Who will lead the IMF? Sebastian Mallaby discusses.

Jun 09, 2011

French Finance Minister Christine Lagarde, who is doing a Twitter chat with The Washington Post at noon ET, is on a global tour to promote her candidacy to succeed Dominique Strauss-Kahn as the head of the International Monetary Fund. The other declared candidate is Mexico's central bank governor, Agustin Carstens. But what does all this really mean?

Chat with Sebastian Mallaby of the Council on Foreign Relations about these candidates at 1 p.m. EST.

Hello, this is Sebastian Mallaby, hosting the Washington Post's live web session on the IMF. It's good to be back at the Post, where I worked for eight years on the editorial page.

Should the IMF presidency be reserved for a European (Continue the Gentleman's Agreement with the U.S.)?

No, absolutely not. Europeans have held the top position at the IMF without interruption since the institution opened its doors in 1946. This was unfair in the first place. It is an anachronism now.

Not only have Europeans had a monopoly, but the French have managed to hold the top post for 35 of the IMF's 65 years. Measured on a PPP basis, the French share of global output is below 3 percent. It is a fraction of China's, and just over half of India's. It is slightly smaller even than Russia or Brazil.

Does Christine Lagarde potential appoinment as IMF Head, act as a significantly negative effect for President Sarkozy, in terms of his attractiveness as a leader for the upcoming elections?

The big boost to Sarkozy came from the discrediting of his strongest opponent, Dominique Strauss-Kahn. I don't think Lagarde's appointment would make a whole lot of difference one way or the other. If she gets the job, the French government will lose one of its more attractive figures--you could view that as a negative for Sarko. If she fails to get the job, France will have suffered a set back--you could also view that as a negative for Sarko.

You will recall that during the financial meltdown, the NY Fed backed AIG's credit default swaps (CDSs) to full face value instead of forcing the AIG's counterparties to take haircuts. I recall reading that one of the reasons for this was that the French, either their central bank or finance ministry, falsely claimed to the NY Fed that it would be a crime under French law for a French banker to accept anything less than 100 cents on the dollar. They claimed that this required the French to demand the US make whole the French counterparties to AIG's CDSs. Naturally, this would have forced us to make whole all of AIG's counterparties. The claim that taking a haircut would violate French law was, of course, entirely false. The French say they never made this claim, but US personnel involved maintain they did. It seems to me that as Finance Minister of a highly-centralized state, Mdm. Lagarge would had to have known of this. If true, this alone should DQ her from leading the IMF. Are you familiar with this charge? Do you think it will come back to haunt her?

I followed the shenanigans of 2008 pretty closely, not least because they feature in my recent book on hedge funds. I have to say that this is the first I've heard of the French angle on AIG. As you say, if the French did say that then they were making it up. This would suggest that the NY Fed would have ignored them.

The real reason for the bail out of AIG's counterparties was simply that the authorities were scared and desperate to neutralize contagion. Under immense time pressure, they overstepped.


My friend Peter Rudegeair from Reuters just emailed me on this.

The AIG haircut negotiations with the French was noted in one of the SIGTARP reports: http://economicsofcontempt.blogspot.com/2009/11/geithner-vindicated-in-tarp-watchdog.html

Hat tip to Peter.



Which of the candidates could contribute more to global governance?

The two candidates are Christine Lagarde, the front runner, and Agustin Carstens, the underdog.

On almost every measure, the underdog is better.

Carstens has an economics PhD. Lagarde does not.

Carstens has worked at the IMF. Lagarde has not.

Carstens comes from a large emerging market. Lagarde comes from the single most over-represented country in the IMF's history.

Carstens has a shot at bringing a fresh approach to the eurozone mess. Lagarde is far less likely to do so, because as France's finance minister she has been part of the team that caused the mess in the first place.

None of this is to say that Lagarde is a bad person. To the contrary, she is a polished politician and accompished lawyer. It's just that Carstens is better qualified for this particular job.

What American, if anyone, is prepared and able to lead the Fund? Any favorites?

It's time to bring an emerging markets person into a top position, so I don't particularly favor a US candidate. That said, Stanley Fischer, Israel's central bank governor, who was (maybe still is?) American, would be a superb candidate for the job.

In short, why does it matter to us who leads the IMF? How much influece does the leader have and where does the power exist within the IMF?

The IMF has played a central role in the response to just about all crises of the past generation. It does not always get things right, but it is still better at administering macroeconomic medicine than any other institution. Therefore it does matter who leads the IMF. A strong leader who commands the respect of major governments  can ensure that the IMF continues to have the resources it needs to play its role, and can continue to get its advice listened to.

