World financial news

Russia’s central bank unexpectedly lifted its overnight deposit rate while leaving the benchmark refinancing and repo rates unchanged today as it seeks to curb inflation without hurting economic growth.

Bank Rossii lifted the fixed overnight deposit rate to 3.5 percent from 3.25 percent, effective May 31, the fourth increase since December, the Moscow-based central bank said today in an e-mailed statement. The move was forecast by nine of 20 economists in a Bloomberg survey. The refinancing rate and overnight auction-based repurchase rates were left at 8.25 percent and 5.50 percent, respectively, in line with economists’ expectations, according to two separate surveys.

Chairman Sergei Ignatiev is trying to keep inflation between 6 percent and 7 percent without stifling credit flows and undermining an economic recovery in the world’s biggest energy supplier. With the inflation rate now “in order,” the bank will be “very cautious” in raising borrowing costs to “avoid hurting economic growth,” Ignatiev said May 26.

“This decision takes into consideration continued high inflation expectations and risks to the stability of economic growth,” the central bank said. “With some excess liquidity in the banking sector, Bank Rossii’s deposit rates continue to be the key factor influencing money-market interest rates.”

Ruble Strengthens

The ruble advanced after the decision, climbing 0.1 percent to 28.0199 against the U.S. dollar after weakening as much as 0.2 percent earlier. Russia’s ruble bonds due 2016 slid for a sixth day, pushing the yield 6 basis points higher to 7.63 percent.

Policy makers left mandatory reserve ratios unchanged for a second month. Economists expected Bank Rossii to begin lifting them in the second half after increases in the first three months of this year, according to the median of 12 forecasts in a Bloomberg survey.

“It’s a signal for the market that the central bank continues to be watching inflation, and that it potentially intends to tighten policy if economic growth firms and consumers proceed with their current behavior of lower savings and higher borrowing,” Dmitry Polevoy, chief economist for Russia and Kazakhstan at ING Groep in Moscow, said by telephone.

Slowest Growing

The central bank lifted rates last month to limit an inflation rate that has held above the bank’s 2011 target since October. The annual rate in April matched an 18-month high of 9.6 percent. The decision to raise the refinancing rate to 8.25 percent from 8 percent surprised 15 of 20 economists, who expected no change.

The slowest-growing economy among the so-called BRIC nations, Russia is relying on revenue from oil to bolster its recovery, while seeking ways to reduce its reliance on energy exports. Oil at more than $100 a barrel is no longer stoking economic expansion, which slowed to 4.1 percent in the first quarter from 4.5 percent in the fourth. Growth slid further in April, to 3 payday loans guaranteed no fax.3 percent, the Economy Ministry said May 26.

The economy will expand 4.5 percent next year, compared with 9.1 percent for China and 7.8 percent for India, the International Monetary Fund forecast in April.

The pace of inflation has shown signs of steadying. Consumer-price growth in May will probably match the rate during the same month last year, when prices gained a monthly 0.5 percent, Ignatiev said May 26.

Inflation

“Inflation has leveled off at around 9.5 percent to 9.6 percent, and we do not see any deterioration to the inflation outlook,” Goldman Sachs Group economists including Clemens Grafe in Moscow wrote yesterday in an e-mailed research note. “We see inflation coming down substantially beginning in August, thanks to base effects from last summer’s weather, which drove food prices up, and coming in at around 6.8 percent at year-end.”

Investors have scaled back bets for higher interest rates. Forward-rate agreements show the likelihood of 30 basis points of interest-rate increases in the next three months at the lowest since last October, Bloomberg data show.

The cost to lock in interest payments for a year dropped 12 basis points last week, to 4.89 percent, according to interest- rate swap data compiled by Bloomberg.

Elections

Unlike their counterparts in Brazil, China and India, Russian policy makers preferred currency gains and higher reserve requirements for lenders as inflation-fighting tools to help fledgling growth. The ruble has gained 9 percent so far this year after the bank relaxed currency controls.

With parliamentary elections at the end of the year and presidential elections in early 2012, policy makers will probably step up their inflation-fighting rhetoric and revive efforts to meet this year’s price goal, according to Danske Bank’s Kurronen, who correctly forecast today’s decision, and Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London.

“It appears that inflation is stabilizing, although it’s very high, and they will definitely remain in a hiking mode,” Sanna Kurronen, a Helsinki-based economist at Danske Bank A/S, said before the release. “Their priority has been assuring growth and they have been quite passive with rate hikes.”

