Christine Lagarde: "The crisis will be tough during the next months, and then there will be a turnaround"

Christine Lagarde believes that Argentina has yet to face some "three or four" tough months during the crisis, but she affirms - with a serious but calm look, and a clear tone - that the program of the government of Mauricio Macri and the International Monetary Fund (IMF) "is working", and will manage to turnaround the economy before next winter.

The plan designed by the economic team of Macri is already showing some "numbered results", the managing director of the Fund -MD, in the jargon of the body- said in an interview. She said she had "all the reasons to believe" that the economy will return to grow in the second quarter of 2019, leaving behind a V-shaped recession, short, but deep. If the crisis worsened, the program could be adjusted again -Lagarde said-, as it happened in August, when Macri called to ask for more funds, the day the dollar exceeded $ 40 for the first time.

"We are capable of adapting, if it is fully justified," Lagarde said. "We have every reason to believe that the situation will change in terms of growth in the second quarter of 2019. We know that this is a difficult phase that we are going through now, and that Argentines are going through, but it is working," she added.

Before her third trip to Buenos Aires, where she will attend the Leaders Summit of the G-20, Lagarde spoke with Argentine media in her office, a wide glazed corner on the seventh floor of the Fund, where a photo of her next to Pope Francis stands out on a table behind her desk.

Lagarde called Macri the "captain" of the Argentine program. The ownership and the power of adjustment are in Buenos Aires, not in Washington, she remarked. Faced with the possibility of working with Cristina Kirchner, she replied the Fund works with countries, not particular political affiliations. After the economy gets moving, she said, the Argentine people will decide.

- What message will you bring to the G20?

- Twelve months ago I said "the sun is shining, time to fix the roof". More recently I said "watch out there are clouds coming, it is still time to fix the roof". The latest development was the "clouds are getting darker, it is never too late to fix the roof, but the window of opportunity for doing that is getting very narrow". I think we’re still at that stage, with a particular focus the opportunities of playing as a team rather than looking at parochial, individual potential and development. Because while we believe that individual focus is necessary both in terms of fiscal policy, re-balancing and structural reforms, we also believe that it is really important now to focus on the upside that there would be from playing collectively, from cooperating better and from trying to eliminate rather than re-construct barriers. So that is going to be my focus. So, let’s be careful of the dark clouds mounting on the horizon and lets focus on the opportunities of improving our game together.

- What kind of achievement does the IMF expect from the [G-20] Summit here in Buenos Aires?

- I guess what is on everybody’s mind is some breakthrough concerning international trade. That would certainly be highly welcomed. I am sure that there will be a formal and official signing of the USMCA taking place in Buenos Aires which will be an indication of at least completion of negotiations that have been on-going for about a year and a half. But all eyes will be also on other nations, including the likes of US and China as to whether or not their discussions will result in a framework, in a commitment to make progress. That will be a strong indication. I also believe that following on the Argentine’s [G-20 presidency] focus on the future of work, the impact of the digital economy there will also be a strong discussion on the impact of technology and the need to address changes, both in terms of work and in terms of data. From our perspective, as the IMF, anything having to do with Fintech, and the implementation of the Fintech Bali agenda would be of critical importance.

- Madame, you have been very explicit about the risk of the so-called trade war. Are you more optimistic now?

- Well, in a way yes. Because seeing the USMCA signed is a clear progress. Only four months ago, many observers and many contenders would have raised their arms and feared for the worst. We have at least an agreement. It brought three countries together. And now we have at least not just the tariffs implementation or the tariffs threats, but we also have two presidents having a bilateral meeting and hopefully laying terms of future negotiations.

- You also have been talking about the risk of nationalism and rising populism in the world. How do you think the world should deal with national populistic governments who in most cases have challenged multilateralism?

- I will surprise you, but I think the response to that is more opening and a different kind of multilateralism. What I mean by more opening is there is a whole segment of our economies that is driven by services and not the exchange of goods. The exchange of goods and the moving of goods around the world represents a relatively small value of the overall value of the trade that is taking place. The whole service industry is still burdened and shackled by restrictions, barriers, tariffs, licenses and so on and so forth. There would be a significant upside gain out of more opening, more trans-border services being made available. And if you have more growth as a result of that then have you more space in order to reallocate growth and in order to better distribute it. That is what I mean by more opening. What I mean by a different multilateralism is one that is more focused on people, that is people-centric. In other words, is international trade, is digitalization, is new technology going to benefit a few or is it going to benefit as many people as possible. From the upside of the openings of markets, are we going to pay special attention to the adjustment of people who will be displaced, people who will be excluded because of the supply chains being transformed, will there be education programs that will be targeted to them in order for them to adjust. So I think there is huge opportunities and potential as a result of that. But we need to push those boundaries.

- Does that include migration in your view?

- When I use the word displacement, I am more thinking in terms of industrial displacement. So those people who have been working in say, the textile industries in countries where clearly the cost of labor is no longer competitive and where those workers, those people and those industries are being displaced. That is what I had in mind.

