The International Monetary Fund seems cursed. One managing-director embroiled in scandal is perhaps unlucky: to suffer three in a row starts to look serious.

First it was the Spaniard Rodrigo Rato, now awaiting trial for embezzlement for allegedly running a "corrupt system" at the helm of Bankia.

Then it was France’s Dominique Strauss-Kahn, accused of louche conduct in a New York hotel room.

Now it is the turn of Christine Lagarde, inheritor of the French fief and today convicted of criminal negligence by a top French court in a case that has strange whiffs of political chicanery.

The guilty verdict certainly calls into question her full fitness to lead a financial superpower with resources of $668bn, and vice-regal dominion over whole countries and societies.

All three are European, the only race able to compete for the post under the Bretton Woods carve-up that has prevailed since the end of the Second World War. The fact that this has led to trouble is not accidental.

“European politics has become very corrupt. It is almost inevitable that the European system will throw up people who have done something that will later be construed as having crossed the line, and who are therefore tainted,” said Ashoka Mody, the IMF’s former deputy-director for Europe.

“My reading is that Europe is in very long-term decline from political and economic pre-eminence, and there is a great temptation to cut corners as they try to face these challenges,” he said.

This European stranglehold over the Fund is now over. It is inconceivable that the next IMF chief will be chosen in the old cosy way.

The Asian powers will not tolerate it any longer. If nothing is done they will walk away from the Fund entirely and create their own financial structures, probably revolving around China.

The Fund mishandled the East Asia crisis in 1998, imposing fiscal retrenchment that went far beyond the therapeutic dose, and dished out the same medicine to countries as starkly different as Korea and Indonesia.

It was bad economic science. Asia’s rising powers concluded that the IMF system was stacked against them. The Class of 1998 turned instead to “self-insurance” by building up such vast foreign reserves that they would never again be at the mercy of the Fund.

This accumulation of excess savings led to the pre-Lehman capital glut and is a key reason why the world economy has been so far out of kilter for the last fifteen years, ending in a global liquidity trap.

When the European crisis blew up, the Fund was suddenly all too willing to bail out countries - and on terms that were not available for the Asians, or the Latin Americans before them. The IMF was in effect hijacked by its European masters for a series of rescues that used up 80pc of its total lending between 2011 and 2014.

The terms violated cardinal rules. Greece, Ireland, and Portugal were each allowed to borrow 3,000pc of their quotas, triple the normal limit. In the case of Greece, the Fund’s management violated their charter by lending to a state known to be insolvent rather than demanding a debt restructuring. An internal probe has since shown that they pulled the wool over the eyes of the IMF board.

Some shortcuts can perhaps be justified given the real danger of contagion to Italy and Spain at that moment, and given fears of a global financial melt-down. Yet what emerges from the board’s probe is that the eurozone political class treated the Fund as their tool. The US went along with this in tacit collusion, but that is surely about to end under the Trump White House.  

The IMF remains vital to the global financial system but it is clearly an organisation that has lost its way. Cleansing must begin from the top down. This could start with the appointment of former Indian central bank governor, Raghuram Rajan, or the Korean chief economist of the Bank for International Settlements, Hyun Song Shin. George Osborne's moment has passed.

David Fuller's view

Most Eurozone economies show some signs of stabilising, following ECB President Super Mario Draghi’s record stimulus and more recent purchases of corporate bonds, in addition to Christine Lagarde’s earlier generous lending (my emphasis above).  Let’s hope this stimulus aids an actual recovery, including for the EU’s Southern European countries.  If not, less benign terms will be available when the IMF moves away from European control as Christine Lagarde’s second 5-year term expires in July 2021, and more importantly, Mario Draghi’s 8-year term at the ECB ends in October 2019.

Here is a PDF of AEP’s column.   

(See also: A Chance to Fix the Way the IMF Picks Its Leader, by Mohamed A El-Erian for Bloomberg)