“Inflation expectations are high” even as the harvest poses the only “serious” risk to the bank’s forecast for price growth this year, Ignatiev said May 26

“Previously” the central bank “put a greater weight on growth, but with signs that the population is becoming increasingly sensitive to the impact of inflation on real disposable incomes, and with opinion polls showing a dip in support for the ruling elites, controlling inflation is also center stage,” Ash wrote in a note e-mailed on May 26.

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If it succeeds, the rival bid for TMX Group Inc., owner of the Toronto Stock Exchange, will make history far beyond derailing a takeover offer for TMX made by London Stock Exchange PLC in February, supported by Royal Bank of Canada and Bank of Montreal.

The nine-member Maple Group Acquisition Corp., a consortium of four Canadian banks and five pension funds, seeks to further strengthen a TMX already regarded by investors worldwide as the

Credit agency Moody’s Investors Service cut its ratings on Bahrain’s government bonds Thursday, citing damage being done by the political turmoil in the Gulf island kingdom.

The move could further jeopardize Bahrain’s status as a stable regional financial center _ a reputation that has been tarnished because of months of unrest.

Moody’s said it lowered the rating because Bahrain’s political outlook is “highly uncertain” following a crackdown on Shiite-led protests that began in February. The rating carries a negative outlook, suggesting the agency could be eyeing further downgrades in the future.

“The main driver underlying Moody’s decision to downgrade is the significant deterioration in Bahrain’s political environment. … Political tensions in the country remain high, and there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term,” the agency said.

At least 30 people have been killed since protests broke out in February by Bahrain’s majority Shiites, who have long complained of discrimination and are pressing for greater rights. Hundreds of demonstrators have been detained in a government crackdown that began in March and has been criticized by human rights groups.

Bahrain’s government, headed by a long-ruling Sunni dynasty, is eager to repair the country’s image and enticed foreign investors and tourists to return. It has announced that a period of martial law-style rule imposed in March will end on June 1, two weeks earlier than planned.

Damage has already been done. Bahrain’s tourism industry, a key part of the economy, was hit hard when the kingdom called off Formula 1’s season-opening Bahrain Grand Prix auto race because of the protests in February. The country is still hoping to host the event later this year.

In making its one-notch downgrade to “Baa1″ grade, Moody’s said the unrest has likely hurt economic growth significantly, particularly in areas such as tourism, trade and financial services. It also cited concerns about the strength of the country’s banking sector and said Bahrain’s oil revenue-backed budget needs higher crude prices to break even.

The bonds remain investment grade.

Haissam Arabi, chief executive and fund manager at Gulfmena Investments in Dubai, said the downgrade comes as no surprise.

“Bond prices may have already priced (in) that expectation earlier,” he said. “The setback is (a) higher cost of borrowing for Bahrain in the future.”

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Purchases of new houses probably held close to a record low in April, showing the real-estate market remains a weak link in the U.S. expansion, economists said before a report today.

New homes sold at a 300,000 annual pace last month, the same as in March, according to the median forecast of 75 economists surveyed by Bloomberg News. Purchases sank to a 270,000 pace in February, the weakest in 48 years of data.

The prospect that foreclosures will keep driving down property values means that buyers may continue to shun new houses in favor of previously owned dwellings, hurting builders like D.R. Horton Inc. Unemployment at 9 percent, stagnant wages and credit restrictions add to the headwinds, signaling a housing recovery will take years to unfold.

“Until that overhang of existing homes works its way down, new-home sales will remain depressed and construction as well,” said Steve Blitz, a senior economist at ITG Investment Research Inc. in New York.

The Commerce Department’s report is due at 10 a.m. in Washington. Estimates in the Bloomberg survey ranged from 280,000 to 320,000.

Stocks of homebuilders have underperformed the broader market. The Standard & Poor’s Supercomposite Homebuilders Index has fallen 1.4 percent so far this year, compared with a 4.7 percent gain for the S&P 500 Index. (SPX)

Douglas Yearley Jr., chief executive officer at Toll Brothers Inc. (TOL), the largest U.S. luxury-home builder, last week said the spring home-selling season has been “disappointing” and that “people are still scared.”

