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The arrest of the IMF chief Dominique Strauss-Kahn over charges of a sex crime in New York, complicates matters for the troubled Euro-zone. A significant supporter for bailouts will be absent in a critical moment. Analysis.

The scandal

The chief of the International Monetary Fund already boarded a plane from New York to Paris when the local police came to arrest him. He is accused of a sexual assault on a maid in the New York Sofitel hotel hours before the scheduled flight.

The maid, that managed to free herself from the director of the IMF (according to her version) and to immediately complain about the case, was questioned by the police that decided to act quickly. They managed to take him of the flight just 10 minutes before it took off.

His lawyer said he will plead “not guilty” and he might be released in the next few days. But given his past misbehavior, this doesn’t look good.

The timing

Strauss-Kahn, also known as DSK, was on his way to meet German Chancellor Angela Merkel on Sunday, and to participate on Monday in a meeting of Euro-zone finance ministers. On Tuesday, finance and economy ministers from all the EU were scheduled to meet.

The timing is horrible as the stakes are high: The IMF contributes one third of the EU / IMF bailout fund. The meetings with Merkel and the senior EU officials comes on the background of two issues:

  • Portugal, which still has a caretaker government, is expected to receive a bailout of 78 billion euros, despite serious doubts that the program will prevent a default.
  • Greece: Here, the situation is more complicated. The country is on the brink of default. Germany already wants and is preparing for restructuring, and the European Commission and the IMF support some softer version of rescheduling. France and the ECB (which holds a lot of Greek debt) currently oppose it.

With the head of the IMF stuck in New York, currently under arrest, it will be even harder for all the parties to reach agreements, especially good ones. Regarding Portugal, the deal is rather straightforward, especially with the approval from Finland.

But regarding Greece, the situation is worse now. Nothing has been agreed, and various forces are pushing to different solutions.

DSK has personally opposed debt restructuring for Greece. While the Greeks officially say that his arrest is meaningless, they unofficially admit this is bad news for them:

Greek officials privately conceded that if Mr. Strauss-Kahn is proven guilty, it would amount to a major blow for country’s search for allies if it needs further financial aid.

With the absence of DSK, which is a dominant figure that supported bailouts, the Greek crisis may last longer and lean  towards a default.

EUR/USD

Last week, the Euro enjoyed talks that a second bailout program for Greece would soon be approved. This was supposedly discussed in the secret meeting in Luxembourg, and gave a lot of hope, as there were much scarier scenarios for European politicians, that Greece would leave the Euro-zone.

As time passed by, Germany made it clear that no new decisions would be made until the EU/IMF delegation would complete its checkup on Greece. This delay sent the Euro falling down. The falls accelerated when this delegation was met with a general strike in Greece, and violent protests on the streets of Athens.

The arrest of DSK makes another delay very likely. And even if the EU leaders and the IMF representatives scramble a deal on Greece, there’s little chance that this deal will be serious.

Euro/Dollar has room for more losses.

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