OPEC mulls oil supply target hike to calm prices

OPEC is considering raising oil supply targets for the first time since 2007 in a move that could weaken $100 oil prices and lessen the drag of high energy costs on global economic growth.

The Organization of the Petroleum Exporting Countries, which pumps more than a third of the world's oil, may raise supply targets by as much as 1.5 million barrels per day (bpd) when ministers meet on June 8, two Gulf oil sources told Reuters on Thursday.

"There is a need for an increase to replace the loss from Libya," one delegate said. "Oil prices are too high. $100 oil is scaring people."

The most likely outcome would be for a rise of 1 million bpd: "That would be calming for prices," the delegate said.

A rise of 1 million bpd in OPEC's output target would result in only a small increase in actual oil supply from the group, the delegate said. That was because part of the rise would simply absorb above-target supply that some members were already pumping, the delegate added.

The 11 members of the group bound by OPEC production targets -- all except Iraq -- pumped 26.23 million bpd in May, nearly 1.4 million bpd above their 24.84 million bpd target.

MEANINGLESS?

"If this is 1 million bpd on top of the targets from over two years ago, then it's meaningless. If it's 1 million bpd above current production levels, then it's exactly what the market needs," said David Wech, analyst at JBC Energy in Vienna.

Raising formal output targets would force OPEC to confront tough issues. Saudi Arabia holds most of the group's spare capacity so is likely produce most of any extra oil supply.

Saudi energy minister Ali Al-Naimi said on Thursday the country would up production if there was demand for more crude.

But other members would also want a share of any rise in supply targets, even if they were already at full capacity.

OPEC members Iran, Libya and Venezuela could resist any rise in targets, industry publication Energy Intelligence reported on Wednesday, citing an OPEC insider.

Iranian OPEC governor Mohammad Ali Khatibi declined to comment on whether the group would agree a production increase.

"We will discuss it in the next meeting," Khatibi said at a gas exporters group meeting in Cairo. "We should see all fundamentals ... all indicators."

Algeria's energy minister said on Thursday he did not expect OPEC to raise output at its meeting in Vienna.

"I do not think so," Energy and Mines Minister Youcef Yousfi said when asked if he expected an OPEC output hike next week.

"We will discuss the matter but I don't think we will be increasing production," he said.

Libya, whose top oil official recently defected, would not want other OPEC members to divide officially its share of the targets, the delegate said. Civil war has cut its exports.

Another delegate saw no need for a formal change and said OPEC members could simply flout official targets to meet demand.

"Why bother?" he said. "Everybody is pumping what they want anyway and getting the money they want and more."

Oil prices were slightly firmer on Thursday with Brent crude up 85 cents at $115.37 a barrel at 1317 GMT.

Brent has traded above $100 since early February, prompting consuming governments to warn of the impact of high oil prices on economies still fragile after the global financial crisis.

SOOTHING CONCERNS

The West's energy watchdog, the International Energy Agency, last month urged producers to boost supplies to help lower fuel costs and protect the economic recovery.

Data this week from top oil consumer the United States has exacerbated concerns that the recovery in the world's largest economy is running out of steam.

Factory output growth in China, the engine of global demand growth for more than a decade, is also slowing.

But fuel costs were only part of a wide list of factors impacting economic expansion, the delegate said: "Some of it is the oil price, but that is not the whole story."

Even if a target increase results in few extra barrels of oil on the market, it could soothe concerns over Libyan supply and high fuel costs, JP Morgan oil analyst Lawrence Eagles said.

"This would be a positive policy step as far as consuming countries are concerned," Eagles said.

Top oil exporter Saudi Arabia boosted oil supply in February to plug the gap left by Libya. But Saudi Arabia reduced supply again in March, citing a lack of demand.

OPEC has taken no formal decision to supply more oil to compensate for Libya's supply disruption or to ease prices.

Saudi Arabia and other Gulf producers are wary of the impact high oil prices might have on the economy and on demand. As recently as February, Saudi Oil Minister Ali al-Naimi said a $70-$80 per barrel was fair to both producers and consumers.

A slightly wider range of $70-$90 per barrel would still be good for both, an OPEC delegate said on Thursday.

Saudi Arabia's oil price needs have risen as it has offered $130 billion in handouts to avoid any chance of the sort of unrest that has rocked much of the Arab world.

OPEC has kept formal supply policy unchanged since late 2008, when the group agreed record cuts to match the sharp fall in demand as the financial crisis engulfed the economy.

Source

Visions Of A Mad Gold Stock Speculator

by Adam Brochert - Gold Versus Paper

24hgold.com

A series of long-term charts suggests to me that we are getting ready for a Gold stock explosion higher that should begin before the summer is over. I am biased due to being rabidly bullish on Gold stocks right now, both intellectually and financially. Please take the following technical analysis smorgasbord with a grain of salt given my greedy dreams of speculative riches, which clearly bias my perspective.

