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The Telegraph - May 22, 2011

Christine Lagarde seems a shoo-in for Dominique Strauss-Kahn's job, despite a growing clamour for the IMF chief to be a non-European.

by Kim Willshire in Paris, Richard Blackden in New York and Kamal Ahmed in London

Christine Lagarde believes that men, left to themselves, will usually make a mess of things.

The view, expressed in a recent television interview, now seems remarkably perceptive in the wake of the arrest of International Monetary Fund chief Dominique Strauss-Kahn in New York last week on rape charges.

As France watched in bemusement while the scandal unfolded and the IMF found itself leaderless, Ms Lagarde, described by admirers as a "rock star" of the financial world, emerged as the women who might rescue her country's reputation and fill the job.

If anyone can span the profound cultural gulf between France and America, highlighted once again by the Strauss-Kahn affair, it is the elegant, silver-haired, Lagarde, who earned the nicknamed 'L'Américaine' among her compatriots after suggesting everyone needed to "roll up our shirt-sleeves and get to work" to beat the country's economic woes.

Serious and hard-working, but also chic, the 55-year-old former synchronised swimming champion, has been praised at home and abroad for her handling of the economic crisis, speaks faultless English and spent a large part of her career working as a lawyer in the United States.

This weekend, with Brazil signalling that it would be "comfortable" with a European leader of the IMF and the Treasury pushing out warm messages on Lagarde, it appears that she is the early leader in the race for a post that has become known as "the world's banker". George Osborne is believed to be sympathetic to Lagarde's candidature, particularly if other European leaders fall behind her.

The key to Lagarde, the French finance minister since 2007, is that she is the acceptable candidate on both sides of the Atlantic. After obtaining a law degree, Lagarde joined the American law firm, Baker & McKenzie, first in Paris, then in Chicago where she rose to become the company president. She remained in America for 25 years and is as comfortable on Wall Street as she is at the Élysée.

Dominique Carreau, professor of international economic law, and author of several books on the IMF, describes her as a remarkable person. "She's also a woman and that's important because there aren't any women heads of organisations like this," he said.

"She will almost certainly have the support of the United States, having lived there for a long time and worked at the head of one of the biggest legal firms in the country. She also has support at a European level."

Kenneth S. Rogoff, a former IMF chief economist who is now professor at Harvard University, went further. "She is enormously impressive, politically astute and a strong personality," he told The New York Times. "At meetings all over the world, she is treated practically like a rock star."

As an example of her no-nonsense approach to the banking crisis, fans cite her exchange with the chief executive of Barclays Bank at the World Economic Forum in January.

When Bob Diamond thanked finance ministers for creating a better economic environment, Lagarde retorted: "The best way for the banking sector to say thank you would be to actually have good financing of the economy, sensible compensation systems in place and reinforcement of their capital." There was applause in the auditorium.

Ms Lagarde, who once said France's "obsessive thinking" prevents reform, argues the financial crisis can be partly blamed on the aggressive, greedy, testosterone-fuelled world of stock exchange trading rooms.

"In gender-dominated environments, men have a tendency to show how hairy chested they are, compared with the man who's sitting next to them. I honestly think that there should never be too much testosterone in one room," the divorced mother-of-two said in a newspaper interview earlier this year.

Her comments, made long before police arrested Strauss-Kahn, 62, on Saturday afternoon as he was about to fly back to France, were prescient.

Today on the list of senior IMF officials, published on the organisation's website, the title Managing Director, is followed by the word "vacant". Under pressure to find a successor fast, it is widely agreed in financial circles that Ms Lagarde would be a good choice.

There are, however, two obstacles: she is French – and the IMF may not be ready to appoint another French person after Mr Strauss-Kahn – and, more seriously she is currently under investigation back home.

The minister is caught up in an arcane scandal over €285m (£325m) damages paid to Bernard Tapie, a controversial and flamboyant character and celebrity supporter of her current boss, Nicolas Sarkozy. French prosecutors have asked for a full inquiry into her role in the award, which might derail her IMF chances if it were to drag on.

Coupled to this, President Sarkozy, with his abysmal ratings in the opinion polls, may feel he cannot afford to lose one of his most popular, respected and successful ministers.

The IMF announced this weekend that the process to find the new managing director will take until June 30. Whether it is Lagarde or another candidate, every twist and turn will be pored over for signals about the future direction for world finance.

The decision will be made by the Executive Board, chaired by Shakour Shaalan.

As the longest-serving member of the Board, the Egyptian economist automatically gets to chair the meetings and said on Friday that countries will be able to begin nominating candidates tomorrow.

The IMF veteran also knows that the board may need to hastily convene at any moment, depending on how quickly their political masters in capitals across the world move.

The contest comes to an institution both emboldened by the crisis and facing unprecedented scrutiny because of it.

