Europe tackles Portugal bailout despite IMF chief arrest

In the wake of IMF chief Dominique Strauss-Kahn's arrest, European minister were set Monday to finalise the details of Portugal's bailout package. Strauss-Kahn had been scheduled to attend the meeting over the coming two days.


AP - European ministers will hammer out the final details of Portugal’s bailout and discuss more help for Greece on Monday at a meeting overshadowed by the arrest of the International Monetary Fund’s managing director Dominique Strauss-Kahn.

The prevailing view in the markets is that Strauss-Kahn’s arrest in New York on charges he sexually assaulted a hotel maid is unlikely to derail Portugal’s 78 billion euros ($111 billion) bailout or affect talks on whether to give Greece more help beyond its current 110 billion euros rescue.

“We doubt his arrest will change the course of negotiations,” Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ, said of Strauss-Kahn. “The key aspect of agreeing another bailout for Greece lies with the eurozone finance ministers and not the IMF.”

The reaction in the markets was guarded, with the euro trading 0.3 percent higher at $1.4119 in late-morning trading in London. Earlier, however, the single currency had fallen as low as $1.4046, its lowest level since March 29.

Strauss-Kahn had been due to join the European finance ministers over the coming two days after a scheduled meeting Sunday with German Chancellor Angela Merkel, whose stance on Europe’s debt crisis is crucial. Nemat Shafik, a deputy managing director who oversees IMF work in several EU countries, will take Strauss-Kahn’s place at the Brussels get-together.

For Portugal, ministers will consider some amendments made by Finland as a condition of approving the aid despite skepticism from key political parties. They include a firmer commitment from Portugal to privatize assets to help pay for the bailout.

Discussions of Greece will likely not lead to a detailed announcement of potential new aid measures, although there is growing acceptance that last year’s bailout was not enough.

Ministers won’t make any firm commitments before a mission of experts currently in Athens conclude their review of the implementation of the existing program and determine how much more money the country may need in the coming years.

However, Monetary Affairs Commissioner Olli Rehn and the President of the European Central Bank Jean-Claude Trichet were expected to brief ministers on the initial findings of the review.

The euro members, notably Germany, have contributed the lion’s share of Europe’s bailouts to Greece and Ireland and the upcoming Portuguese handout. Though the IMF has also stumped up billions of euros - it provides around a third of the bailout funds - its main purpose has been in giving the austerity programs credibility.

Strauss-Kahn has been a key advocate of the strategy.

The IMF has named John Lipsky, Strauss-Kahn’s deputy, as acting leader and said it remains “fully functioning and operational” despite Saturday’s arrest of its managing director. Strauss-Kahn is due to appear in court later Monday for formal charging following medical and forensic tests.

Amadeu Altafaj Tadio, spokesman of the EU’s Rehn, sought to dampen any fears that Strauss-Kahn’s arrest would have a major impact on the crucial discussions.

“I see no reason to have any doubt about the continuity of the efforts,“Altafaj-Tardio said when asked whether Strauss-Kahn’s arrest would have any impact on the EU’s and the IMF’s efforts to fight the European debt crisis.

About John Lipsky he said he is “a skillful man” who “has a very strong knowledge of Europe.”

In the longer-term, analysts said, the arrest of Strauss-Kahn could trigger an overhaul at the Washington DC-based fund, not least whether it will continue to be headed by a European, as it has been since its creation after World War II.

“His (Strauss-Kahn’s) personal involvement in pushing for a greater role for the IMF post-Lehman has been important and indeed he has been heavily involved in the European bailouts,” said Robert Ryan, an analyst at BNP Paribas. “Should he step down, any changes in approach by his successor will be important.”

Strauss-Kahn had been widely expected to quit his post later this year in order to launch a bid for the French presidency in next year’s election, so the markets had been well-prepared for his potential departure.

A key question being debated is whether Strauss-Kahn’s arrest makes it more likely that the IMF will be headed up by someone outside the EU, possibly from one of the emerging economies.

The existing convention is that the European Union proposes the IMF’s managing director, while the U.S. proposes the president of the IMF’s sister organization, the World Bank.

However, the arrangement is increasingly considered anachronistic, not least because Europe is now a heavy recipient of funds from the IMF and the main cash injections come from countries like China.

Though Merkel said it was inappropriate to discuss a change at the top of the IMF, she indicated that the German government still thinks a European should still lead the organization.

“In terms of principle, without conducting this discussion here, we know that in the medium term, emerging countries certainly have a claim to the post of IMF chief as well as the post of head of the World Bank,” Merkel said in Berlin. “But I think that, in the current phase, in which we have a lot of discussions connected to the euro, there are good reasons for Europe also to have good candidates available.”

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