Technical analysis should be objective, but the reality is that one person's bullish chart is another's bearish warning chart. This is what makes markets and why it ain'talways easy to make money as a trader. In any case, I believe we are on the cusp of a major move higher in Gold stocks as a sector.

I think the bottom in Gold stocks will roughly correspond with a cyclical top in general stock market indices, a la 2001-2003, 2007-early 2008 and 1973-1974. Many Gold stock investors equate general equity bear markets with Gold stocks getting slammed due to the 2008 fall crash fiasco that dragged down everything except the U.S. Dollar. Funny how memories are not only selective but also favor recent history over older history.

One thing is clear: when the stock market drops precipitously over a short period of time, babies get thrown out with the bathwater. But even the October, 2007 thru March, 2009 bear market saw Gold stocks advance significantly during more than half of this bear market period (i.e. October, 2007 thru March 2008 and October, 2008 thru March, 2009). Because bear markets make people nervous and because no one can say if the "wicked" part of the bear market will come up front or not, it takes nerves of steel to be a Gold stock bull when you are anticipating a general stock market cyclical bear.

However, I am suggesting that it is time to do precisely this. I would favor a deflationary-type bear market over an inflationary-type bear market, but I don't claim to know for certain. There is no reason the U.S. Dollar can't rally here against other worthless currencies, as all currencies are sinking relative to Gold (and silver). The paperbug game is to focus on the individual currencies and deliberate about whether a total overall government debt to GDP ratio of 200% versus an annual fiscal deficit of 10% of GDP is more important. I call a deadbeat a deadbeat and keep my savings in physical Gold, the only hard currency that can't be effectively issued by decree. It is for this reason that the GLD ETF is not a "safe" savings vehicle, but rather a short-term speculative vehicle, as it is designed to divert money from the physical Gold market and allow the paper game to continue for longer than it should.

I have been a hard-core bear on general equities over the past 2 years. I have been very, very wrong. But, there is a limit to what a bear market rally within the context of a secular equity bear market can achieve. We are fast approaching that limit. Now, I no longer think I know exactly when that top will occur, but I don't think we make it to the end of the year before the bear market begins. The topping process may take another few weeks or another few months. In the end, I don't really care.

The reason I don't care is because I think Gold stocks are going to rocket higher and more money can be made going long Gold stocks than going short the market, at least for the first 6 months or more of the looming cyclical stock bear market. And, as any seasoned Gold stock investor should know, Gold stocks can move awful fast - a gain of 100% or more in the Gold stock sector in 6 months is not a pie-in-the-sky proposition.

Anyhoo, onto my tea leaf tools. Here are some charts that I think are screaming for bulls to buy on the next dip. The last dip was a great buying opportunity and the next low may or may not be a lower low, but I think we'll get another significant pull-back in general Gold stock indices.

Here's a chart that compares the HUI Gold Bugs' Index ($HUI) to the Dow Jones Industrial Average ($INDU) Index (i.e. an $HUI:$INDU ratio chart) over the past 12 years thru Friday's close:

And I can't seem to do an analysis of the Gold sector without some form of Dow to Gold ratio chart. Here's a 12 year chart of the Gold to Dow Jones ratio chart thru Friday's close (i.e. a $GOLD:$INDU ratio chart):

And why does the Gold to Dow Jones ratio matter when it comes to Gold stocks? Well, let's look at the entire history of the current secular Gold bull market that began at the turn of the century. Here's the same Gold to Dow ratio chart (i.e. $GOLD:$INDU ratio chart, the candlestick plot) plotted along with the $HUI Gold Bugs Index (black straight line) on the same chart over the past 12 years:

And finally, the concept of the "real" price of Gold. I learned this concept from BobHoye and I think it is key to understanding Gold miner profitability. Profits eventually should be reflected in stock prices, though many Gold mining companies seem to do whatever is in their power to make sure this isn't the case... (e.g., share dilution, political struggles, Gold price hedging, etc.). When viewing Gold stocks as an overall sector, however, the real price of Gold is important and I use the Gold price divided by the $CCI or $CRB commodity indices. Because energy is an important cost to mining firms, the heavy oil weighting in the $CRB index may actually be a good thing. In any case, here is the $GOLD:$CRB ratio chart over the past 12 years:

I think Gold and Gold stocks could top on a short-term basis in the next week or so, then decline to a potential final low in June. Summer is rarely an exciting time for the Gold sector, but buying when things are quiet is often a way to reap rewards once the fall hits. We could have a summer spike lower like we did in August of 2007 or things could simply drift quietly lower in the Gold sector. In any case, we are getting to the point where the Gold bull market is going to outshine every other market. If it's a deflationary bear market with the US Dollar rallying, which I would favor, the Gold patch will be the only place to be. If it's an inflationary bear market with the US Dollar crashing, then silver will likely outperform Gold again. I don't claim to know for sure, as trying to pick the prettiest paper currency troll is not an interest of mine. Gold will win the Clash of the Titans battle in the currency arena, of this I am certain.

