Thursday 23 February 2017

Lagarde may need to distance herself from Europe as IMF leader

Sandrine Rastello

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. Ms 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, Ms Lagarde must now switch her allegiance to the 187-nation IMF, which has already lent $110bn (€76bn) 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 IMF.

"A major challenge Ms 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 favoured treatment."

Mr Prasad, a senior fellow at the Brookings Institution in Washington, said in an email: "The IMF is a key player, but has in some ways been a bystander in assisting Greece. Now it must take a more active role."

European leaders have committed to a new three-year programme for Greece to stave off default, including a voluntary debt rollover by banks, as long as Prime Minister George Papandreou pushes through a €78bn package of budget cuts.

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.

Ms Lagarde faces "an uphill struggle" to preserve the IMF's impartiality on Greece, said Jerome Booth, who helps manage about $47bn of emerging-market assets as co-founder and head of research at Ashmore Investment Management in London.

Sustainable debt

"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, Ms 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 Mr Strauss-Kahn.

Ms 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.

Ms Merkel and Mr 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, Ms Lagarde has said.

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

Mr Strauss-Kahn, also a former French finance minister, made the IMF a central player in Europe's response to the crisis, says 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 sceptical 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

Ms Lagarde has pledged she won't grant Europe any special favours. "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 Ms Lagarde.

"Ms 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 EU and French government economic adviser.

Ms 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.

She 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.

Ms Lagarde takes over an institution that has had its resources tripled by the Group of 20 and was given a host of new tasks by the group of developed and emerging economies.

(Bloomberg)

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