Strauss-Kahn’s Arrest Won’t Deter Efforts to Bolster Aid for Greek Crisis

International Monetary Fund Managing Director Dominique Strauss-Kahn’s arrest is an embarrassment that won’t derail attempts to bolster aid for Greece as officials head to Brussels for crisis talks, economists said.

Strauss-Kahn, 62, had been scheduled to meet German Chancellor Angela Merkel today and then attend discussions with euro-area finance ministers in Brussels tomorrow as officials consider further support to stave off a Greek default. He has been charged with attempted rape and a criminal sex act on a woman in a New York hotel. Strauss-Kahn denies the charges.

“Its incredibly embarrassing, and not the IMF’s or Dominique Strauss-Kahn’s finest hour, but I don’t think this ought to undermine what’s going on,” Peter Westaway, chief European economist at Nomura International Plc in London, said in an interview. “I don’t think it will affect negotiations on Greece. In the end, issues for Greece and policy making are more important than that and they’ll carry on.”

European officials are working to prevent the region’s first default as Greek ministers plead for terms to be relaxed on 110 billion-euros ($155 billion) of aid from the IMF and European Union in a debt crisis that has also engulfed Ireland and Portugal. Economists said that talks to reconsider Greece’s aid terms are taking place between institutions rather than individuals and so can endure such turmoil.

“It’s not a fatal blow to the Greek situation,” James Nixon, chief European economist at Societe Generale in London, said in an interview. “Any of these negotiations are larger than a single person.”

EU-Led Aid

The Greek government said in a statement that it “operates institutionally and continues without interruption implementing the program for the country to exit the crisis.” The EU has led efforts to aid Greece and has contributed two-thirds of the funds committed to the rescue of the nation’s economy.

The IMF will be represented at Monday's euro-area finance ministers' meeting by Deputy Managing Director Nemat Shafik, who oversees the organization's work in a number of EU nations, IMF spokesman Bill Murray said in an e-mailed statement today.

Seventeen nations use the euro.

Greece is seeking an extension to the loans and has argued Europe should issue common bonds to stem the region’s fiscal crisis. Eighty-five percent of those surveyed last week in a Bloomberg Global Poll said the country won’t honor its debts, with majorities predicting the same fate for Portugal and Ireland.

Greek Position

Greek Prime Minister George Papandreou on May 13 opposed a debt restructuring, appealing to claims made by the IMF that the country’s debt “is sustainable.” Germany opposes a common-bond issue, saying such a move would weaken member states’ incentives to cut their deficits.

It’s too early to say whether Greece needs more help with its debt crisis, though “extra measures” may be needed if the country can’t return to financial markets next year as planned under the European-led aid program agreed last year, German Finance Minister Wolfgang Schaeuble said in an interview with ARD television in Berlin.

It’s “disappointing” that Strauss-Kahn’s meeting with Merkel is cancelled because the IMF had been pressing for stronger measures that may involve the possibility of a restructuring of Greek debt, Societe General’s Nixon said.

“The meeting could have been quite important in injecting some realism in the discussions and presumably now that voice won’t be heard,” he said. “The IMF have been pushing for a more realistic position, and presumably the gravity of that voice has been lost.”

‘Leadership Vacuum’

Eswar Prasad, a senior fellow at the Brookings Institution in Washington, said that Strauss-Kahn’s arrest may still unsettle investors at a time of tension because of the region’s debt crisis.

“Just the perception that DSK’s departure could create a leadership vacuum at the IMF and shift the institution’s attitude towards Greece and other weak European countries may be enough to roil markets and raise uncertainty at a vulnerable time for the euro zone,” he said.

Hotel Incident

The charges against Strauss-Kahn stem from an incident that allegedly occurred yesterday against a 32-year-old female at a Sofitel hotel in midtown Manhattan, the New York Police Department said in an e-mailed statement early today. He will appear in a Manhattan court later today, police Deputy Commissioner Paul Browne told BBC television in an interview.

Strauss-Kahn played a key role in efforts to stem the European debt crisis which started last year in Greece, with a pledge to contribute about a third of future bailouts in the region by the EU. His term at the IMF is scheduled to expire next year. Speculation in France had mounted that he would leave early to stand for president.

The charges against him won’t affect moves to extend aid to Portugal, which is implementing austerity measures to qualify for an international aid package of as much as 78 billion euros from the EU and IMF, said Gilles Moec, European economist at Deutsche Bank AG.

“The progress can continue and there should not be a change in its dynamics,” he said in an interview.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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