Stay long in physical Gold until the Dow to Gold ratio gets to 2, and we may get below 1 before this secular economic mess is over. Gold stocks are for the speculatively inclined, not the faint of heart. However, I believe this summer is a speculative buying opportunity in the Gold patch that will looked back upon as a "duh, of course I should have bought"-type opportunity. This mad Gold stock speculator couldn't have a more rosy view of the future, but only when the future is priced in Gold.

Adam Brochert

Alwaleed Says Saudi Arabia Seeks $70 to $80 Oil to Preserve Sales to West

Saudi Prince Alwaleed bin Talal. Photographer: Waseem Obaidi/Bloomberg

By Eric Martin bloomberg.com

Prince Alwaleed bin Talal said an oil price of $70 to $80 a barrel is in the best interests of Saudi Arabia because it diminishes the urgency in the U.S. and Europe to develop alternative energy sources.

“We don’t want the West to go and find alternatives,” Alwaleed, a nephew of Saudi King Abdullah, said in an interview on CNN’s “Fareed Zakaria GPS,” scheduled for broadcast today. “The higher the price of oil goes, the more they have incentives to go and find alternatives.”

The rebellion in Libya, political turmoil in Bahrain and speculative buying are responsible for driving oil prices to more than $100 a barrel, Alwaleed said. Crude for July delivery rose 36 cents to settle at $100.59 a barrel on the New York Mercantile Exchange May 27. Prices have increased 35 percent in the past year.

Alwaleed, who owns Citigroup Inc. (C) shares and ranks 26th on Forbes magazine’s list of the world’s richest billionaires with a net worth of $19.6 billion, said he continues to invest in the U.S. and that the nation is “down, for sure, but it is not out.” Standard & Poor’s lowered its U.S. credit-rating outlook on April 18 to negative, citing the widening budget deficit.

Saudi Arabia needs to enact laws that allow for greater public participation in government, Alwaleed said. U.S. President Barack Obama’s administration is seeking to encourage pro-democracy movements inspired by those that ousted longtime leaders in Tunisia and Egypt as part of the so-called Arab Spring to create broader, regional changes.

To contact the reporters on this story: Eric Martin in Washington at emartin21@bloomberg.net;

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

Why gold demand is surging in China?

By IB Times Staff Reporter
ibtimes.com

Chinese gold demand is expected to exceed 700 metric tons in the next several years and sharply outpace domestic production. Annual gold production in China, world’s second largest consumer of precious metal, is expected to reach 400 tonnes by 2014 with demand at 700 tonnes, signaling room for a strong ramp up in imports.

Chinese gold demand grew by 32 percent despite a concurrent 25 percent rise in the annual average local currency gold price. For the first three months of the year, China's investment demand more than doubled to 90.9 tons compared to India's 85.6 tons.

Unlike in other countries, the demand for gold in China was being driven by mainly its population's cultural affinity to the yellow metal. Most of China's gold output stays in the country where it is transformed into jewelry and manufactured items as buying and gifting the gold is an integral part of their culture.

Also gold and its colour has a special significance in Chinese culture as it is a symbol of good luck and the colour of the attires of the emperors. The colour is used as mourning colour for Chinese. Gold is also used in the dragons which are legendary representation in the Chinese civilization.

Hedge against inflation:

The other main reason behind the surging demand is concern over domestic inflation pressure and poor performance of alternative investments, combined with expectations of further gold price gains.

The expectation for higher inflation has fueled great interest among investors to hold physical gold, which led to higher imports. People see gold as a hedge against inflation as the country’s tightening monetary policy drives investors from stocks and properties to gold.

If China wants the yuan to become a global reserve currency, holdings of gold should be increased to match the United States. China has only 1,054 tonnes of gold compared to United States 8000 tonnes of gold in reserve.

China has more than $2.5 trillion in reserve and dollars are its biggest asset. So they can use that reserve for radically increasing their store of gold.

Chinese local gold production is insufficient to supply the retail and institutional market as well as the central bank. So Beijing has encouraged retail consumption by expanding the number of banks allowed to import bullion.

China’s Stocks Fall for Fourth Day on Economic Growth, Inflation Concerns

Bloomberg - China’s stocks fell for a fourth day on concern government measures to cool inflation are slowing the world’s second-biggest economy.

PetroChina Co., the nation’s biggest oil company, lost 1.9 percent after Goldman Sachs Group Inc. cut China’s economic growth estimates. Industrial and Commercial Bank of China Ltd. led declines for lenders after the Securities Times cited investors as saying the central bank may further boost banks’ reserve requirement ratios. China Gezhouba Group Co., which has hydroelectric power projects, rose 2.4 percent as Xinhua News Agency reported China will boost water conservation efforts.

“Investors are concerned about the pace of economic growth after so many measures to cool the economy and the debt crisis in Europe,” said Sun Chao, an analyst at Citic Securities Co., China’s biggest-listed brokerage, in Shanghai. “They are simply selling as they are unwilling to take more risks for now.”

