SUPERVISOR FOR THE WHOLE OF THE EUROZONE WILL HAVE BINDING AUTHORITY OVER WHAT THEY DO.

BARTIROMO: MADAM LAGARDE, WE'RE GOING TO SEND IT BACK TO THE STUDIO. BUT I KNOW YOU'VE ALSO HAD SOME OPINIONS ABOUT WHAT ELSE THE ECB CAN DO IN TERMS OF THIS CRISIS. OF COURSE THE EUROPEAN CENTRAL BANK MEETING ON THURSDAY. I WANT TO ASK YOU ABOUT THAT AS WE CONTINUE OUR INTERVIEW AND THAT WILL BE ON THE CLOSING BELL.

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