Bloomberg News

Lagarde May Need to Distance Herself From Europe as IMF Leader

June 28, 2011

June 29 (Bloomberg) -- Christine Lagarde may seek to distance herself from the Europeans who helped her win the International Monetary Fund’s top job amid pressure on the lender to toughen its response to Greece’s debt crisis.

Lagarde, 55, was chosen yesterday in Washington by the IMF’s 24-member executive board and will start on July 5. She was picked over Agustin Carstens, the head of Mexico’s central bank, and will replace Dominique Strauss-Kahn, who resigned after his arrest last month on charges including attempted rape.

After spending more than a year trying to contain Greece’s turmoil as French finance minister, Lagarde must now switch her allegiance to the 187-nation IMF, which has already lent $110 billion to cash-strapped European nations. As Greece struggles to meet conditions under the bailout, the Washington-based agency must impose stricter rules in exchange for funding and force Europe to accept some debt restructuring, said Eswar Prasad, a former official at the fund.

“A major challenge Lagarde will face at the outset is to manage the IMF’s involvement with Greece in a way that doesn’t cause a blow-up, but also doesn’t smack of favored treatment,” Prasad, a senior fellow at the Brookings Institution in Washington, said in an e-mail. “The IMF is a key player, but has in some ways been a bystander in assisting Greece,” he said, and it must now “take a more active role.”

Austerity Steps

European leaders have committed to a new three-year program for Greece to stave off default, including a voluntary debt rollover by banks, as long as Prime Minister George Papandreou pushes through a 78 billion-euro ($111 billion) package of budget cuts as early as today. While the IMF has pledged to provide a third of the bailouts in the region, it hasn’t acknowledged the need for a new one, asking Greece to first take its austerity steps and European nations to agree on their own funding plan.

Lagarde faces “an uphill struggle” to preserve the IMF’s impartiality on Greece, said Jerome Booth, who helps manage about $47 billion of emerging-market assets as co-founder and head of research at Ashmore Investment Management in London. “If there’s no credible, effective plan to get Greece to a position of sustainable debt, then there’s no justification for further lending,” he said.

While dealing with a crisis the IMF calls a threat to global growth, Lagarde, a former lawyer, must fulfill promises to boost the institutional clout of emerging economies such as China. The first woman to head the IMF has also vowed to improve diversity at an agency reeling from the arrest of Strauss-Kahn, who has pleaded not guilty.

Closing Ranks

Lagarde owes her job in part to the support of leaders, including German Chancellor Angela Merkel and French President Nicolas Sarkozy, who closed ranks behind her candidacy early in the face of calls by emerging markets to end Europe’s six-decade lock on the position.

Merkel and Sarkozy said it was important for a European to run the fund at a time of crisis, and both have said Greece must avoid restructuring its debt. Any resolution to the Greek crisis must avoid involuntary restructuring, Lagarde said in a June 9 interview in Beijing.

Prasad and Booth say that goal is unrealistic. Greek debt, already at a European record of 142.8 percent of gross domestic product, is set to rise to 166.1 percent next year, the EU predicts. The effort to cut a budget deficit that is about 10 percent of GDP has helped deepen a third year of recession.

Central Player

Strauss-Kahn, also a former French finance minister, made the IMF a central player in Europe’s response to the crisis, said Jean Pisani-Ferry, who runs the Bruegel research institute in Brussels. He committed the fund to pledge a third of the money for European bailouts, helped craft Europe’s rescue mechanism and briefed skeptical German lawmakers.

At the same time, European leaders haven’t heeded the IMF’s calls to clean up the balance sheets of banks and to make the rescue fund more flexible, and they have been delaying decisions on Greece amid divisions on how to get private investors involved.

Lagarde has pledged she won’t grant Europe any special favors.

“There is no room for benevolence when tough choices must be made, and there is no option that does not start with difficult but necessary adjustments by the Greek authorities,” she told the IMF board during her June 23 job interview, according to a statement from Lagarde.

Lagarde “will need to redefine the IMF’s position” and aim “for a better balance between the fund’s responsibilities in Europe and in the rest of the world,” said Pisani-Ferry, a former European Union and French government economic adviser.

Familiar Ground

Lagarde has experience in the role of pathfinder. She is the first and only female finance chief in the Group of Seven, and she was the first female chairman of Chicago-based Baker & McKenzie LLP, the world’s fifth biggest law firm by revenue last year.

Lagarde was appointed finance minister in June 2007, just before the onset of the global financial crisis. Her negotiating abilities helped clinch agreement on the euro area’s sovereign bailout fund in May 2010, according to a person who was there.

Lagarde’s IMF candidacy was bolstered by an informal agreement under which an American has always headed the World Bank while a European has led the IMF. Emerging-market officials such as Brazilian Finance Minister Guido Mantega have called for an end to that arrangement, saying the heads of the two institutions should be chosen on the basis of merit.

Winning Support

During a campaign that took her to India and China, Lagarde won emerging-market support, promising to boost the clout of developing nations at the IMF and give more management jobs to people from those countries. She has also vowed to increase diversity in terms of gender and academic background.

When she announced her candidacy on May 25, Lagarde vowed to push for quick implementation of a 2010 agreement that makes China the third-strongest voice in the organization and gives more say to nations such as Brazil and South Korea. It also weakens the influence of advanced European economies, which pledged to reduce the number of seats they hold at the 24-person board. She indicated more changes may come.

Lagarde takes over an institution that got its resources tripled by the Group of 20 and was given a host of new tasks by the group of developed and emerging economies, including helping single out which countries’ policies threaten global growth.

Psychological Counseling

Almost two months since Strauss-Kahn’s arrest, which led the fund to offer psychological counseling to those wanting it, Lagarde acknowledged that the institution needs to heal, and vowed to restore morale.

Lagarde said she is aiming for diversity in gender, country of origin and academic background to fight the “group thinking” that an internal audit last year said contributed to missing signs of the 2008 financial crisis.

Women accounted for 45.5 percent of the IMF’s staff and 21.5 percent of it managerial jobs at the end of 2010, according to the organization’s annual diversity report, which also called the number of employees from emerging-market countries “unacceptably small.”

“It’s clear the place has been dominated by male economists from the U.S. and Europe, and there’s been a real negative spillover effect from that,” said Kevin Gallagher, an associate professor of international relations at Boston University. “A woman has the highest moral authority to clean it up.”

--With assistance from Timothy R. Homan in Washington and Mark Deen and Simon Kennedy in Paris. Editors: Christopher Wellisz, Carlos Torres

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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