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Strauss-Kahn's Arrest A 'Disaster' For IMF, Casts Doubt On Greece, Recovery

Strauss Kahn Arrest

The Huffington Post   First Posted: 05/16/11 10:59 AM ET Updated: 07/16/11 06:12 AM ET

What the arrest of International Monetary Fund chief Dominique Strauss-Kahn means for the global economy has only just begun to take shape.

On Saturday night, Strauss-Kahn was pulled off an Air France flight in New York City and arrested on charges of sexual assault. The arrest of the IMF chief, previously considered the biggest threat to replace French president Nicholas Sarkozy, “comes at just the worst possible time for Europe,” said Eswar Prasad, an international economics professor at Cornell University, according to the Washington Post. “As the world economy stumbles its way to recovery, this could be a pretty serious blow that sets things back.”

(UPDATE: Dominique Strauss-Kahn has been denied bail by a New York City judge.)

The sentiment is reportedly shared within the organization. Despite all indications that Strauss-Kahn was set to leave his post at the IMF in the coming months, his arrest has already been labeled a “disaster” by at least one IMF insider, according to the Economist.

John Lipsky, former banker and previously second-in-command at the IMF, has been put in charge of the organization for now. But just last week, Lipsky himself announced plans to resign from command in August, leaving the leadership of the organization in question.

In a statement by the organization’s spokeswoman, it was insisted that the IMF “remains fully functioning and operational.”

News of Strauss-Kahn's arrest came only days before euro-zone leaders were schedule to discuss whether to extend an additional $85 billion bailout to debt-ridden Greece, according to the Washington Post, since the $155 billion loan provide last spring has already proven insufficient.

Strauss-Kahn had been been particularly flexible with Greece during bailout talks, according to multiple reports. With his arrest, the prospect of a quick resolution to the Greek situation has been cast into doubt.

"This adds uncertainty to the prospect of early resolution. The more uncertainty exists in terms of major institutions, the higher the cost for a country like Greece," said Louka Katseli, Greece's minister of labour and social security, according to the Guardian. "What is needed are firm decisions[.]"

Nemat Shafik, whose work within the IMF focuses on the European Union, the will attend meetings this week, with financial ministers of the Euro Group, instead.

Strauss-Kahn's arrest could also prove particularly pivotal if emerging economies push to increase their say in the organization. Leaders from emerging market economies have in recent years been critical of what some have seen as particularly lenient rules for euro-zone countries, and unnecessarily strict adherence to the rules for everyone else. Already, China and India are considering putting forth a nomination from within their own respective countries.

The sense among emerging economies is that "if one of their countries were in trouble, the IMF would never give them so much rope," said former IMF official Eswar Prasad, according to the Wall Street Journal.

That's not to say Strauss-Kahn, in particular, was not a friend to emerging economies. He had a direct hand in both rescuing Pakistan from financial ruin solidifying the economy of Egypt, according to the Washington Post. He also was a firm supporter of China's status as the world's primary engine for economic growth.

"For Europeans there's going to be a key question," a European official told the Wall Street Journal. "Can they leave the keys of the house to an emerging country at this crucial juncture?"

The largest effect of Strauss-Kahn's arrest, ultimately, could be the reinforcement of the idea that the IMF has what TIME economics blogger Michael Schuman refers to as a "credibility gap."

"I've been baffled over the past couple years by calls for the IMF to play a greater role in the international economy," Schuman writes. "Such faith in the IMF has confused me, since the organization has a less than stellar history of global economic management itself."

Dominque Strauss-Kahn has blogged for The Huffington Post

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