Interview: Finance minister says subprime crisis shows globalization will last

28th August 2007, Comments 0 comments

Paris (AP) - The global subprime crisis is a lesson for capitalism-shy France that globalization is "here to stay" – and it had better prepare for it, Finance Minister Christine Lagarde told The Associated Press.

Paris (AP) - The global subprime crisis is a lesson for capitalism-shy France that globalization is "here to stay" – and it had better prepare for it, Finance Minister Christine Lagarde told The Associated Press.

"The subprime issue and the way it has spread around the globe so quickly is a clear indication that globalization is not something that we can deny or challenge," she said in an interview Monday in her office overlooking the Seine.

Globalization, she added, "is something you have to cope with and for which you have to be prepared."

Global markets were spooked earlier this month when France's largest bank BNP Paribas announced that it was suspending three of its funds due to their exposure to U.S. subprime mortgages.

The crisis reignited French fears of global capitalism, highlighted in a 2005 poll by the University of Maryland's Program on International Policy Attitudes and GlobeScan. France was the only one of 22 countries surveyed in which most people responded "no" to the question: "Is the free enterprise system and free market economy the best system on which to base the future of the world?"

Lagarde's former brief as trade minister included giving globalization lessons to French people to teach them not to be afraid.

The feisty former Chicago executive – who left a job as head of law firm Baker & McKenzie in 2005 on a call to duty from former Prime Minister Dominique de Villepin – said France could be affected by the fallout from the U.S. troubles.

Lagarde said she is waiting for U.S. Treasury Secretary Henry Paulson's forecast for the U.S. economy to see "what effects it will have on the European and, as a result, the French economy."

Still, Lagarde remained upbeat about growth in the second half of the year.

The French economy slowed in the second quarter – expanding just 1.3 percent from a year earlier. Conditions in the third and fourth quarters will be "clearly better," she said.

BNP Paribas will this week resume trading in the funds whose suspension was followed by massive intervention by the European Central Bank and other central banks across the globe.

Lagarde praised the ECB and the U.S. Federal Reserve for injecting liquidity into the banking system to avoid a credit crunch as banks became more stringent about lending in the wake of the crisis.

"The fact that they were able to offer the liquidity that was badly needed on their respective markets, given the position of the respective banks, demonstrates a good assessment of the situation," she said.

The crisis arose when investments in complicated securities underpinned by risky mortgage-backed bonds went bad.

The value of assets fell sharply amid an increase in defaults of subprime mortgages in the United States. Investors began to pull funds and creditors started asking for more collateral to back their loans, causing a credit crunch.

Lagarde said French banks have a "very limited exposure" to subprime products.

The real estate market – which her government is trying to stimulate through tax exemptions on interest payments – should not be affected, she said.

Keen to avoid any risk to France's fragile economic growth, she urged banks not to tighten credit for companies "simply because it is time for them to finance investment."

She also defended previous comments that the ECB should reconsider a planned interest rate hike.

"I don't think it's offensive if governments express their views" about the bank's policy, she said.

ECB President Jean-Claude Trichet, who guards the central bank's independence fiercely, said Monday that his earlier comments – which had been interpreted to suggest that the bank could increase interest rates – were made before the subprime crisis.


Subject: French news

0 Comments To This Article