What Makes Christine Lagarde The Front Runner?

As soon as Dominique Strauss-Kahn was arrested, Christine Lagarde’s name was the first mentioned as a replacement. Hers was also the last serious name put forward, despite the entry into the race of Agustín Carstens, the Mexican central bank governor. Why is this? What does it mean for the IMF?


A gallows atmosphere pervaded a bankers’ dinner during the annual International Monetary Fund meetings in Washington in October 2008. Financial markets had plunged since the collapse of Lehman Brothers Holdings three weeks before, and a meeting of G-7 Finance ministers earlier that day had failed to stem the sense of panic. While most ministers rushed back to their capitals, France’s Christine Lagarde kept her speaking engagement at the dinner and reassured hundreds of assembled bankers, in calm but unscripted remarks, that governments would do whatever was necessary to prevent a meltdown. Within days, the US and European governments adopted a range of bank deposit and liability guarantees that helped unfreeze the financial system.

Lagarde’s confident performance – and strong political backing -- help explain why she is the pre-emptive favorite to win appointment as managing director of the IMF at the end of this month. The 55-year-old lawyer lacked any economic expertise when President Nicolas Sarkozy made her a surprise choice as finance minister four years ago, but the business and diplomatic skills she honed in a 24-year career at Baker & Mackenzie, which enabled her to become the Chicago-based firm’s first non-American chairman, have served her well. She has forged an effective partnership with her German counterpart, Wolfgang Schäuble, in dealing with Europe’s debt crisis, and her energy, charm and fluent English have made her a hit with U.S. officials and other members of the G-20, which France currently chairs.

Some critics believe Lagarde’s aversion to any restructuring of Greek debt, a position she has begun to edge back from in recent weeks amid mounting speculation about a default, makes her a poor choice. “There is major design flaw in the euro zone and Lagarde is the last person that non-European governments should want to put in charge of helping sort that out,” Simon Johnson, a fellow at the Petersen Institute of International Economics and former IMF chief economist, wrote recently on his blog, The Baseline Scenario.

Others complain that the succession looks set to perpetuate the increasingly anachronistic tradition whereby Europeans have led the fund while the U.S. has held the presidency of the World Bank. The G-20 has pledged to give emerging economic powers a bigger voice and vote in both institutions, but with Europe still holding a third of the votes in the IMF, the bloc’s united support of Lagarde makes her candidacy hard to stop. “Europe and the U.S. have continuously resisted the hardwiring of a merit-based MD selection process that is open and transparent, and that involves an appropriate amount of sequenced due diligence,” says Mohamed El-Erian, CEO and co-CIO of bond fund giant Pimco and a former senior IMF official. “As a result, Europeans are again able to front run a process by coronating one of their nationals and then going through the motions of gaining global consensus.”

Agustín Carstens, the Mexican central bank governor who is the only other serious candidate (Kazakhstan has put forward its central bank chief, Grigory Marchenko), is campaigning as a change agent. He says it’s time for the emerging markets to back one of their own for the IMF job. Moreover, he argues that it’s time for a fresh pair of eyes to review the fund’s unprecedented financial commitment to Greece, Ireland and Portugal – a not-so-subtle rebuttal to the Lagarde camp’s contention that only a European can sort out the region’s debt troubles. Carstens also boasts more-extensive credentials than Lagarde: a central banker, ex-Finance minister and former top IMF official who played a key role in designing fund programs like the recently introduced flexible credit line.

Alas, Carstens so far has come up short on political support, which underscores the irony of the succession process. Emerging market countries have complained loudly about Europe’s monopoly on the IMF job, but their lack of cohesion appears set to perpetuate the status quo. Brazilian officials won’t support Carstens because of national rivalry (both countries aim to be the leader of Latin America) as well as the Mexican’s defense of IMF orthodoxy in his days as a former fund official. China can’t push its own candidate because the country doesn’t yet have a convertible currency. “They’re not fully part of the international monetary system yet,” says one fund official. Beijing is even less likely to support an Indian candidate such as Montek Singh Ahluwalia, head of the country’s planning commission, because of the two country’s longstanding rivalry for regional supremacy. Sources say Indonesia and Turkey briefly considered nominating candidates but demurred for lack of support.


Still, emerging market countries can hope to wring some benefits out of the selection process. Lagarde called for a 40 percent increase in India’s IMF quota during a campaign stop in New Delhi on Tuesday. She was expected to make some China-friendly commitments during a visit to Beijing on Wednesday and Thursday. Look for Beijing to obtain a promotion for Min Zhu, currently a special advisor to the fund, to the rank of deputy managing director, sources close to the selection process say.