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Below is the transcript of a First On CNBC interview with Christine Lagarde, Managing Director, IMF. The interview was first broadcast on CNBC's Street Signs on 11 October 2018.
All references must be sourced to a "CNBC Interview'.
Interviewed by CNBC's Geoff Cutmore
Geoff Cutmore (Geoff): I presume you don't think the Federal Reserve is crazy in its policy making at the moment, do you?
Christine Lagarde (Christine): I wouldn't associate Jay Powell with craziness, no. He comes across to members of his board as extremely serious, solid, and certainly keen to base decisions on actual information and desire to communicate that properly, that's what I have observed.
Geoff: The astonishing thing is, if this was President Erdogan in Turkey we would all be throwing our arms up and saying how can you interfere with central bank policy making and independence. But apparently it's okay for a former casino and property builder to weigh in on the actions of the Federal Reserve right now.
Christine: You know all over the world, it is certainly a good principle to have independence of the central banks and of the central bank governor. Certainly, we have advocated that in all the countries, and I think that the Fed is no exception.
Geoff: Let's move on, because I don't think I want to spend too much time on this issue, the markets will make their own judgment. But clearly, the markets overnight were a little bit rocky. I wonder, is the IMF in part responsible for the selloff, by putting out such a downbeat forecast around growth expectations? Back in June, we all thought we were going to bowl along at 3.9%, now we are suddenly in 3.7%, and we are seeing other economies being downgraded, do you think you can take some responsibility for risk off that we saw overnight?
Christine: I doubt that very much, I don't comment on daily volatility of markets here or there. Markets go up and they will go down. When we do a forecast, we do that taking into account all the policies that are confirmed, all the decisions that are made. And also trying to assess confidence impact that some of those decisions are making. And it is a fact that the trade tensions that we are seeing, specifically the tariff decisions that have been made, are having an impact and are clearly eroding confidence in many corners of the world. We're seeing the beginning of it. And that's the reason why, it's not the only reason, there are other reasons as well. The country most affected by our downgrade is Iran, because of incoming sanctions. Our forecasts, I think are completely legitimate in that respect. And they're not downbeat. 3.7% is nothing to be ashamed of. It could be higher, and personally I will certainly wish that we take all the right policies in order to have more growth, so de-escalating the trade tensions, sitting around the table, addressing the issues that the system has, and proposing new terms and a new legal framework within which trade operators, companies, the enterprises, the SMEs, the big corporates can trade and can expect the terms of trade, is in my view an imperative if you want to continue to see growth.
Geoff: We're heading down a very difficult road. We've got a tri-factor of difficult issues here, higher interest rates, and higher dollar funding costs for the emerging world, higher oil prices at the moment, and of course the backdrop of pressure on emerging markets is raising concerns because of the trade issue at this point. Are we at the point of no return? If we were to get a very quick deal between the United States and China, is it still possible to prevent the loss of confidence that we are beginning to see at the corporate level that is affecting investment decisions? Is there time to turn back?
Christine: There's always time to turn back. Look at the anxiety around the NAFTA succession, and how operators have been really satisfied to see certainty as opposed to uncertainty. The USMCA is now the proposed deal, they know where and how they can operate, they understand the constraints, they understand the benefits to be had. If the same could apply in terms of international trade and how the parties will actually organize the process of negotiation -- I'm not naive -- I've been the secretary of trade for France. Trade agreements take much more time than trade disagreements. But agreeing on a process, and accepting to go along the path of negotiations, and of identifying the problems that are on the table, I think would go a long way into reassuring operators, enterprises and large cooperates. Yes I do.
Geoff: You know the Chinese delegation very well. You understand how the government there operates; some analysts are worried that this trade dispute could actually drag on for years, if the Chinese dig in their heels. Premier Li at the WEF event talked a lot about new engines of growth which I think worried some analysts, that meant China looking inside perhaps slowing demand for products and finished goods from emerging markets around them. Is that something that we should be very worried about? That this actually could go on for some time. And that there will be now a lack of demand for emerging economies from China?
Christine: Well, there is certainly a concern in the emerging economies and in the lower income countries as well, about that risk, that growth. If China slowed down to that point where raw materials supply chain are disrupted, but this refocusing on the domestic economy is not something that is new, and for the last 3 years or so, the Chinese authorities have agreed, and I think you know all of us were quite supportive of that shift and that rotation, have agreed to refocus on their domestic market, to be less export-driven, and to actually reduce the imbalance created by the surplus. You know, we all celebrated that, moving from an almost double digit surplus account to 1.5, 2%. It's partly caused by the re-focusing on their domestic markets, and if that was to accelerate, clearly there will be spillover effects to other countries that are part of the supply chain, either through raw materials or the organization of supplying.
Geoff: As we look around the world vulnerable areas, clearly I've flown over from Europe, you know the European story very well, we again focus on Italy, is there a risk that the next challenge for the global financial system actually emerges once again from Europe, just because it has failed to do what the IMF has constantly encouraged it to do, which is fix the roof, while the sun shines.
Christine: And finish the job of reforming and strengthening these extraordinary constructions.
Geoff: I mean this is a terrible place for the ECB to be, if we are about to end the cycle, and go into a new slowdown.
Christine: Finishing the job of structuring and strengthening the euro area in particular should be an imperative, and there was a moment about a year ago, I hope this moment....
Geoff: You think that it's slowed now?
Christine: It has slowed a bit. Yes, let's face it. There were proposals, there was a level of enthusiasm that we're not seeing at the moment and I hope it's rejuvenated. The banking union, the real capital markets, that would cover the whole Euro area, not to mention a real fiscal union, which I don't think we're about to see. But as far as Italy is concerned, we would certainly hope that the fiscal discipline -- which can be growth friendly (but should be disciplined) -- can be continued. And that the rules that have been accepted by all members of the economic area would be respected by all members including Italy.
Geoff: Is there any period in recent history that feels a little bit like now? I know market commentators are looking back at the mid 90's. And they are worried about the debt stock and they are worrying about the vulnerability of emerging markets and they're looking for the next blindside, which economists seem to always fail to predict. Does it feel like the 90's again? That we're at risk of some market related event in the emerging space?
Christine: First of all, I think we should try to learn from history, so looking back at the 90s is one thing, looking back at 2007, looking back at the 30s, and way before that, at the time of the first globalization crisis before the first world war, it is something we should absolutely have on our minds and not be delusional about. But equally we have to project ourselves into the future, and look at the benefits, the challenges that we have. The technological revolution that is going to transform our societies and for which we have to prepare. So I'm really looking forward to that as well.
Geoff: We've got an exciting panel together on Fintech. And it's brought remarkable changes to the financial system. But those crises we've talked about were in part caused by financial innovation that ran out of control.
Christine: Information Technology was clearly at the centre of those days.
Geoff: Absolutely. We all remember the CDO-squares, and cubes and so on from 2008. Have we got it under control?
Christine: It has its upsides and downsides. And we need to find the right balance between not stifling innovation and encouraging it because it provides huge benefits. Look at the number of people who did not have access to banking services around the world who now, thanks to the accommodation of banking and telecom, can actually use banking services, transact in a safe way. This is tremendous, but at the same time we need to be very cautious about the dark side of innovations. That can be a nice medium, nice channel to some dark transactions that we certainly don't want to see and that would bring instability.
Geoff: Very much looking forward to our panel, which will happen in a couple of hours' time, but you've got to rush off...
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