The Shanghai Composite Index dropped 7.5 points, or 0.3 percent, to 2,767.06 as of the 3 p.m. close. The measure has lost 9.5 percent from the close of 3,057.33 on April 18, after earlier sliding as much as 10 percent, a sign analysts say that the market has entered a correction.

The measure plunged 2.9 percent yesterday, erasing this year’s advance of as much as 8.9 percent, after a manufacturing gauge fell to its lowest level in 10 months. China’s preliminary manufacturing index, known as the Flash PMI, was at 51.1 in May, compared with the final reading of 51.8 in April, HSBC Holdings Plc and Markit Economics said yesterday. A number above 50 indicates expansion.

ICBC, the nation’s biggest lender, dropped 0.5 percent to 4.44 yuan today. Agricultural Bank of China Ltd. slid 0.7 percent to 2.85 yuan.

Bank Ratios

The central bank may suspend a sale of three-year notes this week and increase banks’ reserve requirement ratios, the Securities Times reported, citing one market opinion. A suspension may also indicate the central bank is expecting a slowdown in growth, it said, citing another market opinion.

China may continue to raise interest rates, Joseph Yam, the former head of the Hong Kong Monetary Authority, said today. The People’s Bank of China aims to make the one-year deposit rate higher than the rate of inflation, Yam told reporters.

The central bank has increased reserve requirements for banks 11 times and boosted interest rates four times since the start of 2010 to cool consumer prices, which exceeded economists’ estimates in April with a 5.3 percent increase.

Recent rises in pork prices will likely push up China’s inflation in May, according to the Financial News, a People’s Bank of China publication. Each 20 percent increase in the price of pork will likely contribute 0.6 percentage points to the consumer price index, the newspaper said, citing Li Mingliang, an analyst with Haitong Securities Co.

Further Drop

Goldman Sachs said it wouldn’t “rule out” a further decline of up to 10 percent for Chinese stocks as growth in the world’s second-biggest economy slows and inflation accelerates.

“We would not rule out a correction of up to 5 percent to 10 percent near term, triggered by earnings per-share cuts, but would buy on such dips given low earnings risks, valuation, likely policy inflection,” Goldman Sachs analysts led by Helen Zhu and Timothy Moe said in a report today. It expects inflation to peak in June and forecasts “normalization of policy sometime in the third quarter in 2011,” according to the report.

China’s gross domestic product will gain 9.4 percent in 2011, less than a previous call of 10 percent, Goldman Sachs said. The U.S. bankdowngraded Chinese steel, aluminum and industrial stocks to “underweight” from “neutral,” while keeping property and bank shares as top picks.

Commodity Stocks

PetroChina lost 1.9 percent to 10.66 yuan. China Petroleum & Chemical Corp. (600028), Asia’s largest oil refiner, also known as Sinopec, fell 0.3 percent to 8.09 yuan. Tongling Nonferrous Metals Group Co., the second-largest copper producer, declined 3.7 percent to 23.35 yuan.

The Standard & Poor’s 500 Index posted its biggest drop in two months as commodities slumped amid concern that Europe’s debt crisis is worsening and the global economic recovery is losing momentum.

The Federal Reserve Bank of Chicago’s gauge of economic activity unexpectedly dropped below zero in April. In Europe, services and manufacturing growth slowed more than economists forecast in May. Belgium had the outlook on its AA+ credit rating lowered to negative from stable at Fitch Ratings, which cited concern over the pace of structural reform.

Crude oil for July delivery tumbled 2.4 percent to settle at $97.70 a barrel in New York yesterday, the biggest one-day drop since May 11. The London Metal Exchange Index of prices for six industrial metals including copper and aluminum lost 2.7 percent yesterday, the most since May 5.

Water Stocks

Chongqing Three Gorges Water Conservancy and Electric Power Co. surged 10 percent to 19.70 yuan. China Gezhouba added 2.4 percent to 11.46 yuan, the highest close since May 10.

China will increase investment in water conservation projects this decade to 4 trillion yuan, up from 1.06 trillion yuan in the previous 10 years, Xinhua reported, citing Minister of Water Resources Chen Lei. The plan will allow the nation to fight droughts and floods, which have increasingly affected many regions across the nation, Xinhua said, citing Chen.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

Dominique Strauss-Kahn Damned

Whatever the man did, do not forsake his ideas: they are more important

ON SATURDAY morning Dominique Strauss-Kahn, head of the IMF, was contemplating five years in the Elysée palace as France’s next president. By Monday he was locked up in a cell in Rikers Island jail in New York on suicide-watch, charged with sexual assault, unlawful imprisonment and attempted rape. If he is convicted on the most serious charges, he faces as many as five presidential terms in prison.

So steep has been Mr Strauss-Kahn’s fall, and seemingly so self-destructive, that most French people seem to think he is the victim of a plot (see article). Mr Strauss-Kahn has indeed protested that he did not try to force sex on a hotel maid and, plainly, it is for the courts to judge him. Yet this would not be the first time that a dominant man, blinded by the habit of abuse and the arrogance of power, had thrown it all away and ruined the people unfortunate enough to cross his path.

