IMF grapples with Strauss-Kahn arrest

The International Monetary Fund headquarters building in Washington The International Monetary Fund is headquartered in Washington DC

The arrest of Dominique Strauss-Kahn over charges of sexual assault has thrown the International Monetary Fund (IMF) into disarray.

The IMF is a crucial part of the world financial system, along with the World Bank.

Essentially, it is a multinational body charged with giving financial aid and assistance to developing countries to secure global financial stability.

With its head facing serious charges, what is in the immediate future of this important financial institution?

'Limbo'

Having a European in charge of the biggest intergovernmental lender has clearly been beneficial.

Most recently, the IMF has been intimately involved in all of the major eurozone bail-outs so far - Greece, the Irish Republic and Portugal - as well as Iceland.

Without the IMF's deep pockets, it is questionable whether the euro as a currency would still be around in its current form.

Professor Ngaire Woods at the University of Oxford told the BBC that, from a non-European perspective, having a European in charge of an institution whose largest borrower was Europe was like "having a fox in charge of a hen house".

Mr Strauss-Kahn was, in fact, supposed to be in Berlin to discuss aid to Greece, before joining European Union finance ministers in Brussels on Monday and Tuesday.

The Financial Times's Martin Wolf told the BBC that the arrest "is an extraordinary disruption" which "throws the IMF into limbo".

After Mr Strauss-Kahn's arrest on Sunday, the IMF's first deputy managing director, John Lipsky, was appointed acting managing director.

The IMF has said it is "fully functioning and operational".

New leader

Mr Lipsky had already met members of the IMF board on Sunday to keep them informed, according to a spokesman.

He has been with the IMF since 2006, but Mr Lipsky said last week that he would step down in August.

With Mr Strauss-Kahn having been expected to quit in order to contest the French presidential elections in 2012, this was already due to have created a power vacuum at the top of the IMF later this year.

The IMF's first deputy managing director John Lipsky The IMF's first deputy managing director John Lipsky is now in charge

What the scandal does to the IMF's succession planning now is still unclear.

The IMF's head - called the managing director - has customarily been picked by Europe. Mr Strauss-Kahn, a former French Socialist finance minister, was formally named as the new head in 2007.

In 2008, he kept his job after being cleared of harassment and abuse of power over an affair with a colleague.

He apologised and was criticised by the IMF board for a "serious error of judgement" in the matter.

IMF reforms

The IMF was created at the conference at Bretton Woods in 1944 as a means to regulate trade between nations in the aftermath of the Great Depression and World War II.

The IMF has historically lent money to countries that are in deep economic trouble - Mexico in the 1980s for example, Mexico again in 1995, south-east Asia and Russia in the late 1990s and Argentina in 2001.

The fund's role has expanded in the aftermath of the global financial crisis that struck in 2008. The IMF's members have agreed to increase the body's lending capacity, which has now been tripled to about $750bn.

The IMF has a complex system of voting rights, ensuring it remains dominated by the US and Europe. The US exerts a veto, for example.

It is currently undergoing a review of the voting structure, its biggest change since its founding.

In practice, this means that China and other emerging nations like Brazil are likely to get a bigger voice.

It has already been agreed that in future, the convention that the World Bank and IMF must be headed by an American and a European respectively will be abandoned.

The arrest of Mr Strauss-Kahn may accelerate the process of this custom coming to an end.

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