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Security forces and opposition tribal fighters battled with automatic weapons, mortars and tanks in the Yemeni capital on Monday, blasting buildings and setting government offices on fire in violence that hiked fears of an armed confrontation after the collapse of efforts to negotiate a peaceful exit for President Ali Abdullah Saleh.

The street fighting, in which six people were killed and nearly 40 wounded, was the heaviest clash between the pro- and anti-Saleh camps since hundreds of thousands of Yemenis began taking to the streets three months ago in protests demanding the ouster of the president after 32 years in power.

It erupted amid increased tensions after Saleh refused at the last minute on Sunday to sign a U.S.-backed agreement, mediated by Yemen’s powerful Gulf Arab neighbors, under which he would step down in 30 days. Saleh had promised to sign the deal, but instead, his regime sent mobs of armed supporters into the street Sunday, protesting at embassies, in an orchestrated campaign to demand he stay in power.

The United States expressed growing frustration with Saleh, an ally that Washington has relied on to fight al-Qaida’s branch in the impoverished nation at the southern tip of the Arabian Peninsula. Fearing the turmoil is disrupting the campaign against the terror group, Washington has been trying to manage a transition that will keep some measure of stability.

Secretary of State Hillary Rodham Clinton said the Obama administration is “deeply disappointed” by Saleh’s refusal to sign the accord, saying the Yemeni leader “is turning his back on his commitments and disregarding the legitimate aspirations of the Yemeni people.”

So far both sides in Yemen’s turmoil have tried to avoid a direct armed confrontation. The protesters are backed by heavily armed tribes and by army units that defected to the opposition, while Saleh has been able to cling to power by retaining the loyalty of the country’s best trained and equipped military and security forces, which are headed by his relatives. His security forces have cracked down on protesters _ killing at least 150 over the past three months _ but the two sides’ armed factions have generally eyed each other warily around the capital without major clashes.

But Monday’s fighting underlined how explosive the tensions could be.

The violence erupted outside the Sanaa home of Sheik Sadeq al-Ahmar, leader of Yemen’s largest and most powerful tribe, the Hashid. Saleh himself belongs the tribe, but al-Ahmar announced in March that the Hashid were joining the popular uprising against the president. Fighting raged for more than six hours, until the U.S. ambassador mediated a cease-fire, according to a ruling party official.

Witnesses said security forces had been setting up roadblocks between the walled compound and the nearby Interior Ministry, and that tribesmen saw it as a provocation. Abdel-Qawi al-Qawsi, an aide to al-Ahmar, accused security forces of trying to storm the Hashid leader’s residential compound and said tribal fighters counterattacked.

The Hassaba district, where the al-Ahmar compound and a number of ministries are located, was turned into a battle zone, as tribesmen and security forces battled in the streets outside the Interior Ministry, trading fire with automatic weapons and rocket-propelled grenades. An office building of Yemeni Airlines was on fire, and smoke poured out of a building inside the Interior Ministry compound.

Tanks were seen pulling into the neighborhood and the sound of tank fire was heard. Hashid fighters outside Sanaa rushed into the capital to reinforce their comrades, one tribal official said, speaking on condition of anonymity because of the sensitivity of the situation.

Some security forces took refuge in the nearby headquarters of the state news agency Saba, and tribal fighters who seized the Industry Ministry across the street opened fire on them with mortars and automatic weapons, said Hassan al-Warith, Saba’s deputy editor-in-chief. The news agency’s staff took refuge in the basement, and one journalist was wounded by flying shrapnel.

“We have been trapped here in the basement. The top floors have been destroyed,” al-Warith said, pleading for the authorities to rescue them.

The gunfire ceased in the evening, but fighters and security forces remained in the district.

A member of al-Ahmar’s family said five tribal fighters were killed and 37 other fighters wounded. A bystander was also killed and two others wounded, according to a security official. The family member and the security official spoke on condition of anonymity because they were not authorized to speak to the press.

Yemen’s tribes are heavily armed, and their fighters virtually are militias loyal to the tribal leader. Al-Ahmar’s residence, overlooking the main road to the airport in Sanaa, is sprawling, fortified compound, surrounded by walls and barricades on nearby streets. Often, armed tribesmen are seen on rooftops nearby keeping guard.

Saleh and the opposition have traded accusations that each is leading the country into civil war.

