IMF succession: A contested quarry
By Alan Beattie
Published: May 25 2011 22:19
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A candidate from Europe, but not a European candidate. When Christine Lagarde, French finance minister, declared on Wednesday that she would run for the managing directorship of the International Monetary Fund, the distinction she drew between her nationality and her suitability was worthy of Descartes.
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While Europeans have held the IMF’s managing directorship since its launch in 1947, Ms Lagarde was quick to reject the idea of a nationality test. “I am not basing my candidacy on the fact that I am European,” she said. “My intimate knowledge of the European community, of the eurozone and its leaders, can help a bit but it should not be a plus on which my candidacy should be based.”
While Europeans have held the IMF’s managing directorship since its launch in 1947, Ms Lagarde was quick to reject the idea of a nationality test. “I am not basing my candidacy on the fact that I am European,” she said. “My intimate knowledge of the European community, of the eurozone and its leaders, can help a bit but it should not be a plus on which my candidacy should be based.”
Indeed, the IMF’s involvement in increasingly controversial crisis lending programmes in Greece and Ireland – and now in Portugal – could prove a disadvantage to Ms Lagarde’s candidacy. Though she is the clear favourite to succeed Dominique Strauss-Kahn following his spectacular exit, the question of European dominance of the fund is a substantive rather than symbolic issue for the first time in living memory.
In recent decades, the European obsession with holding the managing directorship has seemed mildly baffling rather than deeply sinister. Despite some incremental recent reform, Europe remains heavily overrepresented on the IMF executive board relative to its economic influence, its nations separately holding nearly a third of the total votes. Yet Europeans have rarely roused themselves to speak with one voice or promote a particularly continental European view of economics or to organise much more than the promotion of yet another among their number to MD.
Europe’s main contribution appears to be its influence on the IMF’s managerial style. “Essentially the fund is a Eurocracy,” says Ken Rogoff, a Harvard academic who served for two years as its chief economist. Ousmène Mandeng, a former senior IMF official now at Ashmore Investment in London, concurs. “The management style of the institution is largely European – hierarchical and bureaucratic,” he says. “The traditional pattern is to recruit PhDs at 30 and then employ them for life.”
Michel Camdessus, a French career bureaucrat, served as IMF managing director between 1987 and 2000. Yet much of the fund’s intellectual direction during the defining crises of the 1990s was set by Stan Fischer, Mr Camdessus’s American first deputy managing director (now governor of the Bank of Israel), and by US Treasury secretaries Robert Rubin and Larry Summers.
“As the biggest single shareholder, the US has exercised a great deal of influence,” Mr Mandeng says. “The power held by the EU has not been translated into the dominant view of the institution.” Europeans have frequently complained that the US Treasury on Washington’s 15th Street – just four blocks from the fund’s 19th Street headquarters – exercises undue influence over IMF policies. Although the US holds only 17 per cent of votes on the board, its greater determination and intellectual confidence has usually prevailed.
During the 1990s, the IMF developed a standard operating procedure of issuing large rescue loans contingent on extensive “conditionality” – generally including tight fiscal policy, widespread privatisation and other structural reform. The approach contrasted with the instincts of Germany, for example, which pushed for stricter limits on lending to prevent “moral hazard” in borrower countries.
Facing the first of a series of capital market crises, the IMF and US put together a rescue package of almost $50bn for Mexico in 1995. The fund’s part of the lending was pushed through over the objections of Germany and other European governments, which abstained on the vote.
The dominance of economists, especially those educated in the US, has helped to shape the in-house view. Prof Rogoff says that issues are extensively debated but “fundamentally most people in the fund believe in markets and market-based solutions to problems”. It is, he says, an approach quite different from the interventionist instincts of many Asian and European politicians.
Yet the economic philosophy that shapes its lending programmes has owed a great deal more to the US. In the 1970s, when the IMF transmogrified from underpinning the Bretton Woods fixed exchange rate system to a more general purpose crisis lender, its dominant model became what some Europeans disparagingly call “Anglo-Saxon” economics. The fund instinctively favoured securitised financial markets over the long-term banking model of Rhineland capitalism and pushed an all-encompassing view of globalisation, encouraging financial sector deregulation and the liberalisation of capital accounts.
The application of this philosophy in the Asian financial crisis of 1997-98 caused lingering resentment among some emerging market borrowers forced to undertake extensive medium-term restructuring of their economies in return for short-term crisis loans. In 1997 David Lipton – now a White House official frequently touted as the IMF’s next first deputy managing director – was installed by the US Treasury at the same Hilton hotel in Seoul as the fund mission negotiating a rescue loan for South Korea during the Asian crisis, to ensure a tough deal.
Since then, the IMF has partially retreated from its coercive approach and softened some of its ideology. Having seen the effects of IMF micromanagement first-hand as a German envoy to Indonesia during the Asian financial crisis, Horst Köhler, managing director from 2000 to 2004, led a drive against excessive conditionality. The IMF’s strong aversion to controls on capital flows has also been moderated.
