Frenchman takes IMF helm with promise of reform

WASHINGTON, Nov 1 (Reuters) - Frenchman Dominique Strauss-Kahn takes the reins of the International Monetary Fund on Thursday under pressure to give emerging economies like China a bigger say in the global financial institution.

A former French Socialist finance minister, Strauss-Kahn, 58, got the job on promises that he would pursue reforms of an institution whose makeup still reflects the global economic order following World War Two, with the United States and Europe as the dominant powers.

As he takes the helm from Spaniard Rodrigo Rato, one of the most intensely political issues he faces is finding agreement among the 185-member countries by a 2008 deadline on how to boost the voting power of under-represented emerging powers.

His biggest challenge, analysts say, will be to persuade reluctant European countries to relinquish some voting power.

"Historically we have been used to thinking of Washington being the blockage, but right now the blockage is in fact in Europe," said Domenico Lombardi, president of the Oxford Institute for Economic Policy, which aims to bridge the gap between academic and policymakers.

With China and India driving the world's economic expansion and concern increasing about the growth prospects in the United States and Europe, developing countries are demanding a greater stake in the institution that overseas global financial stability.

While the United States is holding on to its veto power over decisions in the IMF, it has said it will not seek an increase in its voting power.


Countries like France and Britain are nervous that an adjustment in the IMF's votes could push them below China, whose rapidly growing economy is now the fourth largest in the world behind the United States, Japan and Germany.

With Strauss-Kahn at the helm and Italian Finance Minister Tommaso Padoa-Schioppa recently appointed to head the IMF's steering committee, Lombardi said together they could persuade Europe to accept change.

"Europe will have to accept an erosion in its voting power, there is no question about it, but at the same time it could enact some measures that will by far increase its leverage within the institution," said Lombardi, who is also a senior scholar at Washington's Brookings Institute think tank.

One way Europe could do this, Lombardi said, would be for European countries to pool their voting power into a single chair at the IMF's board. Currently European countries occupy 8 of the board's 24 chairs.

"It's in Europe's long-term interest to have a global monetary institution that is well functioning and that can really contribute to global financial stability," he said.


Some developing countries such as Brazil and Argentina have bluntly warned that emerging countries are likely to abandon the fund unless there is a shift within the IMF.

New leadership at the IMF also comes as member countries call for sharper focus by the institution on monitoring the global financial system and shifts brought on by recent market turmoil, a falling U.S. dollar, rising oil prices and global economic imbalances.

Strauss-Kahn's attention will also be on reshaping an institution whose advice has largely been ignored by rich developed countries like the United States, from where the recent credit market turmoil sprang.

While the IMF repeatedly warned about dangers of reckless lending in the U.S. subprime mortgage market, some countries believe the fund should have ensured its message was heard by markets.

The market disarray prompted calls by finance ministers during the IMF's October meetings to step up its scrutiny of the range of complex new financial instruments that lay behind the credit turmoil.

Meanwhile, the IMF's authority among developing countries has also waned with less need for its emergency loans and large borrowers such as Brazil, Argentina repaying their IMF debt.

Strauss-Kahn will also have to oversee planned budget cuts in the IMF and seek alternative sources of income for the fund, that may include the sale of a portion of its gold stockpiles.