But the beleaguered president faces increasing impatience from the United States after his last minute balking at the accord. Saleh has backed out of promises to sign the deal twice before, each time coming up with new excuses. A coalition of opposition parties signed the agreement on Saturday, and the president had promised to do the same on Sunday _ but suddenly demanded that the opposition join him in a public signing ceremony.

Amid Sunday’s turmoil, armed Saleh loyalists trapped the U.S. ambassador along with European and Arab ambassadors for hours inside the United Arab Emirates Embassy. The American ambassador was taken by car out of the mission to the presidential palace to witness while a number of top ruling party officials signed the accord _ but Saleh refused.

“We’ve seen all sides agree on multiple occasions to sign their initiative. And now it appears that President Saleh is the only party that refuses to match his actions to these words,” State Department spokesman Mark Toner told reporters in Washington.

“We believe that President Saleh still has the ability and the opportunity to sign this initiative and break this deadlock,” Toner said. “But, you know, it’s clearly now in President Saleh’s hands.”

In a sign of the tensions, a protest activist said an anti-Saleh army unit seized two supporters of the president who were allegedly storing weapons _ apparently for use in attacking protesters _ near Taghyeer, or Change, Square, the roundabout in the capital that has been the epicenter of the protest movement, with thousands camping there for weeks.

A coalition of Yemeni opposition parties said the protesters would remain peaceful and accused the regime of “assaults that aim to drag the country into civil war.”

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It’s almost as though Americans sense what’s coming in the years ahead.

The country is recovering from the recession, but a feeling of vulnerability remains.

Even among the affluent surveyed this month by MFS Investment Management, there is unease. The survey found 44 percent had reduced their discretionary spending over the past 12 months. In addition, 59 percent said they are “more concerned than ever about being able to retire,” and 49 percent said they have lowered their expectations for how they will live when they retire.

Part of this fragile attitude, of course, may be due to still-high unemployment and gasoline prices that are punishing people at the pump. Empty homes, unmanageable household debts and the government’s $14.3 trillion debt load also don’t help people feel comfortable.

But maybe the apprehensiveness goes beyond that, to a sense of a future that’s dimmed too.

Researchers at the Urban Institute have calculated that the Great Recession will be with this generation for life, eroding earnings and leaving them with less to spend in their working years and later in retirement.

On average, today’s workers can expect to end up with $2,300 a year less in retirement benefits than they would have had if the financial crisis and recession hadn’t put a stranglehold on jobs and wage growth, according to research by Barbara Butrica, Richard W. Johnson and Karen E. Smith.

While people close to retirement might be feeling the most vulnerable now because they have little time to regain retirement savings and have had more difficulty than younger workers getting rehired, they are going to end up less brutalized on average than younger workers, according to the researchers.

The researchers note that over a lifetime, the recent stress of unemployment won’t have as profound effect as the anemic wage growth of the past few years. Salaries and wages generally build on previous pay. So if people are out of jobs or have pay cuts or anemic wage growth, the next year’s pay builds on a low base. So over and over again the sluggish pay of the past few years holds down future pay levels.

In addition, pensions and Social Security are based on incomes, so benefits do not build as much as they would if pay levels had not lagged. Even 401(k) sums can be restrained.

When employers provide profit-sharing money or put matching money into their employees’ 401(k) accounts, those matches are often based on a percentage of pay.

The Urban Institute researchers say “the recession will reduce average annual incomes at age 70 by 4.3 percent” for people who had been working-age in 2008. That’s the $2,300 a person.

Because most people kept their jobs during the recession, the researchers say, unemployment will have “little effect on future aggregate retirement incomes” compared with the residual effect of low pay over many years. Between 2009 and 2010, the Urban Institute found, real weekly earnings declined 3.3 percent for men age 50 or older who were employed full time and 1.2 percent for their female counterparts.

People closest to retirement are not expected to be hit as hard as younger workers because they have fewer years of work in which pay was anemic. But they have problems of their own, according to another Urban Institute study by Johnson and Janice S. Park.

Older workers who had not built enough retirement savings had planned to work longer before retiring so they could amass more savings before dipping into nest eggs.

The researchers found that the recession ruined those plans for many people age 50 or older. The unemployment rate for men ages 50 to 61 increased to 8.3 percent in 2010.