Whether or not the New York prosecutor is right to think Mr Strauss-Kahn guilty, his professional life has now come to an end. Protesting his innocence, he has already resigned from the IMF, which now needs a new head; and France will have to rethink the presidential campaign that is at hand. Both choices will affect millions of lives; and both could go very wrong.

Whatever his personal failings, Mr Strauss-Kahn was an outstanding head of the IMF. Before the financial crisis, the fund risked irrelevance. With him there, it has again played a central part in managing the world economy. Mr Strauss-Kahn combined technical skills with shrewd political instincts. His job is being temporarily filled by his American deputy, John Lipsky, but the shareholders need to decide quickly on a formal replacement. The Europeans, beset by difficulties in the euro zone, are desperate that the job should once again go to one of them. Recently, emerging economies in particular have demanded a more open succession. They are right.

Meanwhile, Mr Strauss-Kahn’s arrest has in effect disqualified from the presidential race the politician who looked best placed to win the presidency for the Socialist Party, for the first time since François Mitterrand’s re-election in 1988. Mr Strauss-Kahn was the candidate with the greatest chance of bringing the Palaeolithic French Socialists into the modern age.

The danger now, as Socialist alternatives line up, is that the party sloughs off its modernising aspirations and reverts to type. Unlike parties of the left in Britain or Germany, France’s Socialists have yet to digest the sour reality that wealth needs to be created before it can be distributed. Their draft manifesto includes a jaw-dropping pledge to reverse France’s minimum retirement age, which has only just been raised from 60 years to 62. The Socialists’ reflex is to tell the French that they need to be “protected” and “sheltered”. However, the French cannot for ever defy the laws of economics and protect themselves with costly benefits that only pile up huge public debts for future generations. France’s tragedy is that Mr Strauss-Kahn, who understood that, misunderstood so much else.

Why this time the sex matters

Somehow Mr Strauss-Kahn sailed through a lifetime of womanising. At the IMF he had a liaison with a more junior colleague in 2008. It was his only publicly investigated affair and an inquiry, by outside lawyers, concluded that the relationship was consensual. Yet the woman in question said that Mr Strauss-Kahn was “a man with a problem that may make him ill-equipped to lead an institution where women work under his command”. That warning now seems prescient.

Many of the other, unpublicised affairs were in France, which faces questions of its own. It can be hard with public figures to trace a clear line between what is in the public interest and what should remain behind the bedroom door. In general France’s determination to respect that difference is admirable. A consensual affair between adults is usually private, barring obvious hypocrisy or some genuine public interest (such as national security). By contrast, attempted rape, or sexual violence, is a public crime. That sounds a straightforward line for a civilised country, and civilised press, to draw. Yet, in everyday political life, where affairs between powerful public figures and relatively powerless subordinates are uncomfortably common, and favours and threats exchanged between the sheets, that line is crossed too often. Accusations of sexual violence, which stack one person’s word against another, are always hard for the victim to make. The worry is that the balance in France leans against public disclosure to such an extent that few victims of harassment by powerful figures dare speak out.

So this is one of those rare cases where a sex trial could change social norms in a good way: indeed, it may already have done so. But none of that should detract from the fact that Mr Strauss Kahn deserves a fair trial—and so do the ideas he stood for. They could change France as well.

From The Economist print edition

IMF Unveils Code of Conduct for Relationships

By Michael Heath - May 19, 2011
Bloomberg

The International Monetary Fund announced a new code of conduct governing personal relationships between managers and staff three years after a probe into a relationship involving former Managing Director Dominique Strauss-Kahn.

The guidelines were approved on May 6, William Murray, a spokesman for the Washington-based IMF, said in a statement. That was eight days before the arrest of Strauss-Kahn, 62, who is awaiting trial on charges that he sexually assaulted and attempted to rape a hotel housekeeper in New York this month.

“A close personal relationship between a supervisor and subordinate presents a potential conflict of interest and must be reported and resolved, usually by reassignment of one of the individuals to a different work unit,” Murray said in the statement.

Strauss-Kahn faced allegations of misconduct in 2008 over a relationship with a female economist at the fund. The employee, Piroska Nagy, quit in August 2008, and an investigation by the IMF board released in October that year concluded that while Strauss-Kahn had made a “serious error of judgment,” he shouldn’t be fired.

Murray said in the statement that “IMF policies on personal relationships are strong and consistent with best practice, including in the United States.”

He said “failure to report and then resolve the potential conflict of interest constitutes misconduct and is grounds for disciplinary action. Under some circumstances, such a relationship may also constitute harassment and would be investigated. If found to exist, harassment is grounds for disciplinary action up to and including dismissal.”

