Lagarde Urges Collective Action to Restore Confidence

Global growth continuing but at a slower pace

Debt problems in advanced countries have led to rise in financial stability risk

Road to recovery needs repair, reform, rebalancing, and rebuilding

“I believe there is a path to recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world―leadership over brinkmanship, cooperation over competition, action over reaction,” IMF Managing Director Christine Lagarde said September 15 at the Woodrow Wilson Center in Washington, D.C.

She made her remarks ahead of the Annual Meetings of the World Bank and IMF, where world economic leaders are expected to discuss the global economic outlook and look for ways to restore confidence.

The gathering will take place amid a worsening of the euro area debt crisis, rising financial strains in advanced countries, and disappointing data pointing to a softer global recovery, especially in the advanced countries. In emerging markets, the growth picture is brighter, but challenges include inflation pressures, managing strong credit growth, and rising current account deficits.

Several countries in the Middle East and North Africa face the task of transforming their economies in the wake of social upheaval, as discussed at the recent Group of Seven (G-7) Deauville Partnership meeting. And while low-income countries are doing reasonably well, they remain very vulnerable to economic dislocation from elsewhere in the world.

The IMF’s updated forecast for the world economy will be published September 20. About 13,000 policymakers, private sector and civil society representatives, journalists, and academics are expected to attend the Annual Meetings, which this year take place on September 23–24.

Overload of debt

In the short run, a key issue weighing on the recovery is the debt overhang in advanced countries. . In the United States, debt-laden households remain reluctant to spend and need some relief. In Europe, uncertainty about sovereign debt sustainability continues to undermine confidence, and European banks need sufficient capital buffers to support growth, Lagarde said.

“Weak growth and weak balance sheets—of governments, financial institutions, and households—are feeding negatively on each other, fueling a crisis of confidence and holding back demand, investment, and job creation.”

Rise in financial stability risks

A second, more long-term issue is the heightened risks to financial stability...