Some examples of the challenges facing the IMF now:

-- What to do about the mess in Europe. The French and Germans have cooked up one failed bailout after another for Greece, Ireland, Portugal, and now Greece again. They need to recognize that none of this will work without serious debt reduction--ie, the Greeks et al have to tell the bond holders that they won't get all their money back. The European Central Bank and most European politicians shrink from grasping this nettle. An IMF run by an authoritative economic statesman could go to Europe and tell the truth: your current approach is doomed, and you need to rethink it.

--China's manipulated currency. If there is any chance of encouraging China to let its currency appreciate faster, it lies in the multilateral  diplomacy coordinated by the IMF. It was not encouraging yesterday when Lagarde, in Beijing to win Chinese support for her candidacy, sounded a bit soft on this issue.

Is there any reason to think that one of the candidates would be better to deal with the bailout of Greece and saving (if desirable) the eurozone?

I addressed this a bit in my last answer. But led me just add something on whether saving the Eurozone is desirable. If we had it to do all over again, I don't think we would want to create a new eurozone with all the same members. It's too big, and the attitudes toward public finances vary from Germanic discipline to Greek profligacy--a doomed mix. That said, now that we do have the eurozone, it's pretty hard to see how you unravel it. If you live in Greece, your bank account is in euros, your pay is in euros, your contracts are written in euros--quitting this arrangement is as hard to contemplate as Maryland quitting the dollar (okay, almost as complicated). 

do you reckon the time has come for the imf to strategically alter the mandate, given their track record o 1)fueling the seeds of the current crisis and their track record in not identifying various asset bubbles.

I'm not sure how one can argue that the IMF fueled the current crisis. This accusation is levied at the Fed, since it controls monetary policy and has a large hand in financial regulation (and even then the accusation can be debated). But the IMF is primarily a crisis response organization, and secondarily a global imbalances watchdog.

There was a richer debate on the IMF's role back in the late 1990s, when it bungled some of the early responses to the Asian financial crisis. But that's another story.

Thanks for your answer. You did say that "An IMF run by an authoritative economic statesman could go to Europe and tell the truth: your current approach is doomed, and you need to rethink it." Who is more likely to be that statesman: outside Carstens or insider Lagarde?

Definitely Carstens. In fact, he recently gave an interview to the Financial Times in which he said all the right things about what Europe needs to do.

Remember, Mexico is a country that came out of a long period of financial instability and now has low inflation, sound budgets, and solid growth. So Carstens, who has been Mexico's finance minister and now is the central bank chief, knows a thing or two about how to go from financial instability to a better place.

So he confirms that the French helped torpedo a haircut for AIG's counterparties. This raises my original question: Given the centralization of l'etat Francais, could Lagrange have not known of the French ploy?

Lagarde became finance minister in 2007, so I guess she would have known. Still, I'm not sure I would make a big deal about this. Remember that there was a huge fight between the US and the UK over the possibility that Barclays would buy Lehman in the weekend before Lehman went bust. Hank Paulson thought Barclays would come in as the rescuer; the UK regulators vetoed the move. This stuff happens during a crisis. Maybe my friend Peter Rudegeair will correct me again, but I am not sure this French angle on AIG is worth excavating at this point.

what are your thoughts on recent IMF wording advocating capital controls in some instances? and do you think where the future leaders come from will effect the funds views on such issues.

The IMF recently softened its opposition to capital controls, saying that they could make sense when other responses to hot money inflows have been exhausted. In my view, the IMF should not have said that. Capital controls leak and usually achieve very little; the consensus is that they may temporarily shift the composition of capital inflows but not the amount. If the purpose is to stop your currency appreciating, they are therefore pretty useless. My worry about the IMF's position is that it appears to bless politicians who love capital controls because they appear to present a less painful alternative to doing hard stuff--eg, cutting your budget deficit so that interest rates can fall and less capital gets sucked in.

I guess that a good economist from an emerging economy (ie, Carstens) would understand this issue and feel secure enough to speak the truth to other emerging market leaders. I also guess that a lawyer from France is likely to curry favor with emerging market politicians by greenlighting their bad habits.

That's it folks! Thanks to everybody for the questions. It's been fun.

In This Chat
Sebastian Mallaby
Sebastian Mallaby is director of the Maurice R. Greenberg Center for Geoeconomic Studies (CGS) and Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations (CFR). An experienced journalist and public speaker, Mr. Mallaby is also a contributing editor for the Financial Times and served previously as a columnist and editorial board member at the Washington Post. His interests cover a wide variety of domestic and international issues, including financial markets, the implications of the rise of newly emerging powers, and the intersection of economics and international relations. In addition to his monthly column for the Financial Times, his recent writing has been published in the New York Times, the Wall Street Journal, and the Atlantic Monthly.

Mallaby is the author of "More Money Than God, Hedge Funds and the Making of a New Elite" just out in paperback.
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