Strauss Kahn arrest casts shadow over EU debt talks

May 16, 2011

, BRUSSELS, May 16 – The arrest of the IMF chief threw a giant cloud on Monday over a meeting of EU finance ministers to approve a rescue for Portugal, fight new debt fires in Greece and name a new president for the ECB.

International Monetary Fund managing director Strauss-Kahn, pivotal in global efforts to tame Europe\’s debt crisis amid fears it could unleash new international financial market contagion, had been due at the talks that start from 1300 GMT.

Replaced by his number two John Lipsky as acting IMF head as he battles to clear his name, Strauss-Kahn\’s arrest — just as he was leaving to meet German Chancellor Angela Merkel — saw the euro wobble and shares fall sharply in Asian trade.

The IMF said that deputy managing director Nemat Shafik will instead attend the talks in Brussels that run through until Tuesday.

"For a few days at least, the market will likely suspect leadership paralysis at the IMF," Gareth Berry, currency strategist at UBS, told Dow Jones Newswires.

"The euro has most to lose from this," he added.

The IMF is pumping in one euro for every two put up by European Union governments in the three bailouts already agreed over the past year: 110 billion euros for Greece, 67.5 billion of international money for Ireland and 78 billion for Portugal.

While Strauss-Kahn\’s arrest will have no impact on rubber-stamping Portuguese aid, expected from 1500 GMT when Eurogroup ministers from the 17-nation eurozone huddle, analysts reckon Greece has lost a powerful friend at court.

"The arrest of the IMF chief over the sexual assault charge in New York City makes the aid to Greece quite uncertain," said Victor Shum, senior principal of Purvin and Gertz international energy consultants in Singapore.

The Eurogroup is also set to anoint Italy\’s Mario Draghi as the incoming president of the European Central Bank later Monday evening, although there remains an outside chance of a chain reaction, were Strauss-Kahn to resign early, altering those plans.

The scandal may also reopen friction within the 187-member IMF over the extent to which the eurozone crisis dominated Strauss-Kahn\’s focus.

The United States, Canada and other major emerging economies have recently queried the volume of energy expended on Europe\’s problems.

As trade unions simultaneously gathering in Athens warn that an austerity is not working, as a severe recession hampers efforts to stabilise the country, the black hole in Greece\’s finances remains the most pressing problem for ministers around the table in Brussels.

Speculation has mounted in recent days that Greece will need an additional 60 billion euros ($85 billion) over the next two years as it won\’t be able to return to commercial money markets next year as expected to refinance its debt.

German Finance Minister Wolfgang Schaeuble said this weekend that Greece could be granted an extension to the repayment of the EU-IMF loans, but only if private creditors also agree to wait longer in the hope of getting all their money back.

Greece\’s overall state debts were last tallied at 330 billion euros, more than a year and a half of national economic output.

EU partners are waiting for the results in early June of an IMF-led examination of Greek public accounts before deciding what new measures are required.

If they prove necessary, Schaeuble told German television, "we must have a clear rule: if there is a rescheduling (of the debt), all credit must be rescheduled."

Officials from the EU and the IMF are poring over Greece\’s books, trying to work out how much of the family silver the Greek government needs to sell to give itself a chance of avoiding the default markets fear.

"I will say it very clearly, Greece must accelerate its economic reforms and set up a complete privatisation programme," EU economic affairs commissioner Olli Rehn said.

"It is an illusion to think there is an alternative to reforms."

Some hardliners want Greece to serve up an island or a historical monument as collateral for fresh loans.

"To ask us for an island or a monument as a warranty is almost an insult," Greek Prime Minister Georges Papandreou has said.

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