Strauss-Kahn resigned yesterday, saying in a statement he wanted to devote his efforts to “proving my innocence” in the New York case.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Adams Interview on Strauss-Kahn

May 17 (Bloomberg) -- Charles Adams, visiting professor at the National University of Singapore and a former International Monetary Fund official, speaks about a scandal involving International Monetary Fund chief Dominique Strauss-Kahn. Strauss-Kahn, accused of sexually assaulting and attempting to rape a hotel housekeeper, was sent to New York’s Rikers Island jail complex, a corrections official said. Adams speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

IMF Managing Director Dominique Strauss-Kahn Resigns

IMF Managing Director Dominique Strauss-Kahn Resigns

Dominique Strauss-Kahn: The downfall of DSK

France is in shock and the IMF is in turmoil: the head of the fund, expected by many to be his country’s next president, is accused of attempted rape

MARCHED off a plane; arrested; charged with seven offences, including attempted rape; taken before a New York court; sent to Rikers Island jail. The transformation within two days of Dominique Strauss-Kahn from would-be president of France and managing director of the International Monetary Fund into prisoner 1225782, a suspect awaiting trial, prompted gasps of disbelief and consternation the world over, particularly in his native land (where Mr Strauss-Kahn is often known simply by his initials).

Mr Strauss-Kahn is yet to be tried and unless he is convicted his innocence has to be presumed. In a letter of resignation to the IMF’s board on May 18th he denied “with the greatest possible firmness all the allegations that have been made against me.” But the sorry affair looks certain to wreck his political future, has thrown France’s 2012 presidential election into confusion and has left the fund reeling.

The criminal complaint filed by Manhattan’s district attorney goes into excruciating detail. It says that at around noon on May 14th the alleged victim, a maid at the posh Sofitel Hotel, near Times Square, entered Mr Strauss-Kahn’s room to clean it, where she was ambushed. According to the complaint, Mr Strauss-Kahn shut the door, preventing her from leaving. He grabbed her chest and tried to remove her tights. He forced her to engage in oral sex.

She escaped and told hotel staff, who called the police. Police discovered Mr Strauss-Kahn’s whereabouts by chance, when he rang the hotel from Kennedy airport to ask about things he’d left behind. Soon afterwards he was hauled out of the first-class section of an Air France flight to Paris. He was brought to the New York Police Department’s sex-crimes unit in East Harlem, where the maid, an immigrant from Guinea, identified him in a line-up. Handcuffed, he made the “perp walk” in front of rolling cameras and flashing bulbs.

And then to court

Mr Strauss-Kahn looked tired and rumpled when he appeared in court on May 16th. The most serious charges—two counts of “criminal sexual acts”—carry a maximum sentence of 25 years in prison. His lawyer, Benjamin Brafman, who has represented both stars, such as Michael Jackson and Sean “Diddy” Combs, and mobsters, expected him to be freed on $1m bail, but John McConnell, the assistant district attorney, argued that “he has almost no incentive to stay in this country and almost every resource to leave it,” although he had already given up his passport. France has a limited extradition agreement with the United States. Bail was denied. As The Economist went to press, Mr Strauss-Kahn was appealing against this decision.

Outside the court, Mr Brafman addressed waiting journalists. He said that it was “quite likely” that his client would “ultimately be exonerated”. Mr Strauss-Kahn is due in court again on May 20th.

Mr Strauss-Kahn’s compatriots reacted with shock and disbelief. The news was splashed across every front page and beamed non-stop on French television-news channels. Martine Aubry, the Socialist Party leader, called it a “thunderbolt”. Others spoke of a “cataclysm” and a “bombshell”. This was, after all, the man widely expected next month to declare his candidacy for the Socialists’ primary for the presidential election in 2012. Although he was working in Washington, no party rival had come close to Mr Strauss-Kahn’s poll numbers since the start of the year (see charts). He was by far the best-placed candidate to beat the unpopular President Nicolas Sarkozy in a second-round run-off and looked likely to top a first-round poll. He had a communications team ready in Paris to run his campaign; in Washington, talk had already turned to finding a successor at the IMF.

Forbidden from political comment by IMF rules, and therefore protected from the petty squabbles of daily French politics, “DSK” had acquired an almost mystical aura in his home country. For the Socialists, who have failed to win the presidency since François Mitterrand’s re-election in 1988, he was the saviour who would return and lead them to victory. For moderate voters let down by Mr Sarkozy’s half-hearted reforms, he was the face of a modernising left that could help France to face up to the reality of 21st-century global capitalism.

As the news sank in, shock gave way to incredulity and talk of a set-up. The charges were impossible to believe, insisted Mr Strauss-Kahn’s supporters. His wife, Anne Sinclair, a well-liked French former television presenter, declared that she did not believe “for a single second” that her husband was guilty. Michèle Sabban, a Socialist politician from the Paris region, said that she was “convinced that there is an international plot” behind the affair. Even Mr Strauss-Kahn’s detractors expressed their doubts. Henri de Raincourt, a minister from Mr Sarkozy’s party, said that “one cannot exclude thinking about a set-up”. Fully 57% of people questioned by CSA, a polling firm, on May 16th thought that Mr Strauss-Kahn was the victim of a trap.

