Markets unfazed in near-term by IMF chief's arrest

Associated Press
FILE - In this April 22, 2010 photo, IMF Managing Director Dominique Strauss-Kahn, speaks during a news briefing at the 2010 WB/IMF Spring Meetings in Washington, Strauss-Kahn has been taken into custody by New York City police and is being questioned in connection with a sexual assault of a hotel maid on Saturday, May 14, 2011. NYPD top spokesman Paul Browne says Dominique Strauss-Kahn was pulled off an Air France flight to Paris on Saturday afternoon at John F. Kennedy International Airport after he left the Manhattan hotel.  Strauss-Kahn, the managing director of the IMF, has not been charged. (Manuel Balce Ceneta)
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FILE - In this April 22, 2010 photo, IMF Managing Director Dominique Strauss-Kahn, speaks during a news …

The euro briefly fell to a six-week low against the dollar Monday following the arrest of the International Monetary Fund's managing director Dominique Strauss-Kahn, but the selling pressure diminished as the markets concluded that it would have little immediate impact on Europe's debt crisis.

However, in the longer-term, analysts said, the arrest of Strauss-Kahn could trigger a fairly seismic overhaul at the Washington DC-based fund, not least whether it will continue to be headed by a European, as it has been since its creation after World War II.

"His (Strauss-Kahn's) personal involvement in pushing for a greater role for the IMF post-Lehman has been important and indeed he has been heavily involved in the European bailouts," said Robert Ryan, an analyst at BNP Paribas. "Should he step down, any changes in approach by his successor will be important."

For now though, the reaction in the markets has been fairly guarded and the euro was trading 0.3 percent higher at $1.4113 in late-morning trading in London. Earlier, during Asian trading hours, the single currency had fallen as low as $1.4046, its lowest level since March 29.

The prevailing view in the markets is that the arrest of Strauss-Kahn in New York on charges he sexually assaulted a maid in his hotel room, is unlikely to derail a €78 billion bailout of Portugal or alter discussions about whether Greece will need any more aid, on top of last year's €110 billion financial rescue.

European finance ministers are meeting over the coming two days in Brussels, with Portugal and Greece topping the agenda. Strauss-Kahn had been due to join them after a scheduled meeting Sunday with German Chancellor Angela Merkel, whose stance on Europe's debt crisis is crucial. Nemat Shafik, a deputy managing director who oversees IMF work in several EU countries, will take Strauss-Kahn's place at the Brussels get-together.

"We doubt his arrest will change the course of negotiations," Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ, said of Strauss-Kahn. "The key aspect of agreeing another bailout for Greece lies with the eurozone finance ministers and not the IMF."

For Portugal, ministers will consider some amendments made by Finland as a condition of approving the aid despite skepticism from key political parties. They include a firmer commitment from Portugal to privatize assets to help pay for the bailout.

Discussions of Greece will likely not lead to a detailed announcement of potential new aid measures, although there is growing acceptance that last year's bailout was not enough.

Ministers won't make any firm commitments before a mission of experts currently in Athens conclude their review of the implementation of the existing program and determine how much more money the country may need in the coming years.

However, Monetary Affairs Commissioner Olli Rehn and the President of the European Central Bank Jean-Claude Trichet were expected to brief ministers on the initial findings of the review.

The euro members, notably Germany, have contributed the lion's share of Europe's bailouts to Greece and Ireland and the upcoming Portuguese handout. Though the IMF has also stumped up billions of euros — it provides around a third of the bailout funds — its main purpose has been in giving the austerity programs credibility. Strauss-Kahn has been a key advocate of the strategy.

The IMF has named John Lipsky, Strauss-Kahn's deputy, as acting leader and said it remains "fully functioning and operational" despite Saturday's arrest of its managing director. Strauss-Kahn is due to appear in court later Monday for formal charging following medical and forensic tests.

Strauss-Kahn had been widely expected to quit his post later this year in order to launch a bid for the French presidency in next year's election, so the markets had been well-prepared for his potential departure.

A key question being debated is whether Strauss-Kahn's arrest makes it more likely that the IMF will be headed up by someone outside the EU, possibly from one of the emerging economies.

The existing convention is that the European Union proposes the IMF's managing director, while the U.S. proposes the president of the IMF's sister organization, the World Bank.

However, the arrangement is considered anachronistic in many quarters, not least because Europe is now a heavy recipient of funds from the IMF and the main cash injections come from countries like China.

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Gabriele Steinhauser in Brussels contributed to this story.

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