And older workers have had significantly more trouble than younger workers getting jobs after being laid off. The researchers found that among jobless workers, about 53.5 percent of the people ages 50 to 61 were unemployed more than 26 weeks in 2010, compared with 45.6 percent of those ages 25 to 49. Among those 62 and older, 53.1 percent had been looking for a new job for more than 26 weeks. Unemployment spells exceeded one year for 30 percent of those over 50.

Researchers have found that while older workers tend to keep their jobs during downturns in the economy, age discrimination works against those who do need to find new jobs. The pay in new jobs tends to be far lower.

According to the researchers, men ages 50 to 61 who became rehired from 1996 to 2007 settled for hourly pay 20 percent below the median. Median wages fell only 4 percent for men ages 34 to 49.

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Why buy a bookstore?

John Malone, who made a fortune in cable television, is offering $1 billion for Barnes & Noble _ trying to jump into a business so sick that its No. 2 competitor, Borders Group Inc., is on life support.

The difference is that Malone and his Liberty Media conglomerate aren’t betting on the books-and-mortar past, analysts say, but the promise of the electronic future.

Barnes & Noble’s Nook electronic reader now accounts for 28 percent of the market for those devices. And the Nook has the potential to go beyond books to deliver all types of digital products, including music, magazines, TV shows and movies. That makes it a competitor not just to Amazon.com’s Kindle but also to Apple’s iPad.

“This deal is all about the device,” said Sherif Mityas, a partner in the retail practice of global management consulting firm A.T. Kearney. “As Apple proved, you need to have the content and the device. Malone has the content, and Barnes & Noble has the device. You’re not buying the stores; you’re buying the Nook.”

Malone’s empire, Liberty Media Corp., operates three publicly traded companies _ Liberty Interactive Inc., Liberty Starz Group and Liberty Capital Group _ through which it runs home-shopping network QVC and movie channel Starz. It also holds stakes in numerous other online, media and communications companies. Some believe that QVC could be used as a marketing vehicle for Barnes & Noble’s Nook.

With the backing of a media conglomerate, Barnes & Noble’s digital business would be able to compete better with Amazon, Apple and others, said Gary Balter, a retail analyst at Credit Suisse.

Barnes & Noble’s 700 stores may appear to be an albatross. But they could be transformed into places that highlight mostly digital devices and content and mimic Apple’s successful stores. Barnes & Noble has already cleared space at the front of its stores to display the Nook and push e-books.

“You don’t want the old-fashioned bookstore customer who goes in and sits and reads a book for two hours. You want people going in there who are hungry for experience,” said Richard Hastings, a consumer strategist with Global Hunter Securities.

Barnes & Noble’s shares surged almost 30 percent on Friday and passed Liberty’s bid of $17 a share in cash, closing at $18.33. The companies haven’t yet signed an agreement, and the deal is still subject to closing conditions, including one that founding Chairman Leonard Riggio keep a stake in the company and remain in a management position, Barnes & Noble said.

Barnes & Noble reiterated Friday a committee of its board is evaluating the offer.

Barnes & Noble had put itself up for sale in August in response to pressure from billionaire activist shareholder Ron Burkle, but the company didn’t find much interest.

Traditional book sellers have been facing increasing competition from online retailers like Amazon.com and discounters like Wal-Mart Stores Inc. And heavy readers are quickly embracing e-books.

Right now, though, Simba Information senior trade analyst Michael Norris estimates there are still at least five print book buyers for every e-book buyer cash advance to savings account.

Still, the industry thinks e-books are the future. Amazon.com said Thursday that, after less than four years of selling electronic books, it’s now selling more of them than printed books. Stores have cut shelf space devoted to printed books by 15 percent over the past year, estimated Mike Shatzkin, CEO of Idea Logical, a book consulting company. Last year, he predicted that it would take five years for stores to cut space for printed books by 50 percent; now, he believes it will only take about three.

The shift has already rocked Borders Group, which filed for bankruptcy court protection in February. It has been closing stores and is reportedly in talks to sell more than half of those that remain.

While Barnes & Noble has done better than Borders, its quarterly results have been weighed down by large investments in its online and e-reader businesses. Barnes & Noble reported growth in its online store in the most recent quarter, and said both that and its bricks-and-mortar stores were helped by sales of its Nook e-reader.

Last month, Barnes & Noble added an app store and an e-mail program to its Nook Color e-reader. That brings the $249 device closer to working like a tablet computer like the iPad, which sells for twice as much. Barnes & Noble is expected to announce a new version of the Nook next week, though it hasn’t said what features it will include.