Such thoughts may have been fuelled by a virulent recent press campaign in France against Mr Strauss-Kahn’s wealthy lifestyle, with details of his and his wife’s swanky properties in Marrakech, Paris and Washington. A photograph of him in Paris getting into a friend’s Porsche set off a heated discussion about whether it is possible to be socialist and rich.

The French, unused to the American criminal-justice system, have been particularly shaken by the sight of an unshaven, handcuffed Mr Strauss-Kahn being led away by New York’s finest. Under French law, suspects may not be shown handcuffed, nor their faces exposed. Jack Lang, a Socialist grandee and former culture minister, called such images a “lynching”. Bernard-Henri Lévy, a celebrity philosopher (this is France), lamented that Mr Strauss-Kahn was being “thrown to the dogs”.

It will be months before the facts of what occurred in the Sofitel are tested in court. In the meantime, Mr Strauss-Kahn faces two other difficulties. First, the charges have prompted various other revelations about his relationships with women, none of them flattering. Second, lengthy legal procedures will surely make a political comeback impossible in time for 2012, even if Mr Strauss-Kahn is exonerated.

On the first point, stories of Mr Strauss-Kahn’s behaviour range from tales of the enthusiastic pursuit of seduction to allegations of something much darker. It was an open secret long before his arrest that Mr Strauss-Kahn, a former finance minister and economics professor, was an inveterate womaniser. Mr Sarkozy is known to have told a private gathering some months ago that the IMF boss would not survive having his private life put under the microscope. Mr Strauss-Kahn himself told journalists at Libération, a newspaper, over a recent lunch that his electoral weaknesses in France were “money, women and being Jewish”. Consensual liaisons, however, are a long way from the alleged events of May 14th. “As much as he is human and has a weakness for women, I simply cannot imagine that he would do something so stupid,” says an ex-colleague.

Mr Strauss-Kahn’s “weakness” had caused a stir soon after his arrival at the IMF in 2007. The next year an inquiry into an affair he had with Piroska Nagy, an economist at the fund, concluded that he had shown a “serious error of judgment”. But it cleared Mr Strauss-Kahn of any abuse of authority and the fund judged that there was “no harassment”. Both parties did indeed call the affair between boss and subordinate consensual. Yet in a letter to the IMF’s executive board, Ms Nagy also said that Mr Strauss-Kahn was “a man with a problem that may make him ill-equipped to lead an institution where women work under his command”.

Much more troubling is a story involving Tristane Banon, a 31-year-old French writer. It emerged this week that Ms Banon had considered filing charges against Mr Strauss-Kahn for sexual assault in 2002 when she went to interview him for a book. Her mother, Anne Mansouret, a Socialist politician, says that, at the time, she advised her daughter against doing so because it was “delicate” and they were close to the Strauss-Kahn family. Ms Banon described the assault in detail on an obscure television show broadcast in 2007, but Mr Strauss-Kahn’s name was beeped out. Ms Banon’s lawyer, David Koubbi, said this week that she was intending to press charges against Mr Strauss-Kahn.

Parts of the French media are now deploring their own failure to pursue Ms Banon’s allegation—and other tales about politicians. Convention says that the public interest stops at the bedroom door (see Charlemagne). The French are famously indifferent to their politicians’ private lives, which are protected by strong privacy laws: affairs are tolerated, if not de rigueur, for public figures. Reporters knew, for instance, that Mitterrand secretly kept a mistress and their daughter lodged at the taxpayer’s expense, but for years published nothing. Under the same code, Mr Strauss-Kahn’s womanising was only obliquely referred to by a comedian here or a blogger there, and never followed up. Now such self-censorship is being revisited. “The protection of private life should not be a pretext for hiding entire sides to the personality of politicians who are candidates to lead the country,” wrote Pierre Haski, co-founder of Rue89, a popular news website.

Wanted: un(e) candidat(e)

How long and how deeply France will search its soul, no one knows. What is certain is that next year it must choose a president. The Socialist Party has been knocked sideways by the arrest of its front-runner. Manuel Valls, a fellow Socialist presidential aspirant, said he had tears in his eyes at the sight of Mr Strauss-Kahn in the dock. As the party staggers back to its feet, all candidates for its primary to elect a nominee need to declare by July 13th, ahead of a vote in the autumn.

Mr Strauss-Kahn and Ms Aubry had an informal pact not to run against each other. Ms Aubry, who was the architect of France’s 35-hour working week and sits squarely on the left of the party, has at times looked relieved that this would excuse her from a difficult contest. But with her supporters pressing her to stand, it will now be hard for her not to do so. Her rivals would include Ségolène Royal, the party’s defeated candidate in 2007. But the strongest is François Hollande, Ms Royal’s former partner, who has quietly been gaining ground. A poll this week suggests that Mr Hollande is the most popular replacement for Mr Strauss-Kahn among Socialist voters, drawing 49% support, against 23% for Ms Aubry and 10% for Ms Royal. Laurent Fabius, an ex-prime minister and party grandee, might also try his chances.

