Jake's View

How on earth did Lagarde manage to dodge her latest bullet?

IMF chief lost control of her own country’s fiscal position, and was then deemed suitable to lead an institution which exists to enforce fiscal rectitude on profligate governments

PUBLISHED : Monday, 02 January, 2017, 2:50pm
UPDATED : Monday, 02 January, 2017, 10:52pm

Christine Lagarde will remain head of the International Monetary Fund despite her conviction on Monday of negligence in a case dating to her tenure as France’s finance minister.

AP, SCMP, December 21

Bad decision. They should have sacked her, not because she committed any crime in France (she didn’t) but because she should never have been given the top job at the IMF and this was a convenient occasion to drop her.

Let’s start with that conviction. She was found guilty of not reducing an arbitrator’s award in the sale of a financial asset by an associate of the president she served as finance minister.

Politicians are not supposed to overturn arbitrators’ awards. It makes a mockery of arbitration. In any event the asset was resold shortly afterward for almost double the value the arbitrator set on it.

But, hey, in politics when you have your enemy in your sights you pull the trigger. Let any political jurisdiction that is innocent throw the first stone.

We in Hong Kong certainly cannot do so with a former chief executive soon to go on trial on charges that, well ... hmmmm ... as I say.

As to Christine Lagarde’s career as France’s finance minister, the chart tells the story: France’s fiscal position crippled by record deficits and soaring debt. She is a labour lawyer who had no financial background before taking office and a poor record while in office.

She got the top job at the IMF for two reasons. The first is that this job is a French sinecure by agreement with the United States. The US in turn always gets the top job at the World Bank, appointment by merit, you know.

The second reason is that her predecessor at the IMF one day developed an overfondness, shall we say, for the maid who cleaned his room in a New York hotel, and was led off in manacles. Christine Lagarde was then faster than anyone else in France to jump up and say, “...me, me, I want the job. Gimme.”

We shall thus give her nine out of ten for enthusiasm. As to other qualifications, a key role of the IMF in world affairs is to enforce fiscal rectitude on profligate governments. How then is a politician who lost control of her own country’s fiscal position deemed suitable to lead such an institution?

Her most recent failure of judgement has been the most damaging. It was largely at her instigation that the IMF last summer admitted China to its inner club of countries whose currencies are components of the IMF’s special drawing rights (SDR), credits made available to distressed countries.

The restrictions on the yuan have been tightened, not loosened. Inclusion in the SDR basket at an early date was a rash decision and it was widely recognised to be so at the time

This may be an honour but it is more an obligation and is really only for countries whose currencies are exchangeable across the world without restriction.

The IMF knew the yuan had not yet achieved this status but went ahead anyway on the reasoning that reforms in process would soon create an open capital account.

In the event things have gone the other way. The restrictions on the yuan have been tightened, not loosened. Inclusion in the SDR basket at an early date was a rash decision and it was widely recognised to be so at the time.

The IMF is now somewhat in the position of a policeman who has stopped a drunk driver but then let him proceed anyway out of misplaced kindness.

It has done China no favours. There is potentially a huge embarrassment to come if foreign recipients of SDRs can exchange yuan freely in size for US dollars or euros but citizens of China cannot. Beijing wanted respect but the world will laugh if it happens.

And it was largely Christine Lagarde’s doing. Why was this chance to drop her missed?