Clearly, there are concerns. Norris says he would like assurance from Liberty that it’s not going to look at the Nook in “a vacuum” and get rid of the stores.

“Its success has been (tied) with the physical bookstores because people are not giving up physical books,” he added.

No one know knows exactly what Malone, 70, has in mind. He has typically been a pure investor, like Warren Buffett or a private equity firm, who buys companies when they are cheap and on the brink of financial ruin.

Malone doesn’t have a history of putting together grand technological schemes, said Wedge Partners analyst Martin Pyykkonen. He called Malone a “financial engineer” who demands excellent returns, keeps management in place and reaps rewards when the business returns to health.

It could be there is no grand plan with Barnes & Noble, either, besides closing unprofitable stores and otherwise improving profitability. One thing that is similar with other Malone investments is Barnes & Noble’s big share of its market, which could get bigger if Borders Group closes or sells more stores.

“Malone’s style is to very quietly, very patiently look and watch, and when things get to his threshold level, then make his move,” Pyykkonen said. “But he makes his move in a generally quiet, friendly, cooperative way, because he actually wants management to stay in there and keep running the company.”

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Dominique Strauss-Kahn’s bail hearing Friday could spell the end of his leadership of the International Monetary Fund.

If a New York judge denies bail for Strauss-Kahn or imposes highly restrictive conditions on his freedom, the IMF’s executive board would expect him to resign, two senior IMF officials said Wednesday. If he didn’t, the board could remove him on the grounds that he couldn’t lead the IMF from a jail cell or far from its Washington headquarters.

The two officials spoke on condition of anonymity because of the highly sensitive situation. Strauss-Kahn is jailed in New York City on charges of sexually assaulting a hotel maid.

No action is foreseen before Friday’s court hearing. Attempts to reach Strauss-Kahn’s lawyers were unsuccessful. The Frenchman hasn’t said whether he’ll yield to rising international pressure for his resignation.

One of the IMF officials said the fund had yet to speak with its managing director since his weekend arrest. The IMF has appointed an interim chief, but there are no procedures for suspending or placing its leader on extended leave.

As a result, any prolonged legal troubles would mean that Strauss-Kahn would have to resign to avoid being ousted by the 24-member board. The board can meet whenever it wants to decide on Strauss-Kahn’s future, the official said.

The other IMF official said the board will insist on a meeting Friday after the court hearing. The board can remove Strauss-Kahn without cause, the official noted.

While Strauss-Kahn remains confined to a Rikers Island jail cell, the dividing lines are sharpening in a dispute over whether someone from a rich or an emerging economy should lead the IMF after his exit.

Europe is aggressively staking its traditional claim to the top position. But fast-growing nations such as China, Brazil and South Africa are trying to break Europe’s grip on an organization empowered to direct billions of dollars to stabilize the global economy.

Europeans have led the IMF since its inception after World War II. Americans have occupied both the No. 2 position at the IMF and the top post at its sister institution, the World Bank. The World Bank funds projects in developing countries.

Europe has “an abundance of highly qualified candidates” to lead the IMF, German government spokesman Christoph Steegmans declared Wednesday. He also noted the relevance of having a European at the helm, to deal with the debt problems that have racked the eurozone.

Steegmans didn’t name any potential candidates or say whether Germany might propose one. But German Chancellor Angela Merkel, along with the finance ministers of Sweden and the Netherlands, have pressed Europe’s case for the IMF leadership.

Still, developing nations see Europe’s stranglehold on the position as increasingly out of touch with the world economy. China’s is now the world’s second-largest economy. India’s and Brazil’s have cracked the top 10. Many emerging economies are sitting on stockpiles of cash and have become forces of financial stability, while rich countries have become weighed down by debt.

“We must establish meritocracy, so that the person leading the IMF is selected for their merits and not for being European,” Brazilian Finance Minister Guido Mantega said, calling for a “new criteria” for leadership. “You can have a competent European … but you can have a representative from an emerging nation who is competent as well.”

China suggested it was time to shake things up at the IMF, with Foreign Ministry spokeswoman Jiang Yu saying the leadership “should be based on fairness, transparency and merit.”

And South African Finance Minister Pravin Gordhan spoke in stronger terms. He said the new director should come from an emerging economy, to “bring a new perspective that will ensure that the interests of all countries, both developed and developing, are fully reflected in the operations and policies of the IMF.”

