Geithner May Support Lagarde for IMF to Keep U.S. Leadership of World Bank

Photographer: Dominique Charriau/Getty Images

French Finance Minister Christine Lagarde announces her candidacy for International Monetary Fund (IMF) presidency, at Ministere des Finances, May 25, 2011, in Paris, France. Close

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Photographer: Dominique Charriau/Getty Images

French Finance Minister Christine Lagarde announces her candidacy for International Monetary Fund (IMF) presidency, at Ministere des Finances, May 25, 2011, in Paris, France.

U.S. Treasury Secretary Timothy F. Geithner says France’s Christine Lagarde and Mexico’s Agustin Carstens are both qualified to run the International Monetary Fund. He may have little choice but to support Lagarde.

Under an unwritten agreement that dates back to the end of World War II, the IMF has always been led by a European while the World Bank has been headed by an American. Backing a non- European for the IMF could mean relinquishing U.S. control of the World Bank -- an outcome members of Congress who decide on funding for development banks are not ready to contemplate.

“For the sake of influencing policy and lending, as well as maintaining congressional support, it is very important that the World Bank continue to be led by an American,” Representative Nita Lowey of New York, the top Democrat on the House Appropriations Committee panel that oversees foreign-aid spending, said in an e-mail. Congress has yet to approve the Treasury Department’s $3.4 billion international aid budget for next year, which includes funding for the World Bank.

“We would like to see the U.S. continue to play and have a leadership role in these institutions,” Representative Robert Dold, an Illinois Republican and vice chairman of the Financial Services Committee panel that oversees development banks, said in an interview.

The World Bank, headed by former U.S. Trade Representative Robert Zoellick, finances projects in developing nations, including $1.5 billion in loans to help improve India’s rural roads last year. The IMF provides emergency loans to countries in financial distress, committing about $105 billion in aid to Portugal, Greece and Ireland. The U.S. also controls the No. 2 job at the IMF, now held by John Lipsky, a former JPMorgan Chase & Co. executive.

‘Very Talented’

Geithner on May 25 said Lagarde, the French finance minister, and Mexican central bank Governor Carstens are both “very talented” candidates to replace Dominique Strauss-Kahn at the IMF. He also said the U.S., the fund’s largest shareholder with 17 percent, will play a “significant” role in choosing a successor to Strauss-Kahn, who resigned after his arrest on charges of attempted rape and sexual assault.

Strauss-Kahn pleaded not guilty to all seven charges today in Manhattan before New York State Supreme Court Justice Michael Obus. Obus scheduled the next hearing for July 18.

“Congress is certainly watching this election process very closely,” Tim Adams, a former Treasury undersecretary and now managing director at the Lindsey Group, an investment consulting firm based in Fairfax, Virginia, said in an interview. “They will want to ensure that the U.S. representation at both the fund and the bank remain at its current levels.”

Lipsky’s position will also be up for grabs when his term as first deputy managing director ends in August, and the U.S. will probably get a guarantee from Europeans to keep the No. 2 post if Lagarde gets the top job, said Nancy Birdsall, president of the Washington-based Center for Global Development, an aid research group.

Failing to Coalesce

Emerging market leaders such as Brazilian Finance Minister Guido Mantega have questioned the division of leadership posts at the two agencies, saying the choice should be made on the basis of merit, not nationality. Yet emerging economies have failed to coalesce around Carstens or another candidate, while European nations have closed ranks behind Lagarde.

Candidates for the post also include Grigori Marchenko, chairman of the central bank of Kazakhstan. Countries have until the end of this week to nominate a candidate. The IMF has said it’s aiming to make a choice by June 30.

Geithner has pushed to increase the influence of emerging economies such as China and Brazil at the fund. On May 20, he said the U.S. will back an IMF leader who has “broad support” and stressed the importance of an “open process.”

The U.S. also supported having the Group of 20 nations replace the G-8 as the main forum for global economic coordination, in recognition of a shift in power from rich countries to emerging markets.

‘Champion of Reform’

“The U.S. is certainly champion of reform of the system,” said C. Fred Bergsten, who heads the Washington-based Peterson Institute for International Economics in Washington. “On the other hand, the U.S. has its traditional interest in keeping the World Bank job for an American.”

The major development banks obtained capital increases from their shareholders after boosting emergency loans during the global financial crisis. The U.S. Congress has yet to approve $1.8 billion for the World Bank, the Inter-American Development Bank, the Asian Development Bank and the African Development Bank for coming years.

Senate Report

A March 2010 report by the staff of Senator Richard Lugar of Indiana, the top Republican on the Committee on Foreign Relations, recommended that the U.S. “preserve” its leadership at the World Bank “and senior level positions at the other” international financial institutions.

“Having an American at the helm of the World Bank helps ensure continued U.S. support for the institution and facilitates communication” with the bank, the report said.

Lugar and Democrat John Kerry of Massachusetts, the committee chairman, in September sent a letter to Geithner saying changes to the process of selecting leaders of development banks shouldn’t be considered separately.

“We understand the G-20 commitment to merit-based leadership decisions,” they wrote. Still, “any discussions of changes in the leadership selection process must occur across” all the institutions.

The letter was resent to Treasury officials a few days after Strauss-Kahn’s May 14 arrest as a reminder of the senators’ position, according to a person from the committee who declined to be named because the communication wasn’t public.

Asian Development Bank

The leadership of other development banks is also based on geography. The head of the Asian Development Bank, for instance, is picked by Japan, which is its biggest shareholder alongside the U.S.

U.S. officials haven’t mentioned the World Bank presidency in the IMF succession debate.

Still, when Marisa Lago, the Treasury’s assistant secretary for international markets and development, was asked at a Senate hearing in September whether the Obama administration would be willing to give up leadership of the World Bank, she replied that any such discussions would have to occur “at the highest political level.”

She also told the Foreign Relations Committee that such changes should be made at all international financial institutions at once. “We have been very well served by the U.S. leadership and the World Bank has been well served,” she said.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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