More trouble for the IMF.

Photographer: Pierre Philippe Marcou/AFP/Getty Images

Curse of the IMF Chiefs

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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Has the International Monetary Fund been hexed?

First, the former IMF Managing Director Dominique Strauss-Kahn was embroiled sex scandals and charged with aggravated pimping. Then his successor, Christine Lagarde, was placed under investigation, while still in office, for alleged negligence at her previous job as economy minister in France. And now Rodrigo Rato, who ran the IMF before Strauss-Kahn, has been briefly detained in Madrid, in connection with one of four fraud and money-laundering accusations against him.

I don't, of course, think the IMF is suffering the effects of some witch's curse, but the question is more than rhetorical. As the institution itself says, it has a reputational problem that's interfering with its ability to do its job. The continued scandals surrounding its past leaders aren't helping.

Rato, the descendant of a wealthy, aristocratic Spanish family, is involved in at least four controversies. One concerns the claim of a former treasurer to Spain's ruling People's Party that maintained a slush fund for use by Rato and other party leaders. Another centers on the use of corporate credit cards by the management of Bankia, a lender Rato headed after leaving the IMF: Rato allegedly used his unauthorized corporate card to pay 54,800 euros ($59,400 at today's exchange rate) for travel, clothes and entertainment.

In a separate Bankia-related issue, Spanish authorities are investigating whether the lender's management intentionally misled regulators about its earnings, helping to bring about the bank's collapse and subsequent $22.4 billion bailout. Last night, Rato was detained for seven hours as part of yet another investigation, into whether the funds he repatriated from offshore accounts under a capital amnesty were of legal origin.

Rato denies all the accusations except the credit card-related ones, and has reimbursed Bankia for those expenses. Even so, a substantial cloud hangs over him. Between them, Rato and Strauss-Kahn ran the IMF for seven years until 2011. Previous IMF bosses hadn't been so scandal-prone, and after resigning would go on to have respectable careers as senior statesmen.

Now Lagarde is fighting allegations of negligence in the case of businessman Bernard Tapie, who received a 403 million euro payout from the French state for damages caused to him by the nationalized bank, Credit Lyonnais, in 2008. As economy minister at the time, Lagarde allowed the arbitration that made the award. She has denied any wrongdoing, and the case appears less damaging than those embroiling her predecessors.

None of this enhances the IMF's prestige at a time when the austerity policies it imposes on countries such as Greece as their last-ditch lender are making it increasingly unpopular. Last year, the IMF admitted  that its image problem was making governments reluctant to turn to it for aid:

Policymakers’ reluctance to come to the Fund appears to stem largely from the persistently negative image that the Fund has among many civil society opinion leaders, NGOs, and the general public, particularly in countries affected by past crises. 

The character issues facing the most recent IMF bosses contribute to the "stigma" described in the IMF policy paper. Never mind if the Fund's standard policies are correct: Are the intentions behind IMF funding decisions purely technical, or can the fund's top officials be swayed by political interests that have little to do with the prospects of economic reform in client countries, or indeed their ability to repay debt? 

By mutual agreement, the top post at the IMF always goes to a European, and the World Bank to an American. The U.S., with the biggest share of the IMF's total capital and voting rights, has a de facto veto power over appointments. It also continues to block a five-year old proposal to reform the quota and voting system. If the change went through, emerging economies would get a stronger say and the U.S. and Europe would lose their lock on managerial appointments.

Neither Rato, Strauss-Kahn, nor Lagarde could have been appointed as IMF director without U.S. consent. So questions about the flexibility of their principles inevitably raise further questions about whether they might have been susceptible to political pressure. 

Quota reform is coming up for discussion again at the annual World Bank and IMF meetings in Washington, which begin today. Germany's Bundesbank said in a recent statement that the meeting would discuss what "interim steps" can be taken toward the reform objectives, so long as there's no need for approval for the U.S. Congress. 

Last year, the BRICS countries -- Brazil, Russia, India, China and South Africa -- announced the creation of their own $100 billion currency reserve and a New Development Bank as alternatives to the IMF and the World Bank. The continuing embarrassments of former IMF bosses and intractable U.S. resistance to reform make the venture attractive to the big developing nations. The five founding governments are promising to name representatives to the $50 billion development bank by the end of this month, and to launch it early next year. 

Although the dominance and financial power of the IMF, with $350 billion in available capital, have appeared unshakable, the BRICS project may start with a reputational advantage: Because it's new, the bank won't be weighed down by past scandals, policy failures or a legacy of outsized U.S. and European influence. The field is open to competition.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at

To contact the editor on this story:
Marc Champion at