New IMF head Christine Lagarde faces immediate crisis in Greece

French Finance Minister Christine Lagarde on Tuesday became the first woman and the first non-economist appointed to head the International Monetary Fund, an agency that is facing some of its deepest challenges since its founding 66 years ago.

She will have to jump immediately into crisis negotiations over Greece, navigate demands from developing nations for more power in the agency, and cope with the internal fallout from the sexual assault arrest of former managing director Dominique Strauss-Kahn.

Lagarde is a lawyer by training and a skilled diplomat by reputation, and her ability to tackle those issues — more the province of a negotiator than the PhD economists that have run the fund since it was founded after World War II — will define the success or failure of a five-year term that will begin July 5.

Lagarde, 55, was chosen by the IMF board over Mexican central bank governor Agustin Carstens, leaving the agency in the hands of a European, as it has been for more than 60 years.

But although she began the competition with a head start — major European powers endorsed her before knowing who else might vie for the job — IMF officials and others familiar with the process say her political savvy elevated her above the more technocratic Carstens to win the position as a consensus choice.

The former chairman of the Chicago-based Baker & McKenzie law firm, Lagarde is known for her disarming sense of humor — she quips about the dangers of “too much testosterone in one room” — and her knack for drawing consensus out of conflict. When European leaders stalled in talks over Greece’s crisis last year, Lagarde received credit for convincing the group that it needed to “shock” markets with an overwhelming commitment of support for the entire euro currency area — an argument that carried the day with the establishment of a $1 trillion emergency fund.

The United States endorsed her candidacy on Tuesday, joining major developing nations including Brazil, India and Russia.

The French finance chief issued a brief statement saying she was “deeply honored by the trust placed in me” to guide the 187-member organization, which manages a $326 billion fund that makes loans to troubled countries and monitors the global economy.

Lagarde gave a more detailed outline of the challenges she faces in an earlier statement to the fund’s 24-member board. She spoke of “healing” the “open wounds” left at the agency after Strauss-Kahn’s arrest on sexual assault charges and earlier reprimand for having an affair with an IMF staff member — an incident that called into question the rigors of the agency’s ethics rules.

Following Strauss-Kahn, “it is lucky for the IMF and for the Europeans that their best candidate was a woman,” said Nancy Birdsall, president of the Center for Global Development.

Lagarde also faces ongoing talks about Greece, a fact that will test her promise to serve as a neutral arbiter for the international agency after months of representing France’s interests.

Greece is again confronting default after the breakdown of a financial rescue plan. Lagarde’s role in helping to craft that effort has been criticized by some as too lax on Greece, and too forgiving of the banks that extended easy credit to the country during better times — and now want to be protected from losses.

With three European countries under emergency programs and tens of billions of dollars in IMF loans outstanding to them, Lagarde pledged not to show favoritism in future negotiations. France shares the euro with Greece and other troubled European economies, and its banks and other major institutions have a direct interest in seeing the crisis resolved.

Alessandro Leipold, who worked closely with Lagarde and her finance ministry staff as former head of the IMF’s European division, said it is important that she quickly establish her independence from the European powers that helped make her one of the world’s most influential women.

“She’ll succeed to the extent she divorces herself from the European nexus,” said Leipold, the chief economist at the Lisbon Council think tank. “She needs to cut the cord.”

Details of her contract were not immediately available. Strauss-Kahn earned about $440,000 annually.

The tone for Lagarde’s administration may be evident early. It is expected that she will follow tradition and appoint someone from the United States as her second in command, possibly David Lipton, a former IMF staff member and adviser to President Obama.

Her relations with large developing nations will be studied. As part of her campaign, Lagarde agreed that the IMF needed to better reflect a changing world economy in which Brazil, China and India are growing more quickly than developed nations.

That commitment may be seen through appointments, such as the possible elevation of Chinese national Min Zhu from his role as a special adviser to the more formal inner circle of deputy managing directors. Or it could come through a push for less European representation on the IMF board.

Although developing nations ultimately supported Lagarde, they were critical of a process that seemed over before it began, with Europe endorsing a favorite and the United States largely sitting on the sidelines to avoid a fight. Besides Carstens, Stanley Fischer, the governor of the Bank of Israel, sought the post, but his candidacy did not gain traction.

“Our expectation is that she will live up to two commitments: One is of evenhandedness and the other is a commitment to reform,” said Amar Bhattacharya, executive director of the G24 group of developing nations.

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