Lagarde says IMF stands by Greece, urges euro zone action

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.

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.

But Lagarde emphasized that the euro area was not the only risk facing the world economy.