However, little of this reflected an organised European campaign. The shift away from capital account liberalisation following fears about volatile and destabilising flows of hot money may have chimed with European instincts, but it reflected a broader shift in the economics profession. The arguments most often cited within the fund came from Americans such as Prof Rogoff and Carmen Reinhart, a former IMF official.
Similarly, Germany and other European governments concerned about moral hazard had long called for private investors to be “bailed in”, and made to take writedowns or “haircuts” in the value of their holdings of sovereign debt, as part of IMF rescue programmes.
The Bank of England under Mervyn King, its governor, argued for a formal means of restructuring sovereign debts during a crisis. But the idea did not really gain traction until a restructuring mechanism was proposed by Anne Krueger, Mr Fischer’s American successor as first deputy managing director, in 2001.
These days, however, the Europeans have a much better reason to organise and throw their weight around – but not in line with their traditional views and, critics would say, not in the fund’s own interests.
With sovereign debt fears spreading to western Europe in 2010, the IMF has become a minority partner in two of the largest rescue packages on record, for Greece and Ireland. Many investors and economists consider those programmes increasingly unsustainable without forcing private bondholders to take losses on their holdings of Greek sovereign debt and the senior bonds of Irish banks.
With European banks holding much of that debt, however, the traditional European predilection for asking private-sector investors to take a haircut has conveniently been dropped. The European Central Bank and leading continental politicians – especially in France and Germany – have opposed a rapid and substantial restructuring. Mr Strauss-Kahn did manage to get the IMF involved in the Greek and Irish programmes, against the initial wishes of the ECB, but whether it has made any real difference to policy remains unclear. Accounts differ of how strongly IMF officials have pushed for debt writedowns in private discussions with the Greek and Irish governments and the ECB and eurozone authorities, but in any case that view has not prevailed.
“Excessive forbearance has been practised with the periphery countries in Europe, and the IMF has supported that,” Prof Rogoff says.
As French finance minister, Ms Lagarde has opposed serious debt restructuring in the near future. Some involved in the negotiations say she seems to take a more nuanced line in internal discussions, but the dominant approach so far has been driven by the ECB. Whether Ms Lagarde would be able, or willing, to turn around and confront the no-writedown camp as an IMF managing director remains to be seen.
Ms Lagarde, who used to run the law firm Baker & McKenzie in Chicago, has the trust of many in the financial services industry, including in the US. At the height of the crisis in October 2008, weeks after the collapse of Lehman Brothers, she spoke at a gathering of the Institute of International Finance, a grouping of banks and other financial institutions, during the annual meeting of the IMF in Washington. At a packed and hushed dinner in Washington’s National Portrait Gallery, she pledged that the world’s leading governments would do whatever it took to prevent financial meltdown, and received an ovation.
“The IMF needs a leader who understands the intersection of finance, economics and politics, and Christine Lagarde certainly fits that mould,” says Charles Dallara, managing director of the IIF and formerly a US executive director on the IMF board.
Others question whether a leader close to Europe’s banks and politicians is what the IMF needs at this point. Long accused of being in the pockets of Wall Street, the fund is now coming under fire for pursuing the interests of French and German banks above that of the workers and taxpayers of Greece and Ireland. Some suspect Mr Strauss-Kahn’s political ambitions in France caused him to soft-pedal demands for restructuring.
“The IMF should be driven by technocratic considerations,” Mr Mandeng says. “Installing politicians and politics at the IMF is problematic.
The fund should have looked at the Greek situation from the point of view of Greece and the sustainability of the programme, and it appeared not to.” Prof Rogoff says: “Ninety-eight per cent of the time the nationality of the MD does not matter and the fund runs as a technocratic institution.” But he adds that the amount of time the last few managing directors spent in Europe certainly gave the impression that the fund was oriented towards that continent rather than, say, Asia.
Agustin Carstens, the Mexican central bank governor who appears to be the most plausible emerging market candidate, is trying to exploit that perception. He himself is straight out of the traditional IMF mould: trained in economics at the famously orthodox University of Chicago, he served as a deputy managing director at the IMF from 2003-06 and has since been finance secretary as well as central banker.
Yet his pitch when he announced his candidacy this week was a barely veiled appeal to emerging market solidarity. “We need a managing director who can best serve all of the member countries, not merely those experiencing challenges at one particular point in time,” he said.
BORN IN BRETTON WOODS
The International Monetary Fund was born out of international discussions at Bretton Woods, New Hampshire, in 1944, and opened for business in 1947. Its original aim was to lend to governments to smooth balance of payments problems arising under the pegged exchange rates system named after the 1944 conference. With the breakdown of that regime in the early 1970s, the IMF shifted into more general lending to governments, increasingly in emerging markets. It was heavily involved in the Latin American debt crises of the 1980s and the Asian and Russian crises of 1997-98. But its focus has swung back to Europe, where it has assisted governments that have built up huge fiscal deficits or been forced to rescue their troubled banking systems.
