Christine Lagarde: Challenges facing IMF's new head

Christine Lagarde's objective will shift from preventing a eurozone restructuring to managing it

So, the IMF in choosing Christine Lagarde has picked yet another European Managing Director.

It has never picked from outside the continent, and has a strong tendency towards French candidates.

Of the 11 who have held the post, Ms Lagarde makes the fifth pick from France.

Less usually, Europe is the setting for her biggest and most pressing challenge, the crisis in the eurozone.

The IMF and the eurozone countries have so far been trying to find a way through that does not involve a default by any euro country.

It is increasingly difficult to achieve that.

In the financial markets, the prevailing view is that Greece, and perhaps others, will at some stage default, or restructure their government debts, as the euphemism has it.

If it comes to that Ms Lagarde's objective will shift from preventing a restructuring to managing it, trying to see that it happens without widespread financial market disturbances.

Severe haircut

Orderly government debt restructuring has happened in the past. One relatively recent case that is sometimes mentioned in this context is Uruguay in the early years of this century.

But it was tiny compared to the euro area's problem.

Uruguay's total debts were $11bn (£6.9bn, 7.7bn euros), and the loss or "haircut" to use the financial jargon, was a relatively modest 20% on about half the debt.

Today, Greece alone owes over 340bn euros (getting on for half a trillion dollars) and the talk in the markets is of a haircut of 50% or more.

Going for a managed restructuring might be a little uncomfortable for Ms Lagarde personally having devoted so much effort to avoiding it.

But if it comes to it she will manage to make the necessary adjustment.

And it will not be unfamiliar territory for the staff. The IMF has supported the debt restructuring in Uruguay and some other countries.

The fact that the euro crisis is the IMF's biggest problem has been used both by supporters and opponents of Ms Lagarde's candidature.

For critics of her appointment, the big question is: will she be able to give Europe the independent unbiased advice it needs?

Martin Wolf in the Financial Times, not a strident opponent of her selection by any means, says she will not.

Simon Johnson, a former IMF chief economist writing in the New York Times is less restrained: "Ms Lagarde personifies the strategy of gambling for eurozone resurrection with other people's money. Why would taxpayers in the United States and elsewhere want to support her?"

Balance

Ms Lagarde's European roots define her other big challenge: her relations with the IMF's emerging and developing country members.

They have had repeated assurances that the post-war carve up of the IMF and World Bank leadership was over - that is the informal deal that a European runs the IMF and an American the World Bank.

G20 communiques have promised over and again that the selection process should be open, transparent and based on merit.

That does not rule out a European, or Ms Lagarde in particular, but it does suggest that the day must come when it will be a non-European.

That day has evidently not yet come.

Ms Lagarde will thus have to work to persuade the emerging economies that she has their interests at heart.

She has been making sympathetic noises in her campaign for the job.

But she needs to avoid being seen in the way Simon Johnson describes - as someone using the IMF to sort out the mess back home in Europe.