Will IMF chief sex charges hit EU bailout?

Will IMF chief sex charges hit EU bailout?

Posted by:
CNN Correspondent, John Defterios
May 16th, 2011 02:24 AM GMT

Brussels, Belgium (CNN) – The arrest and arraignment in New York of the Managing Director of the International Monetary Fund Dominique Strauss-Kahn raises a number of questions across the Atlantic where the organization has been a leading player in the European bailout packages.

One man may not make an organization, but the timing of his arrest on alleged sexual assault charges could not have been worse. European Finance ministers begin two days of meetings late Monday to sign off on a bailout package for Portugal, consider offering Ireland a lower interest rate for its rescue plan and evaluate whether Greece warrants emergency funding.

As ministers sit down in Brussels, auditors from the IMF and the co-lead organization, the European Central Bank, continue their work in Athens on Greek progress in reducing their budget deficit and collecting taxes. IMF officials noted last week that early indications are not promising in Greece – all the more reason the arrest of the organization’s leader can serve as a major distraction.

While Strauss-Kahn and the board of the IMF try to navigate a policy response to the assault charges, they also need to weigh in the resignation last week of the Fund’s number two policy maker, John Lipsky. The former Wall Street economist made it clear he will not seek an extension of his five-year term, which expires at the end of August. Strauss-Kahn and his deputy formed what was considered a highly respectable one-two punch on international monetary affairs.

During the autumn 2008 meltdown of global financial markets – lead by the collapse of Lehman Brothers – there was a power and policy vacuum at the top due to the severity of the crisis on U.S. financial markets. The IMF not only filled that vacuum but also moved quickly bring more players to the table to help solve a liquidity crisis.

In a span of weeks, the international monetary system went from thinking and acting in a G-8 policy context dominated by the U.S. and Europe, to embracing a much wider body of the G-20. The welcome mat was rolled out for the surplus countries such as China and Saudi Arabia and players like India and Indonesia. Strauss-Kahn led this effort and was a key voice in restructuring the Fund’s financial tool kit including the so-called Flexible Credit Line to speed up access to funds in a crisis.

Usually the IMF Managing Director is a well known figure in financial circles, but Strauss-Kahn also has become a major player in French politics. He was the “fireman” who put out the flames of the rapidly spreading wildfire of the credit crisis in 2008-09. He carried on that role during the European financial crisis as Greece became the frontline of a spiralling debt crisis a year ago. This served him well in the polls as the top candidate to lead France’s Socialist Party into elections next year.

A French presidential run now seems a distant dream for Strauss-Kahn. But his arrest in New York raises a much larger question about the current, understood tradition of hiring at these global institutions. They have been dominated by G-8 countries – a European normally leads the IMF and an American takes charge of the World Bank. When Lipsky announced his plans for departure last week, not surprisingly the rumor mill generated candidates from the emerging world: Mexico, South Africa and India. The Managing Director’s personal challenges may accelerate the call from future power players that the existing U.S.-E.U. dominance over appointments may need to change.

Meanwhile, in Brussels there is some serious work to be done on nearly $400 billion dollars worth of bailout funds. The IMF needs to be part of that process. But it won’t likely include the name Strauss-Kahn this week - or perhaps in the future as well.

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