Head of the International Monetary Fund (IMF) Dominique Strauss-Kahn spent his third night in jail in New York after arrest on sexual assault charges when a judge denied him bail. The impact of the allegations could result in Europe losing its hold on the top job of the IMF, and PIMCO co-CEO Mohamed El-Erian said in a blog post on Tuesday that the turmoil over succession could have repercussions for peripheral euro zone nations.
Reuters reported that Judge Melissa Jackson denied Strauss-Kahn bail over concerns that he could be a flight risk. Headlines in his native France and elsewhere have been full of the story and concerns are that, whether the IMF chief is eventually cleared or not, his career may be over. The fallout from that would be wide-ranging, from the leadership of the IMF to the presidency of France, for which Strauss-Kahn was expected to run in 2012.
While his term as head of the IMF was to end in 2012, there is now a push to choose a successor by some countries within the organization. Others are counseling patience, until the charges are resolved, but the IMF’s temporary head, John Lipsky, had already said he would step down from his regular post in August. Senior Europeans at the IMF have also expressed the opinion that Lipsky would not be as influential in the matter of Europe’s debt crisis because he is an American.
Also, Strauss-Kahn has been instrumental in changing the power structure within the IMF to give emerging nations more of a voice. This could be their opportunity to push for one of their own to head up the organization, and Egypt has already twice nominated El-Erian. Others who could move into the top slot are former Turkish Finance Minister Kemal Dervis, Agustin Carstens, governor of Mexico's central bank, and Montek Singh Ahluwlia, an influential economic adviser to Indian Prime Minister Manmohan Singh.
El-Erian, in his blog on Tuesday, pointed to the weaknesses in the IMF succession process and said that regardless of how a successor is chosen, it could have serious effects for peripheral nations. Under Strauss-Kahn’s leadership, he said, the IMF has been willing to use liquidity as a weapon against growing debt in nations like Greece. But a new leader, he said, "would make the institution less enthusiastic for an approach that has already shown signs of slippage, ineffectiveness and overall fatigue. Should this materialize, the European Central Bank (ECB) and European Union (EU) would find it extremely difficult to continue to pursue a course that is shifting dubious liabilities from private creditors to European taxpayers yet failing to deliver to Greece either the reality or the promise of economic growth and jobs." He predicted a growth in market uncertainty under these circumstances, since it would become more probable that both Ireland and Portugal would then need debt restructuring.
Read more about Dominique Strauss-Kahn and the IMF at AdvisorOne.com.