- The populist agenda could soon be back in parts of Latin America. What sort of effect could that have on the economies in the region?

- What you often see with populism is unrealistic promises that are not fiscally calibrated. And what generally stems from that is frustration and resentment because the promises that have been made cannot be delivered upon. I very much hope that the fear of populism in certain countries is actually reduced by fiscal realism when people actually measure the cost of certain projects and the fiscal space that is available to actually finance those promises. I think reality always comes back to haunt you. And the reality when it comes to delivering on political promises is actually fiscal space.

- Are you concerned about the increasing presence of China in Latin America? This is something that is being talked a lot here in Washington...

A: I tell you what I am really concerned about. I am concerned about excessive debt, not just in Latin America but in all countries. Because we have - and this is really a concern here - we have an overall debt, public, private, corporate and household which is at an all-time high. We have a 182 trillion dollars of debt at the moment. This is 60% more than what we had pre-financial crisis. We cannot carry on accumulating debt and there are certain countries that are in debt distress or at or close to debt distress risk. So we need to pay more attention to that by expecting and requesting that there is full transparency on debt, both in terms of who is the creditor, what are the terms and conditions, what are the maturities in order to really calculate the debt sustainability of countries so they can be on alert and whoever is the lender. Whether it is China, or any other creditor that they have the ability to say no and the creditor themselves, whether they are private or public. You know some banks, some lenders are equally responsible to check the sustainability of those countries.

- Speaking of debt, let me move on to Argentina. Here in Washington President Macri is seen as a role model against populism in Latin America, and under your leadership the IMF signed with Argentina its largest program ever, twice. Is that the main reason why the IMF did that, because Macri is seen as a role model against populism?

- I think that the reason we, the Board of the IMF, decided to support the program designed and defined by the Argentine authorities is its credibility and the financing needs that Argentina had. So, it was an adjustment between the credibility, the ownership, the design and the financing needs. All of that combined, together with the international support that was clearly expressed by the board at large, that gave raise to this significant program.

- Do you think, Madame Lagarde, that the zero deficit target set by the Argentine government went too far, wasn’t it too ambitious, was it necessary to go that far?

- I think in response to the summer development, as we saw it in July and August, which I would characterize as a combination of external factors, plus the major corruption case, plus lack of confidence in latest developments, a strong response and a strong correction was defined and proposed by the Argentine authorities and we thought that it would be appropriate.

- Madame, more than half of Argentines have a negative image of the IMF, some people to put the burden of the program in Washington in the US and the IMF, but not in Buenos Aires. What would you say to them?

- I would say that it’s very much a program that was conceived, designed, fine-tuned, elaborated and ultimately owned by the Argentine authorities. When president Macri called me first time around, he had very much in mind with his team, what kind of measures were needed. And we are very proud and feel privileged to support Argentina in that journey. And it’s a difficult one, we know that, and we see it, but it’s one that was defined by the captain not by us.

- Madame Lagarde, there is fear in Argentina that there might be social unrest…you know December is a usually a difficult month, to put it that way. What will happen if things get worse and president Macri calls you again asking for more help, more money. What will you do?

- Well, we are not at the end of the program and, you know, there is…We always have the ability to adjust, and we have demonstrated that. Because if you remember from where we started, which was a smaller program, which was predominantly precautionary, we have adjusted, we have increased the size of the program, it is no longer precautionary, so we are capable for adjusting if it is fully justified. It seems to me, from what I see and from the second review that has just been completed, that the program as it stands is working and that it has stabilized the economy and particularly the financial situation. We are beginning to see some numbered results and we have every reason to believe that the situation will turn around in terms of growth in the second quarter of 2019. So we know that this is a difficult phase that we are going through now, and that the Argentine people are going through, but you know, it’s working. The program is really off to a good start from the stabilization perspective and it’s a question of really keeping at it, delivering day after day until it turns around which we figured should be at the second quarter of 2019 where we should see inflation come down significantly, where we should see growth beginning to turn around and stop contracting.

- Would you say that the worse part of the crisis is over?

- I would say that we see a stabilization of the economy, and every reason to see a turnaround at the second quarter of 2019. Is the peak of the crisis is over? I think it is still going to be tough for the next few months, you know, three or four months, and then a turnaround.

- How do you think about the possibility of working with Cristina Kirchner in the future?

- We work with a country, we work with its authorities and there are political changes taking place all the time in all the countries in which we operate. Our focus is the economy and the people, our focus is not a particular political representation. But in all circumstances, what we expect is ownership and determination to deliver under sound economic terms.

- Are you concerned about the future of the program if President Macri is not reelected next year?

- First of all, I would suggest that we will begin to see positive development from the program in the second quarter of 2019, so that is April, May, June, should see the beginning of the turnaround and after that is going to be on the Argentine people to decide what they want going forward.

Por Rafael Mathus Ruiz

• G20 Summit 2018
• Christine Lagarde
• FMI

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