The International Monetary Fund was born out of international discussions at Bretton Woods, New Hampshire, in 1944, and opened for business in 1947. Its original aim was to lend to governments to smooth balance of payments problems arising under the pegged exchange rates system named after the 1944 conference. With the breakdown of that regime in the early 1970s, the IMF shifted into more general lending to governments, increasingly in emerging markets. It was heavily involved in the Latin American debt crises of the 1980s and the Asian and Russian crises of 1997-98. But its focus has swung back to Europe, where it has assisted governments that have built up huge fiscal deficits or been forced to rescue their troubled banking systems.
IMF and eurozone rescues
An occasionally conciliatory counterweight to ECB ‘hardliners’
International Monetary Fund involvement in eurozone bail-outs was initially opposed by some European Union policymakers, and greeted with trepidation in Athens, writes Dimitris Kontogiannis. But, observers say, it has also acted as a counter to an uncompromising European Central Bank.
Last May, as details of Greece’s €110bn ($156bn) international bail-out were being negotiated, local television played images of riots in countries where the IMF had gone before.
Newspapers reported on the harsh economic conditions in countries applying fund-sponsored policies.
The Greeks continued to see the fund more negatively than the European Commission and the ECB, even as government officials noted Poul Thomsen – IMF member of the “troika” (with the ECB and the European Commission) overseeing the rescue plan – was taking a more understanding and flexible stance.
According to one senior EU official, a pattern developed in Greece – followed in Ireland and Portugal, now also subject to bail-outs – for the ECB to play the “hardliner”, especially on fiscal policy. The IMF was more conciliatory; the Commission, somewhere between.
The Greek package comprised €80bn in bilateral loans from eurozone countries and €30bn from the IMF, which also contributed its experience of implementing bail-outs elsewhere.
Before the deal, Jean-Claude Trichet, ECB president, voiced concern about bringing in the Washington-based IMF.
Eurozone governments should take the lead in resolving the problems erupting in Europe’s monetary union, he argued, and the Greek bail-out should fit within an EU framework.
Separately, Wolfgang Schäuble, German finance minister, called for the establishment of an alternative European Monetary Fund that would provide finance in a crisis – subject to very stern conditions.
Both objections were overruled by Angela Merkel, German chancellor, who needed the IMF’s involvement to deflect domestic opposition to helping Greece.
The IMF and the ECB have since become accustomed to working together with little sign of public friction, at least on the ground in Athens, Lisbon and Dublin. The ECB teams have concentrated largely on banking, liquidity and financial stability issues, leaving the Commission and the IMF to focus more on fiscal issues.
Greek officials have not stated any preference publicly on the IMF’s next head, but are generally thought to prefer a European, with Christine Lagarde, French finance minister, probably their first choice.
An occasionally conciliatory counterweight to ECB ‘hardliners’
International Monetary Fund involvement in eurozone bail-outs was initially opposed by some European Union policymakers, and greeted with trepidation in Athens, writes Dimitris Kontogiannis. But, observers say, it has also acted as a counter to an uncompromising European Central Bank.
Last May, as details of Greece’s €110bn ($156bn) international bail-out were being negotiated, local television played images of riots in countries where the IMF had gone before.
Newspapers reported on the harsh economic conditions in countries applying fund-sponsored policies.
The Greeks continued to see the fund more negatively than the European Commission and the ECB, even as government officials noted Poul Thomsen – IMF member of the “troika” (with the ECB and the European Commission) overseeing the rescue plan – was taking a more understanding and flexible stance.
According to one senior EU official, a pattern developed in Greece – followed in Ireland and Portugal, now also subject to bail-outs – for the ECB to play the “hardliner”, especially on fiscal policy. The IMF was more conciliatory; the Commission, somewhere between.
The Greek package comprised €80bn in bilateral loans from eurozone countries and €30bn from the IMF, which also contributed its experience of implementing bail-outs elsewhere.
Before the deal, Jean-Claude Trichet, ECB president, voiced concern about bringing in the Washington-based IMF.
Eurozone governments should take the lead in resolving the problems erupting in Europe’s monetary union, he argued, and the Greek bail-out should fit within an EU framework.
Separately, Wolfgang Schäuble, German finance minister, called for the establishment of an alternative European Monetary Fund that would provide finance in a crisis – subject to very stern conditions.
Both objections were overruled by Angela Merkel, German chancellor, who needed the IMF’s involvement to deflect domestic opposition to helping Greece.
The IMF and the ECB have since become accustomed to working together with little sign of public friction, at least on the ground in Athens, Lisbon and Dublin. The ECB teams have concentrated largely on banking, liquidity and financial stability issues, leaving the Commission and the IMF to focus more on fiscal issues.
Greek officials have not stated any preference publicly on the IMF’s next head, but are generally thought to prefer a European, with Christine Lagarde, French finance minister, probably their first choice.
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