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Europe to Duel Asia for Top IMF Post

Wednesday, 18 May 2011 07:14 AM

Treasury Secretary Timothy Geithner said Tuesday at the Harvard Club in New York that he wants a vote to raise the debt ceiling (now at $14.294 trillion) “done and clean.”

I think there will probably be some kind of a compromise by July, ahead of the critical Aug. 2 date when Geithner believes the Treasury will run out of options to prevent a U.S. default.

Interestingly, he also added Republican leaders have told him privately they won't “monkey around” with the issue.

When asked about the possibility of a default, he said: “We're the United States of America … You've got to be kidding.”

And when asked whether investors eventually might lose faith in the U.S. government and the dollar if actions aren't taken to address the country's fiscal problems, he said: “At the worst moments in the crisis ... you saw people basically say they want to be in dollars, in Treasurys, and we need to preserve that. We want to act to earn that confidence over time, and not take advantage of it.”

It’s important for the dollar to maintain its status as a safe haven during times of global crisis.

As far as I’m concerned, I completely rule out the possibility of the U.S. defaulting, but I don’t rule out at all a Greek restructuring. That’s why I still have more faith in the dollar (which I think could move up from here much more than most think is possible) than I have in the euro (which could hit the wall earlier than most think is possible). Of course and as always, time will tell if I’m right or wrong.

Meanwhile, Geithner also said the International Monetary Fund needs to find a way to resolve its leadership crisis and formally name an interim leader after Dominique Strauss-Kahn’s jailing, who he said was “obviously not in the position to run the IMF.”

The IMF has a “pivotal” role in helping to extinguish the debt crisis that rages across the euro zone. Greece still may be forced to restructure its sovereign debt despite that nearly all key euro zone players fiercely reject this.

We now already see Europe and Asia setting for battle over the top IMF post. Keep in mind that until now, it has generally been the custom for European officials to head the IMF and for Americans to head the World Bank.

I don’t think the Europeans are likely to surrender this privilege lightly. Tellingly, Belgian Finance Minister Didier Reynders seemingly remains hostile to any change at all when he said yesterday: “The EU-U.S. balance at the Bretton Woods institutions must be maintained.”

Nevertheless, China didn’t wait either for letting their opinion to be known. Chinese Foreign Ministry spokeswoman Jiang Yu said Tuesday that the selection for leadership of the IMF should be based on “fairness, transparency and merit.”

It would have been enlightening if she would have given more details about what she really meant by that precisely. Maybe she made an allusion to Strauss-Kahn’s statements he gave last year in July, speaking in the Korean city of Daejeon during the Asia 21 Conference to students: “I want Asian countries to see the IMF as a second home. I want Asian countries to see the IMF as their institution … I understand they [Asian countries] could be angry at the IMF, that is because a lot of things that we know now, we did not know at that time … Now we need to look forward and to see how Asian countries and the IMF could work together for the future.”

I’m sure various members of the IMF haven’t forgotten these statements on the IMF-Asia relationship either. I think it could be good also to take into consideration the fact that the U.S. has voiced criticism over the IMF’s various rescues/bailouts.

Last year, the U.S. Senate voted unanimously to block the use of U.S. taxpayers’ money for IMF rescues that made no economic sense or bail-outs for countries like Greece that are far beyond the point of no return.

We shouldn’t overlook that in December 2010, the IMF adopted a major realignment of quota shares among its members. Once in effect it will result in a shift of more than 6 percent of quota shares to dynamic emerging market and developing countries and more than 6 percent from over-represented to under-represented countries, while protecting the quota shares and voting power of the poorest members.

The Board of Governors also supported in December 2010 an amendment to the Articles of Agreement that would facilitate a move to a more representative, all-elected Executive Board.

The 10 Fund members with the largest voting share will consist of the United States, Japan, plus the so-called “BRICs” that will represent 13.5 percent when considered as a bloc that comprises Brazil, China, India, and the Russian Federation.

The four largest European countries represent 16.37 percent when France, Germany, Italy and the United Kingdom, which is a European Union member state but not a “euro zone” member, are put together. The major realignment in the ranking of quota shares under this reform will result in a fund that better reflects global realities.

In my opinion, it’s certainly clear that risks are out there, especially now if a new IMF leadership emerges from the current vacancy that would be more inclined to show constraint in bailing out profligate governments.

No, this can’t be excluded for the time being and if that would have to occur, that could become a sizable negative for the euro zone’s perseverant, at least so far, bail-out intentions. I would like to say: “Watch out!”

In the meantime, a senior figure in the Brazilian government said: “We think it would be appropriate to have someone from emerging countries to head the IMF … We believe India and Brazil would be good options. But we also believe that Europe is likely to keep its deep stranglehold on the position, and so we're not planning to push very hard on this issue for now.”

Also, India's Planning Commission deputy chairman Montek Singh Ahluwalia said he wasn’t putting forward his name for the top IMF job.

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Treasury Secretary Timothy Geithner said Tuesday at the Harvard Club in New York that he wants a vote to raise the debt ceiling (now at $14.294 trillion) done and clean. I think there will probably be some kind of a compromise by July, ahead of the critical Aug. 2 date...
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Wednesday, 18 May 2011 07:14 AM
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