In 2006, for example, the IMF handed out just $58.7m (£36m), with Paraguay and Albania the only borrowers. Last year, it lent a record $91.7bn. Last week's plunge in Greek bond prices provided a sharp reminder that Europe's debt crisis is still lapping at the doors of its Washington DC headquarters, while the thorny question of how to reduce the world's global economic imbalances remains unsolved.

"It's important that a decision be taken as quickly as possible," says Bill Rhodes, who during a 57-year career at US bank Citigroup played a key role in most of the IMF's sovereign debt restructurings. "The position of leadership has never been more important."

After a frantic few days in Berlin, Paris and Washington, attention is turning to Thursday's meeting of the G8 group of countries at the seaside resort of Deauville on the Normandy coast. Shaalan knows that his home country will be discussed because President Barack Obama has asked the IMF and the World Bank to present plans to help the economies of Egypt and its neighbour Tunisia.

The real agenda, though, will be the hopes of European leaders to seal the unofficial coronation of Lagarde as the fifth French leader of the IMF since the institution was created during three humid weeks in the summer of 1944 at the New Hampshire resort of Bretton Woods. With countries from the European Union controlling 31.5pc of the votes at the Executive Board, it needs only to convince the US – which, with 16.8pc, has the most sway of any nation – and Lagarde will almost have the simple majority she needs.

Running in Lagarde's favour is the unwritten agreement, struck at Bretton Woods, that a European will run the IMF as long as an American gets the top job just down the road at the World Bank. The White House has so far proved tight-lipped about the succession, with Tim Geithner, the US Treasury Secretary, saying he will support someone with deep experience.

"The Europeans are in a very strong position," explains Garry Schinasi, who was co-director of the IMF's financial stability department for more than a decade. "Geithner would have a very difficult case to make against Lagarde because of her experience, high competence and gender."

But Geithner, whose Treasury headquarters are a short walk from the IMF, also insisted late on Friday that the selection process must be transparent and that the new head must have the support of all the fund's donors.

Famed for its secrecy, the IMF, which some staffers say remains in a state of shock following Strauss-Kahn's downfall, was always going to struggle with the first condition. The US Congress can't, for example, compel IMF staff to testify before them and whether the actual process of appointment – always a subject of much horse trading – will ever be revealed is a moot point.

Whether Lagarde or another European candidate – an unlikely prospect – can meet the second condition (support from funders) will prove the defining issue over the next fraught days and will do much to shape the IMF's effectiveness over the next five years, experts say.

China, South Africa, Chile and South Korea have all added their calls that the eleventh leader of the IMF should be the first to hail from outside Europe. Their failure, so far at least, has been to unite around a candidate. Kemal Dervis, who oversaw the transformation of the Turkish economy in the early part of the last decade, has ruled himself out, leaving Arminio Fraga, who helped turn around Brazil's economy as head of its central bank, Agustin Carstens, Mexico's central bank chief and Tharman Shanmugaratnam, Singapore's finance minister as contenders.

The financial crisis certainly sped up the shifting of global economic muscle both eastwards and south, and the prospect of a successor being picked at a meeting of the G8 risks making the task of winning the support of emerging economies tougher.

"The international financial crisis has really altered the power relationships in the world economy," says Domenico Lombardi, an economist who was asked by the IMF to write a report on its reform in 2009. "If the Europeans try to impose a candidate, there will be tensions."

Angela Merkel, the German Chancellor, has been the most powerful voice, but far from the only one, to argue only a European can steer the region from a debt crisis that still threatens to pull the euro apart.

It's true that Strauss-Kahn's joint visit with Jean-Claude Trichet, the president of the European Central Bank, to Berlin in the spring of last year did much to jolt Merkel into recognising the gravity of the euro's problems. Since then the IMF has agreed to lend more than Eu85bn (£74bn) as part of the bail-outs of Greece, Ireland and, most recently, Portugal.

However, the vacuum at the top of the institution comes at a time of growing concerns in the US and China over whether the bail-outs will prove effective in reducing the countries' debt burdens while at the same time restoring them on a path to eventual growth.

Critics say that picking a leader from a developing economy will banish the potentially damaging allegation that a European will be politically compromised when handling the region's debt crisis. And thanks to the Latin American debt crisis of the 1980s, and the trouble that swept through Asia a decade later, there's plenty of experience outside Europe's capitals of dealing with too much debt.

"The Europeans were very much in denial that they had a problem," says Simon Johnson, a former chief economist at the IMF and now a professor at the Massachusetts Institute of Technology. "That's why it would be very bad for a European to lead the fund."

The June 30 deadline set by the Board certainly gives, at least in theory, those outside Europe more time to find a candidate and throw their collective weight behind them. Long-term observers of the IMF remain sceptical that 2011's race will develop into the first genuine two-horse race in the institution's history. More likely is some serious bargaining that results in a European winner with strings attached. China, for example, may want to see Min Zhu, currently special adviser to the managing director, propelled into a more senior role.

Either way, the countdown to Shaalan bringing down the gavel on a final decision will be watched intensely. At this stage, it is Lagarde's to lose.

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