IMF Leadership Thrown Into Disarray

Dominique Strauss-Kahn (Reuters)

MAY 15, 2011By SUDEEP REDDY and IAN TALLEY
The Wall Street Journal

WASHINGTON—The arrest of International Monetary Fund chief Dominique Strauss-Kahn on sexual assault accusations throws into disarray not only the IMF's leadership, but its central role in the financial rescue of several struggling European nations.

Mr. Strauss-Kahn was arrested Saturday in New York for an alleged sexual assault of a maid in a Manhattan hotel, authorities said. According to a law enforcement official, Mr. Strauss-Kahn allegedly forced a cleaning woman onto his bed and sexually assaulted her at around 1 p.m. Saturday inside his room at the Sofitel Hotel near Times Square.

Mr. Strauss-Kahn, 62, was headed to Europe to discuss the worsening European debt crisis with top leaders there. He was scheduled to meet with German Chancellor Angela Merkel on Sunday and financial ministers in the Euro Group on Monday and Tuesday. Besides putting the finishing touches on the €78 billion Portugal bailout package, the main focus of the meetings was how to resolve Greece's deteriorating sovereign debt crisis.

The arrest of the head of one of the world's most important financial institutions comes at a time when the global economy is still recovering from the 2008 financial crisis, and when Europe is still reeling from a still-unfolding series of government debt crises.

The charges, if true, would strike a blow to France's current politics. Mr. Strauss-Kahn, a former French finance minister who ran unsuccessfully for the Socialist nomination for French president in 2006, had been widely expected to resign from the IMF in coming months to run for the presidency of France as a Socialist Party candidate.

The incident Saturday will undoubtedly cast a cloud over the IMF's role in addressing the rescues. Mr. Strauss-Kahn had been seen as a forceful leader in responding to the European debt crisis.

He has strongly supported the Greek rescue, even in the face of growing doubts about the Greek government's ability and resolve to meet the commitments of the international aid package. His latest trip was likely to focus on whether to adjust the terms of Greece's loans in order to keep the country—and the rest of the euro zone—from falling into a deeper crisis.

Germany's finance ministry said the government is waiting to finalize its conclusions on Greece once the troika of the IMF, European Central Bank and European Commission have published the findings of their current ongoing review of the Greek rescue program.

Ms. Merkel wanted Mr. Strauss-Kahn's opinion on Greece, Portugal and Ireland before finalizing her own view.

An IMF mission is in Greece now reviewing the state of the country's finances, chiefly trying to determine whether the fund's board can approve another tranche of the joint EU/IMF €110 billion emergency rescue loan.

Emerging-market nations had questioned aspects of the IMF's response, with some members suggesting "if one of their countries were in trouble the IMF would never give them so much rope," said Eswar Prasad, a Cornell University economist and former IMF official.

Having Mr. Strauss-Kahn sidelined could give them more power to push back against deeper involvement in some European nations.

"The level of support from the IMF for Europe is going to come into question to some degree, both in terms of the amount of resources and the conditions imposed," Mr. Prasad said.

The arrest throws into question whether Mr. Strauss-Kahn will be forced to resign his slot. In 2008, early in his IMF term, he was investigated by the IMF's staff for whether he abused his power by having an affair with a female staffer. Although he was cleared of abuse of power charges, several directors said they warned Mr. Strauss-Kahn that such conduct wouldn't be allowed in the future and that he had brought the IMF into disrepute.

At the time, the IMF chief acknowledged the lapse in judgment and apologized to the board and staff. "I am committed, going forward, to uphold the high standards" expected of an IMF managing director, Mr. Strauss-Kahn said then.

An IMF executive board member said the board members were shocked to hear the news from the media, but had seen nothing official from the IMF about the incident. IMF spokesman Bill Murray declined to comment when reached Saturday evening.

With or without a quick resignation from Mr. Strauss-Kahn, the IMF's daily leadership is likely to fall to John Lipsky, the No. 2 official at the fund, under the IMF procedures. But Mr. Lipsky is also on his way out.

Mr. Lipsky, a U.S. national and former J.P. Morgan Chase executive, announced Thursday that he would step down when his five-year term ends in August. Mr. Lipsky, the fund's first deputy managing director, had agreed to serve as a special advisor to Mr. Strauss-Kahn through November's meeting of heads of state from the Group of 20 leading economies.

Current and former IMF board members said that if the investigation proceeds, the IMF's 24-member executive board based in Washington would likely be called in for an emergency meeting to discuss the allegations and how to proceed with the fund's top leadership. By tradition, the fund's managing director is a European and the No. 2 official is an American.

European finance ministers have been preparing for Mr. Strauss-Kahn's possible resignation, given widespread speculation about his pursuit of the French presidency.

Mr. Strauss-Kahn is a leading member of France's opposition Socialist Party and has been considered as a potential front-runner for the next presidential election in May 2012.

The Socialist Party is holding primaries this Fall but candidates have been requested to apply to run between June 28 and July 13.

Mr. Strauss-Kahn's decision regarding his candidacy has been much awaited as polls have consistently shown over the past few months that he would beat France's current president Nicolas Sarkozy as soon as in the first round. His decision was expected as soon as end of May, a person close to him told Dow Jones Newswires.

European finance ministers "were already factoring in that Strauss-Kahn could be leaving very soon," said Domenico Lombardi, Brookings Institution economist and former IMF official. "They would have talked about the succession anyway, of course under different circumstances....I would expect that the position could be filled in a relatively short length of time."

—Tamer El-Ghobashy, Michael R. Crittenden, Geraldine Amiel and Bob Davis.

Write to Sudeep Reddy at sudeep.reddy@wsj.com and Ian Talley at ian.talley@dowjones.com