Arrest of IMF head shocks the eurozone

European Union finance ministers convened in Brussels May 16 at a meeting International Monetary Fund (IMF) head Dominique Strauss-Kahn was supposed to attend. Instead, Strauss-Kahn, 62, sits in a single-person cell on Rikers Island in New York, held without bail after allegations that he sexually assaulted a hotel maid at the Sofitel New York.

Europe's finance ministers meanwhile continue efforts to stem the Continent's debt crisis, approving on May 16 a 78 billion euro bailout package to Portugal in a three-year program that will be under the administration of both the European Union and the IMF.

The interest rate on those loans would be slightly below 6 percent, according to European Commissioner for Economic and Monetary Affairs Olli Rehn. Greece presented the more pressing problem, however, as ministers tried to create a strategy that would avoid a second bailout. Greece is being pressured to accelerate a privatization program to sell off state assets, and ministers are considering requiring that an outside, private agency handle the privatization process.

Strauss-Kahn, who took on the head role at the IMF toward the end of 2007, is a former French government minister and was expected to mount a strong candidacy against French President Nicolas Sarkozy in the next elections. The IMF provided approximately a third of Greece's original bailout package, worth 110 billion euros, and was seen as more open to restructuring Greek debt.

The arrest was not discussed officially at the Brussels meeting, but the topic dominated conversations outside official agendas, Finance Minister Miroslav Kalousek told the journalists in Brussels May 16.

"Not a single word about it was uttered [at the meeting]. Of course, we could not help ourselves discussing it in corridors," he said.

"I firmly hope this will be cleared up. I keep my fingers crossed for him to manage to defend himself. It seems totally unbelievable to me, but this is naturally only my personal impression," he added.

At this point, European leaders hope the relationship with the IMF will continue as it has, but patience may be wearing thin in countries elsewhere, which have been watching the organization devote a significant part of its resources and time to the EU.

"His personality has been very important. I don't dare to speculate how big [an] impact [Strauss-Kahn's affair] will have on the IMF's further policy. It would be ... pure speculation," Kalousek said.

Despite leaders' anxieties, Vladimír Pikora of Next Finance believes the IMF will elect another European leader because the debt crisis here is what has given the organization relevance as of late. Otherwise, he believes the organization is an "outdated institution" where candidates, typically retired policymakers, are chosen for nationality rather than ability.

"The rescue of Greece is the perfect opportunity for the IMF to demonstrate that the fund is still important," he said. "Therefore, the fund will be willing to lend to those that nobody else is willing to lend to anymore. In other words, [to] such places where there is the threat that the money is being thrown into a black hole."

The IMF has appointed First Deputy Managing Director John Lipsky acting managing director in Strauss-Kahn's absence. The stunning development is especially portentous for Europe, where a French IMF head has been especially important during the debt crisis. The IMF has played a large role next to the European Central Bank (ECB) and the EU during the European crisis of the past few years.

Speaking to Reuters in Berlin May 16, German Chancellor Angela Merkel said it makes sense for a European to hold the top post at the IMF for now.

"Generally, we know that in the medium term, developing countries certainly have a claim both to the post of IMF chief as well as World Bank chief," Merkel said. "I believe, however, that in the current phase, there are good reasons for Europe to have good candidates ready."

European media had reported Merkel backing Italian central banker Mario Draghi as a candidate to head the IMF when Strauss-Kahn's term ends next year, but on May 16, Eurozone finance ministers elected Draghi to succeed Jean-Claude Trichet as president of the ECB. Trichet leaves the post in October.

Back in New York, Strauss-Kahn faces several charges, including sexual assault, attempted rape and sexual abuse, and could serve up to 25 years if convicted, according to The New York Times. He returns to court May 20 to hear whether the Grand Jury will deliver an indictment.

Claire Compton can be reached at
ccompton@praguepost.com