With Arrest of IMF's Strauss-Kahn, El-Erian Asserts Greece Default Risk Heightens

(May 17, 2011) — The risk of Greece defaulting is increasing since the arrest of of International Monetary Fund (IMF) head Dominique Strauss-Kahn, Pacific Investment Management Co.’s (PIMCO) Mohamed El-Erian said.

In an article featured in Reuters, El-Erian wrote, referring to Strauss-Kahn, or, as he is commonly known, DSK: “We must wait to make a full assessment until we know the outcome of ongoing police investigations into allegations that, according to his lawyer, DSK intends to ‘contest vigorously.’ Having said that, some commentators are already taking the view that the IMF could lose its managing director, and that France could lose a leading candidate for next year’s presidential elections.”

According to El-Erian, if Strauss-Kahn were forced to step down, confidence in the IMF would be eroded. “And it would pull the rug from under initiatives aimed at enabling it to play a more effective role in global policy coordination and, more generally, in improving global economic governance and filling a damaging vacuum at the center of the international monetary system,” El-Erian stated.

In an interview with Bloomberg TV, El-Erian described Strauss-Kahn’s arrest and the impact on the IMF: “This stunning development could not have come at a worse time. The IMF is like an army and the general is very important in that institution. The IMF is involved right now in the debt crisis in Europe, newly democratic countries like Egypt are looking to it for help and you need the IMF to coordinate this global healing. It is the worst possible time to lose your general.” He added that one should not underestimate the importance of Strauss-Kahn, and that without him, “it’s going to be much more difficult to coordinate the European governments.”

Yesterday, a New York judge ordered Strauss-Kahn to be held without bail. After being charged with sexually assaulting and trying to rape a hotel housekeeper on May 14, he was sent to the city’s Rikers Island jail complex. Meanwhile, Straus-Kahn has vehemently denied the allegations.

Just a couple of days before the arrest of Straus-Kahn, the IMF calmed fears on Greece, noting that the country is well-positioned to avoid the restructuring of its debt. However, the IMF also warned that Europe’s debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe.

According to the organization, substantial measures have already been put in place in the euro area to overcome the crisis. Nationally, new policies are being implemented to bolster confidence. Regionally, the governance framework is being revamped. “Important actions are still required to deal decisively with weak banks across Europe’s advanced economies, and to follow through with implementing the EU-wide reforms that have been agreed in principle,” the IMF noted.