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05.16.11

Strauss-Kahn Scandal Causes IMF Crisis

Dominique Strauss-Kahn’s perp walk certainly didn’t help his reputation, but it may have hurt the IMF’s more. Daniel Stone on what the monetary fund really does—and why the scandal could end up seriously damaging Europe’s economy. Plus, full coverage of Strauss-Kahn.

In a city full of loudmouths and egos, people who work at the International Monetary Fund usually keep to themselves. The financial organization is three blocks from the White House, which usually sees all the action. But Monday morning, every major network’s satellite truck was parked outside the IMF’s front entrance. “It’s some big news event,” a uniformed officer outside told me.

Certainly an understatement. Crude headlines on front pages would have you believe the big news was the fall of its managing director, Dominique Strauss-Kahn, who was arrested over the weekend for alleged rape in a New York City hotel room.

But sex scandals fade and leaders can always be replaced. The IMF’s current crisis isn’t just over how to recover from the disturbing fall of its chief. Shell-shocked employees filing into the IMF this morning knew the implications would extend further. Caroline Atkinson, director of external relations, put out a statement assuring that the IMF was “fully functioning and operational.” But one official who wasn’t authorized to speak on the record was more candid: “It’ll probably impact most things we do.”

The IMF monitors the global financial system, keeping an eye on exchange rates and balancing payments to ensure a level economy. To aid the financial recovery, it helped facilitate the $136 billion bailout last year for Greece. Not long after, the fund approved a $32 billion loan to Ireland. In the days before Strauss-Kahn’s arrest, finance ministers working with IMF officials were discussing a substantial bailout for cash-strapped Portugal, and another payment to Greece. The plane that police arrested Strauss-Kahn on would have delivered him to Europe before a round of meetings on new loans and funding for developing countries.

One official who wasn’t authorized to speak on the record was more candid: “It’ll probably impact most things we do.”

With such power over the international economy, the most valuable currency of the IMF has long been its credibility. Critics have argued that the way the organization is run, and its power over global exchange rates, gives some countries immense influence. Conditions imposed on loans to developing countries often push economic policies like deregulation and privatization that those countries may not have chosen themselves.

Panic at the IMF won’t help quiet its critics. “It’s now underlined that it looks like they’re in disarray to get a replacement,” says Desmond Lachman, a former IMF deputy director. “That’s a problem. But its longer-term problem is the policies [Strauss-Kahn] pushed [in Greece and Ireland] that don’t seem to be working.” An IMF spokesperson had no immediate comment.

Europe was also shaken by the news over the weekend—and not just for the political implications for next year’s presidential election in France. Strauss-Kahn has been a major financial player in Europe—part of the coterie that created the euro—and has the respect of most of the continent’s finance ministers. But when he was appointed to the IMF in 2007, developing countries claimed they weren’t proportionally represented on the board and that it was unfair to have a European head the fund. German Chancellor Angela Merkel said over the weekend that Strauss-Kahn’s replacement should also be a European. But the embarrassment caused by the latest episode could make that a harder case to make.

John Lipsky, the top deputy manager, will take over the IMF’s daily operations as Strauss-Kahn sorts things out (his lawyer has said he’ll plead not guilty). But Lipsky, a former JPMorgan Chase executive, lacks the same heft and global reputation as Strauss-Kahn.

It doesn’t help that the day the ax fell on the IMF was the same day the U.S. was expected to hit its debt ceiling, with chilling implications for America’s financial dealings. Both issues had been on the mind of the White House over the weekend. When asked aboard Air Force One, Press Secretary Jay Carney said President Obama remained “fully confident” the IMF could still function effectively. But with the global recovery still inching along, the more widespread implication is clear: it would be easier if it were just a sex scandal.

Daniel Stone is Newsweek's White House correspondent. He also covers national energy and environmental policy.