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Après Strauss-Kahn, le déluge?

International Monetary Fund | Après Strauss-Kahn, le déluge? Ian Fraser

Even several days after the story first broke, the Dominique Strauss-Kahn affair beggars belief.

Strauss-Kahn resigns

One of the most powerful men in the world, on whose input it is argued the very future of eurozone depends -- and someone who could easily have become the next president of France - stands accused of sexually assaulting and imprisoning a 32-year-old chambermaid in the Hotel Sofitel in New York. Seen as a “flight risk” DSK was locked up in Rikers Island, one of America’s most notorious jails, for several days but has now been released on bail.

For several days, as the crisis unfolded, DSK clung onto his position as IMF managing director. However that was becoming increasingly untenable and he tendered his resignation to the IMF executive board on Thursday morning. In a brief letter Strauss-Kahn wrote:

It is with infinite sadness that I … present … my resignation ... To all, I want to say that I deny with the greatest possible firmness all the allegations that have been made against me. I want to protect this institution which I have served with honor and devotion, and especially - especially - I want to devote all my strength, all my time, and all my energy to proving my innocence.

The letter meant the starting gun in the race to succeed DSK (in which the limbering up was admittedly already well underway) had officially been fired. And this race is about much more than mere personalities. It has also arguably become a seminal moment for the global balance of power.

The IMF's 'feudalistic' voting system

Partly because of the relentless debt crisis and the probable need for further bailouts of busted peripheral EU member states, European powers are desperate to stick to the colonial-istic (unwritten) rule whereby the fund has until now always been run by a European (with the World Bank run by an American).

However, even as long ago ago as 2002, professor Joseph Stiglitz was pointing out this rule was anachronistic, saying it would be preferable if the fund’s leader could be chosen on merit rather than their European-ness.

Given the economic rise of emerging markets since the IMF’s 1944 foundation, the rule has now become even more frayed and emerging market leaders now strongly believe it's time someone from their part of the world took the helm. In a letter to the G20, Brazil's finance minister Guido Mantega said: "If the Fund wants to maintain its legitimacy, its managing director must be selected after broad consultation with the member countries.”

According to Mohamed El-Erian of Pimco, the Egyptian-born bond fund manager who has also been listed as a possible DSK successor, the fund faces a tough choice: "Retain its feudalistic approach, or implement an open merit-based selection process based on clear criteria and a transparent process." The first, he says, is quicker but "lacks credibility and legitimacy." The second resolves "a long-standing deficiency" but is slower.

In an interview with CNBC’s NetNet, James Rickards, senior managing director of market intelligence at Tangent Capital, said:

"The tradition of a European head of the IMF is just a tradition and not a rule. Emerging markets have been looking for a larger voice in the IMF and here is a chance for the IMF Executive Board to show they are serious.

The voting structures at the IMF certainly seem rather odd. The US currently holds nearly 17% of the voting power, giving it sufficient clout to block a non-favoured candidate. Yet, even though it is the world's second largest economy, China holds only 3.65% of the votes. Both China and Brazil want someone from an emerging economy to take over from the disgraced Frenchman. The China Daily newspaper reported leading Chinese economist Guo Tianyong saying that "Europe's history of chairing the IMF may be broken".

However many commentators believe that, in view of urgency with which a successor to DSK must be found, and given the severity of the European crisis, a European should once again get the top job. As David Wessel, the Wall Street Journal's economic editor, wrote:

"The smart money says that unless major emerging markets quickly unite behind one of several experienced non-European candidates, the IMF will end up with another European."

This is probably not a good time for the IMF to experience a prolonged leaderless period. Here are the runners and riders so far.

Who will succeed Strauss-Kahn?

Here are the runners and riders so far. The current favourite is 55-year-old Frenchwoman Christine Lagarde, who is rapidly emerging as the EU's preferred candidate and has the backing of German chancellor Angela Merkel (although there have been reports that her chances may be stymied as a result of her handling of a longstanding legal dispute with the French entrepreneur Bernard Tapie).

  • Montek Singh Ahluwalia - Indian civil servant (currently Deputy Chairman of India’s Planning Commission)
  • Gordon Brown - British former finance minister and former prime minister. (In the absence of support from the UK government, Brown looks unlikely to be chosen)
  • Kemal Dervis - Turkish economist (vice-president the Brookings Institution; credited with saving Turkey from bankruptcy in early 2000s. But would be an unlikely choice give the biggest challenge facing the IMF right now is Greece).
  • Arminio Fraga - Brazilian economist and former George Soros associate
  • Christine Lagarde - French finance minister and former corporate lawyer with Baker & Mackenenzie
  • Peer Steinbrück - German former finance minister
  • Axel Weber - German central banker

Further reading on the International Monetary Fund:

Tags: bailout , Greece , Greek bailout , IMF , PIIGS , reform of the IMF , US
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