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IMF’s Lagarde: World needs $1tn for recovery

Tuesday 24 January 2012 – by Karina Whalley

The International Monetary Fund has estimated a “global potential financing need” of up to $1tn over the next few years, half of which the organisation aims to raise.

Speaking in Berlin on Monday, IMF managing director Christine Lagarde called on the international community to take urgent action to stop the economy from its downward spiral.

“In the coming years, we estimate a global potential financing need of $1 trillion,” Lagarde told the German Council of Foreign Affairs.

“To play its part, the IMF would aim to raise up to $500 billion in additional lending resources. Right now, we are exploring options and consulting the membership.”

“I’m convinced that we must step up the Fund’s lending capacity,” Lagarde urged.

Eurozone countries have already pledged to provide up to $200bn in new financing for the IMF. However, Lagarde says European resources will need to be supplemented by the IMF as well as helping “innocent bystanders” affected by the contagion. A global world needs global firewalls, she said.

However, the 56-year-old was quick to point out that countries will need to make strong policy commitments to secure IMF lending.

“Our role is to catalyse, not indefinitely replace, private financing,” she said.
Europe is “at the centre of concerns” and needs stronger growth, larger firewalls and deeper integration, according to the IMF head.

Lagarde advocates “timely” monetary easing and raising banks’ capital levels rather than cutting back lending, as the way to boost capital ratios. She also said it is crucial that “orderly funding conditions” are maintained.

“We need a larger firewall. Adding substantial real resources to what is currently available by folding the European Financial Stability Facility into the European Stability Mechanism, increasing the size of the ESM and identifying a clear and credible timetable for making it operational would help greatly,” Lagarde said.

“We must also break the vicious cycle of banks hurting sovereigns and sovereigns hurting banks,” warned Lagarde, who has been IMF head since July.

To do so, she said banks must be made stronger and confidence in sovereign debt must be restored, while to stop the feedback loop between sovereigns and banks, there needs to be more risk sharing across borders in the banking system.

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