On Sunday at Jackson Hole, Christine Lagarde, the new head of the IMF, gave her first big speech in the U.S. since taking over for Dominique Strauss Kahn.
Immediately headlines reflected central bankers’ critical reaction.
Gerhard Hofmann, board member of the association of German cooperative banks told Reuters: “(Lagarde’s) comments won’t help to boost confidence in the international financial system … If any European bank needs fresh capital, it would be better to stabilise the institute properly than to discuss it publicly in such a tense market situation.”
The criticism is aimed at this paragraph in Lagarde’s speech at Jackson Hole yesterday:
“[European] banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns.”
Later she said that the private sector could bear some of the capitalisation brunt. Lagarde’s statement is a big one: that Euro banks need urgent, mandatory, and substantial recapitalization.
And the criticism is that banks are already recapitalizing in order to meet significantly higher capital requirements and that they are much better capitalised now than they were a year ago.
Both Trichet and Merkel’s views contrast with Lagarde’s.
German Finance Ministry spokeswoman Silke Bruns told Reuters that Chancellor Angela Merkel’s government shares the views of European Central Bank President Jean-Claude Trichet that measures taken already will “prevent a liquidity crisis in the European banking sector.”
In the markets too, Euro banks are disregarding her remarks. Banks are up after her comments.
This is the second time that Lagarde has come under scrutiny since beginning her reign at the IMF. She’s also currently under investigation for her conduct in a business deal she helped organise in 2008.
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