The downfall of DSK, and the implications for Europe have not been priced into the European debt markets fully yet, in my opinion. The era of a Euro-centric focus at the IMF under DSK is about to change.
The IMF has announced that its current temporary Managing Director will be retiring at the end of August. This will leave the IMF with out its two most senior bankers as the world transitions from a QE 2.0 reality into an unknown economic future. This also puts into play, who will be in charge of directing the focus of the IMF in the future.
The jockeying for who replaces DSK at the IMF has already started, with PIMCO’s co’CEO releasing one of his instant OpEd pieces announcing his disinterest. What is clear, is that the primary leadership at the top of the IMF is going to change suddenly, and with it potentially, a new focus for the IMF. Historically, the IMF focused its resources on smaller third world nations that needed access to capital. A return to these grass roots would have serious implications for Europe.
This has the role of the IMF in doubt in Europe, as a new Managing Director from the third world or North America, would have a different focus for the funds, than a Euro-Centric leader has had. In fact, there are already arguments that the IMF has deployed to much capital in Europe already. It was not supposed to bail out economic unions, which is what it has morphed into lately.
In fact, with the changes coming up in the leadership of the IMF, the continued role in any new specific bail out is in doubt. This is already noticeable, as the IMF quickly rolled out funds for Ireland that had been on hold, along with signing off on the Portugal bail out this summer, before they have a new government voted in. The European Desk at the IMF is quickly funding its current mandates, however it may or may not have a future role in new bail outs. Specifically, of nations it has already bailed out once during this crisis.
The pressure on European leaders to arrive at a solution to their many economic issues is increasing as time runs out on the current crop of bail out nations. That is, when the original bail outs were announced, there was expectations of future debt issues to meet the proposed numbers. These debt issuing events have been pulled from the market as the risk of default has grown in Greece, causing the cost to insure against a default to increase.
The IMF, which has its own quasi currency called SDR’s (Special Drawing Rights), has been proposed as a replacement for the US dollar as the reserve currency of the world. The idea of growing the IMF into a Super-Senior Central Bank to the world with leadership provided by European centric bankers is now on hold.
What happens next, and who replaces whom at the IMF, will have monetary implications for everyone for decades. It will be interesting to see if China decides to pour real money into the IMF to try and gain control of its focus.
What hasn’t happened, is an end to the need of the IMF. That is, the world still needs an organization to help bail out economies that have lapsed into economic insolvency.
In the past, the US provided the largest funding slice and was able to direct the politics of how those funds were disbursed. However, since 2007, under DSK, the IMF has become focused on European bail outs.
If the IMF is distracted or unable to bail out the European Governments in the future, it will be up to the European leaders to figure out their own solutions to their own problems. Historically, this has not ended well.