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Strauss-Kahn arrest adds to European uncertainty

By Pan Pylas

Associated Press

Published: Monday, May 16 2011 10:02 a.m. MDT

LONDON — The arrest of International Monetary Fund chief Dominique Strauss-Kahn adds more uncertainty to Europe's debt crisis by removing a widely respected expert from talks on how to save the 17-nation eurozone.

Strauss-Kahn, who was France's finance minister when the euro was created in 1999, is an authority on Europe's economic issues and comfortable with the region's complex web of power politics.

His experience is broadly perceived to have been crucial to the currency union's struggle with the biggest crisis since its inception. His absence will increase worries about the IMF's longer-term capacity to help Europe.

"It's like losing an experienced ship's captain, while navigating particularly difficult, unchartered waters," said Jan Randolph, head of sovereign risk analyst at IHS Global Insight.

The prevailing view in the markets is that Strauss-Kahn's arrest isn't going to affect this week's meeting of European finance ministers. Eurozone countries will sign off on Portugal's €78 billion ($111 billion) bailout and discuss whether to give Greece more help beyond its current €110 billion rescue.

Markets have kept their cool, with the euro actually trading 1 percent higher at $1.42116 in mid afternoon trading in London after a brief sell-off in early hours.

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.

But analysts said his arrest in New York on charges he sexually assaulted a hotel maid will quicken changes to the fund's leadership and affect its position in international finance.

Strauss-Kahn's stewardship of the Washington DC-based institution has been widely praised. Over the past few years, he has managed to raise the IMF's clout at a time of global financial turbulence and his economic stature gave him a key seat at the table, particularly during discussions over Europe's worsening government debt situation.

"Whatever else one might like to think of him, Dominic Strauss-Kahn does have the remarkable ability to cut a knife through dogmatic politics and diplomacy when it occurs," said Howard Wheeldon, senior strategist at BGC Partners.

"His loss, be it temporary or otherwise, will clearly be formidable for a while although in my book it will be manageable," Wheeldon added.

Strauss-Kahn's arrest could also speed up an overhaul at the Washington DC-based fund.

A key question is whether it is now more likely that the IMF will be headed up by someone outside the EU, possibly from one of the emerging economies. British Prime Minister David Cameron has recently said he would have no problems having a non-European head the fund.

The 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 increasingly considered anachronistic, not least because Europe is now a heavy recipient of funds from the IMF and big cash injections come from countries like China, which is now a major player after backing calls to help the Fund triple its financial firepower, firepower which is now being used extensively in Europe.

"China could use its influence to support an emerging market candidate for the top IMF job, should the vacancy arise," said IHS Global Insight's Randolph. China is the biggest new IMF bondholder. Its huge financial contribution in 2008, effectively tripled the size of the IMF's lending power during the financial crisis.

It looks like Europe though will continue to fight for its right to grab the top IMF job, at least the next one.

Though German Chancellor Angela Merkel said it was inappropriate to discuss a change at the top of the IMF, she indicated that the German government still thinks a European should still lead the organization.

"In terms of principle, without conducting this discussion here, we know that in the medium term, emerging countries certainly have a claim to the post of IMF chief as well as the post of head of the World Bank," Merkel said in Berlin. "But I think that, in the current phase, in which we have a lot of discussions connected to the euro, there are good reasons for Europe also to have good candidates available."

Geir Moulson in Berlin contributed to this report.

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