A former party leader with a reputation for consensus-seeking, Mr Hollande lacks magnetism. Next to the hyperactive, mercurial Mr Sarkozy, however, his bid for the title of “normal president” could carry a certain appeal. He has been studiously cultivating an image as a man of the people—though he, like Ms Aubry, Ms Royal and Mr Fabius, was educated at the Ecole Nationale d’Administration, France’s elite postgraduate civil-service college—by riding about on a scooter and spending time in deep rural France. In a country hostile to flashy displays of wealth, he once declared, “I don’t like rich people.”

The effective disqualification of Mr Strauss-Kahn does not make a Socialist victory in 2012 impossible. But it does make the re-election of Mr Sarkozy look more likely than it did a week ago, and the president’s team has been under strict orders not to appear triumphant. Much depends on which candidates line up in the first round. If the Socialists now tack left, this could open a space in the centre for an alternative candidate, such as Jean-Louis Borloo, a former environment minister who has quit Mr Sarkozy’s party. The arrest of Mr Strauss-Kahn could also strengthen Marine Le Pen, the leader of the far-right National Front. Polls already suggested that she might make it into the second-round run-off, just as her father, Jean-Marie, did in 2002. In transforming his once-untouchable fringe movement into a serious party, she has made a potent appeal to voters fed up with the antics of the political class. Mr Strauss-Kahn’s arrest feeds neatly into Ms Le Pen’s narrative of a corrupt elite ignoring the concerns of ordinary voters.

So much for the job Mr Strauss-Kahn might have had. What of the one he used to have? John Lipsky, the IMF’s second-in-command, has taken temporary charge. The IMF’s day-to-day business, negotiating rescue packages with troubled governments, is led by teams of technocrats and will continue. On May 16th the IMF announced the disbursal of €1.6 billion ($2.2 billion) to Ireland as part of the rescue package agreed on in December.

Nevertheless, the fund is in a pickle. It is embarrassed by Mr Strauss-Kahn’s arrest and because its handling of his affair with Ms Nagy has been called into question. A March 2008 report commissioned by its Internal Evaluation Office (IEO) concluded that the fund lacked “clear and protected arrangements for reporting possible misconduct” by its boss and “clear disciplinary arrangements” should such misconduct occur. The fund also finds itself without a man who, whatever his personal failings, has been a highly capable managing director.

As a political heavyweight, Mr Strauss-Kahn was perfectly suited to negotiating with European policymakers over the Greek debt crisis. The Greeks trusted him. He is said to be one of the few non-German policymakers to have had influence over Angela Merkel, Germany’s chancellor. Such qualities will be hard to replace—and may be especially important now that the fund’s biggest clients are all European countries. The €51 billion it has agreed to lend Ireland and Greece exceeds the combined size of its 20 programmes with non-euro-area countries. And on May 17th it agreed to supply a third of the €78 billion rescue package for Portugal (see article).

Washington wishes

Furthermore, Mr Strauss-Kahn’s departure has thrown the fund’s succession planning into disarray. He was expected to leave anyway to run for the French presidency; now the choice of a replacement is more urgent and more complicated. Even before he resigned, the fund’s board was being pressed to appoint a non-European for the first time. Governments in emerging economies have long argued for this. On May 17th a spokeswoman for the Chinese foreign ministry said China wanted the choice of leading officials to be based on “fairness, transparency and merit”—code for a break with the convention. A senior Brazilian official has said his country favours an emerging-market candidate. So has South Africa’s foreign minister.

Situation vacant

Those being talked about include Augustin Carstens, governor of Mexico’s central bank and a former fund official, Kemal Dervis, a Turkish ex-finance minister, and Trevor Manuel, a former South African finance minister. Montek Singh Ahluwalia, an Indian ex-head of the IEO, and Stanley Fisher, governor of the Bank of Israel and a former number two at the fund, have also been mentioned. But both are over 65 and thus too old under current rules.

The Europeans, however, are unlikely to give up the boss’s chair easily. Christine Lagarde, France’s finance minister (who would be the IMF’s first female boss), and Axel Weber, a former president of the Bundesbank, are mentioned most. Mrs Merkel has said that there are “good reasons” to replace Mr Strauss-Kahn with another European, such as the fund’s involvement in the euro-zone crisis. Not everyone agrees: when Asian or Latin American countries were supplicants of the fund, such an idea would have had short shrift.

Others think a compromise candidate, from a rich country outside the euro zone, might stand a chance. Mark Carney, head of the Canadian central bank, who won praise for guiding his economy through the economic crisis, might be such a man.

Before his fall, Mr Strauss-Kahn had done more than any other recent managing director to restore the IMF’s reputation. A few years ago the fund’s very relevance was being questioned. But his early and prescient endorsement of fiscal stimulus during the crisis was taken seriously and acted upon. He convinced the governments of both rich and emerging economies to contribute over $500 billion to the fund, tripling the size of its war-chest from its pre-crisis level. His championing of the need to insulate the poor from the effects of fiscal austerity has, many believe, led the fund to become kinder and gentler. Now it is Mr Strauss-Kahn’s reputation that needs urgent repair.

From The Economist print edition