WASHINGTON (Reuters) - The head of the International Monetary Fund on Wednesday vowed the global lender will stand by troubled Greece and said uncertainty over the future of the euro zone was clouding the outlook for the embattled Spanish economy.
IMF Managing Director Christine Lagarde said a broad decline in confidence was being fueled by weak economic data coming out of many countries and investors reacting to that.
Uncertainty over the euro zone debt crisis and the potential for a so-called “fiscal cliff” in the United States, which she said raised “serious questions” about the U.S. economy, were predominantly weighing on confidence, Lagarde said.
Speaking ahead of a critical meeting of the European Central Bank on Thursday, Lagarde signaled that the IMF believes the central bank should cut rates given low inflation levels.
If European leaders followed through on commitments made at a June summit to tackle the debt crisis “there are reasons to hope the situation will improve,” she added.
But the United States kept up pressure on Wednesday for Europe to act, with U.S. Treasury Secretary Timothy Geithner calling on euro zone leaders to take steps to bring down interest rates in countries that are reforming.
President Barack Obama, in a telephone call with French President Francois Hollande, pushed for decisive efforts.
Concerns over Greece and Spain were also weighing on market confidence, Lagarde said.
The IMF is currently in Athens as part of a “troika” of international lenders, including the European Commission and European Central Bank, looking at ways to keep Greece afloat.
But with the IMF-EU program in Greece way off track and European officials already saying that the country will need further debt restructuring, questions are arising over whether IMF member countries will seek to change course on Greece.
“The IMF never leaves the negotiation table,” Lagarde insisted during the roundtable interview with reporters at the IMF headquarters. “We are in Greece at the moment ... and we are engaged in dialogue with the Greek authorities.”
Lagarde acknowledged, however, that Greece could do more by collecting more taxes from wealthy Greeks to boost government revenues and economic reforms to strengthen the economy.
“I certainly hope with a better consolidated coalition and real ownership (of the program) by the authorities, that Greece can actually go further and improve the situation,” she said of the new conservative led coalition government of Prime Minister Antonis Samaras.
The IMF has recently come under attack from private economists and analysts over its handling of the euro zone crisis, which some say is toeing the official European-German line. Its critics also question whether the IMF can remain truly independent and give candid advice while working as part of the “troika” of lenders in countries like Greece, Ireland and Portugal.
“I find it surprising when I see the hostile response,” Lagarde said, vowing “to do everything I can” to protect the IMF’s credibility as it deals with Europe.
Lagarde said last year she called for the recapitalization of European banks, which was controversial at the time in Europe, made early calls for a fiscal and banking union in the euro zone despite pushback by some Europeans, and pressed for a stronger financial firewall in Europe.
She said the Fund would be honest but also demanding of governments by providing sound economic assessments.
Lagarde again praised Spanish efforts to cut its budget deficit and overhaul its economy to boost growth. Those efforts were however being undermined by investor uncertainty over the future of the euro zone, she said.
Spain’s struggling economy, which continues in recession, has been taking a beating from investors despite ambitious fiscal and structural reforms and a 100-billion-euro bailout for its banks hit by the bursting of a property bubble.
Lagarde said an IMF supervised program in Spain would not demand much more than the government is already doing.
“What Spain has already done and is committing to do is not much more than we would be asking from Spain if it was in a program with the IMF,” Lagarde said, calling Spain’s fiscal consolidation a “huge effort”.
She said, however, that more could be done to address weaknesses in the Spanish banking sector.
While there are lingering concerns among investors over continued weak growth in Spain, Lagarde said improving exports showed that the economy was starting to mend.
“There are factors at work to improve the Spanish economy but there are also external elements that cloud the horizon of Spain and that is the uncertainty in the euro zone in general,” she added.
But Lagarde emphasized that the euro area was not the only risk facing the world economy.
Removing uncertainty in the United States over the path of fiscal policy would also help calm investor nerves, she said.
The U.S. economy is facing $4 trillion worth of expiring tax cuts and automatic government spending reductions, and most analysts do not expect Congress to act until after the congressional and presidential elections in November.
Lagarde welcomed steps by Congress on Tuesday to avoid a government shutdown by agreeing to extend funding for federal government agencies and discretionary program through March 2013.
“But there are serious questions regarding the U.S. economic future particularly as a result of the potential fiscal cliff should Congress not agree on at least a temporary plan in the coming months,” she added.
Editing by Neil Stempleman, James Dalgleish and Diane Craft