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L'Affaire Strauss-Kahn: How the IMF Scandal Threatens the World Economy

Dominique Strauss-Kahn's political career is in tatters, regardless of whether he is ultimately found guilty of trying to rape a maid in a New York hotel. Now the question is whether the IMF chief's arrest could set off a chain of events that throws the European -- and perhaps even the global -- economy into crisis.

The problem isn't in Manhattan, but in Greece. Although the European Union rescued the country last year in a $155 billion bailout, it is widely expected to default on its debt. Strauss-Kahn, who many considered the leading contender to represent France's Socialist party in challenging President Nicolas Sarkozy in next year's national elections, has pushed the IMF and other European states to take stronger measures to help Greece. His arrest takes him out of the equation just as Greek officials are set this week to make their case for further aid.

The leadership vacuum at the fund also could spur Germany, where the 2010 Greek bailout was politically unpopular, to seek tougher repayment terms for Athens:

"Greece is going to have to be bailed out and there's going to be a restructuring of their debt," Eswar Prasad, a senior fellow at the Brookings Institution in Washington, said in a Bloomberg Television interview. "The presumption was that with Strauss-Kahn at the helm the IMF would not turn its back on Europe, that the IMF would continue to support Europe. Now, with Strauss-Kahn gone, that proposition becomes a little dubious."
Butchering the PIGS
Flagging regional support for another Greek rescue package could throw the Eurozone into chaos. It would raise fears about economic collapses in other heavily indebted nations in the region, notably Portugal, Ireland and Spain. (European stocks are already are shuddering.)

A full-blown sovereign debt crisis across the Atlantic would in turn slam large American banks, which are heavily exposed in Europe, and corporations. With Europe's growth far outpacing our own tepid recovery, such turmoil also could undermine the global economy. Prasad added in reference to the scandal surrounding Strauss-Kahn:

"As the world economy stumbles its way to recovery, this could be a pretty serious blow that sets things back."
Here's the good news -- no one is more sensitive to the domino-like risks of a Greek default than the EU. The dire economy in Greece, where unemployment now tops 15 percent, has set off a tide of unrest in the country. The good burghers of Brussels know that such malaise would be hard to contain if it is allowed to spread. While German Chancellor Angela Merkel may be a stickler for balancing the books, she's no sucker for punishment.

Greece's debt, although crippling, also only amounts to 3 percent of the Eurozone's GDP. The fiscal medicine for what ails Europe is likely to prove less economically and politically painful than allowing the disease to fester.

DSK's woman problem
And what of Strauss-Kahn? Without convicting the man in advance, it looks bad for the former French finance minister. A 31-year-old French journalist claims he also sexually assaulted her several years ago and now plans to file a legal complaint. Indeed, it appears Strauss-Kahn's libidinous (and possibly criminal) sexual habits have practically been an open secret in France. Said one French journalist in 2007 after the official was nominated to head the IMF [translation mine].

Strauss-Kahn's only real problem is his relationship with women. Overly pushy, his behavior often borders on harassment. A fault known in the media, but one about which no one speaks (we are in France).
They're speaking now. His problem may now be the world's problem.

Image by Guillaume Paumier via Wikimedia Commons, CC 2.5

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