It remains unclear which way the United States is leaning. Treasury Secretary Timothy Geithner said Tuesday that Strauss-Kahn is “obviously not in a position” to run the IMF, escalating the pressure on the 62-year-old economist.

The United States has a major say in determining who will head the fund, in part because it holds the largest number of votes. The prevailing view among analysts and former Treasury officials appears to be that Washington would back a strong European candidate who could be approved in a smooth process.

“It’s kind of not our fight,” said Phillip Swagel, a Treasury official in the George W. Bush administration. “There are very good reasons to have a forceful, prominent European head of IMF.”

One such candidate would be French Finance Minister Christine Lagarde.

Other Europeans touted as possibilities are Germany’s former central bank chief Axel Weber; the head of Europe’s bailout fund, Klaus Regling; and Peer Steinbrueck, a former German finance minister.

Candidates from elsewhere include Turkey’s former finance minister, Kemal Dervis; Singapore’s finance chief Tharman Shanmugaratnam; and Indian economist Montek Singh Ahluwalia.

More possibilities include Trevor Manuel, South Africa’s former finance minister; Mexico’s central bank governor, Agustin Carstens; and former Brazilian central bank president Arminio Fraga.

Strauss-Kahn was removed from a plane Saturday at John F. Kennedy International Airport, moments before he was to fly to Paris. He was supposed to meet Sunday with German Chancellor Angela Merkel to discuss aid to debt-laden Greece and then join EU finance ministers in Brussels on Monday and Tuesday.

Strauss-Kahn’s flight from Washington was paid for by the IMF, with an approved stopover in New York, the official said. That meant his New York visit was in a private capacity. He was not accompanied by security personnel or any IMF aides.

The official said Strauss-Kahn’s security team was supposed to meet him at Paris’ Charles de Gaulle airport. His assistants were already in Europe.

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Finance ministers sought to bolster confidence in the International Monetary Fund as they began discussing a successor to Managing Director Dominique Strauss- Kahn, who was jailed on charges including attempted rape.

Canadian Finance Minister Jim Flaherty said he is “absolutely confident” the IMF will “carry on with its business” under Acting Managing Director John Lipsky. French Finance Minister Christine Lagarde said the 187-member lender to governments is “solid.” Kaoru Yosano, Japan’s economy minister, said the flap won’t compromise the fund’s mission.

Germany and Belgium said they prefer another European as head of the agency, responding to a push by developing countries to throw open its leadership. There are “good reasons” for Europe to keep the post amid the euro area’s debt crisis, German Chancellor Angela Merkel told reporters in Berlin. A European has always run the lender, which has helped bail out Portugal, Greece and Ireland, while an American heads the World Bank.

The IMF’s executive board, meeting in Washington, agreed to seek contact with Strauss-Kahn about his intentions, according to an official briefed on the deliberations. Strauss-Kahn, a 62- year-old former French finance minister accused of sexually assaulting a hotel housekeeper, was sent to New York’s Riker’s Island prison yesterday after being denied bail.

Emerging Markets

The choice of the next IMF leader “should be absolutely merit-based,” said former Bank of Canada Governor David Dodge. “I would argue that, all other things being equal, it would be very nice to have someone who has at least deep roots in, if not necessarily a current representative of, one of the major emerging-market countries.”

The process to select Strauss-Kahn’s replacement should be “fair, transparent” and aimed at finding the best person for the job, China’s Foreign Ministry spokeswoman Jiang Yu said at a regular briefing in Beijing today.

Strauss-Kahn would have been the overwhelming favorite if he had chosen to enter next year’s French presidential race, public opinion polls say. He was taken off an Air France flight about to leave John F. Kennedy International Airport for Paris on May 14. He will plead not guilty, his lawyer Benjamin Brafman has said. He faces as long as 25 years in prison if convicted of the most serious charges pay day loans.

IMF spokeswoman Caroline Atkinson told reporters yesterday that the fund is “fully operational” and working on matters for its member countries around the world. She said IMF business is continuing “uninterrupted.”

Potential Successor

Still, much of the talk in Washington and in European capitals focused on who would replace Strauss-Kahn if he leaves office before the scheduled end of his term more than 17 months from now.

Belgian Finance Minister Didier Reynders said Europe and the U.S. should maintain the arrangement, dating to the end of World War II, of dividing the IMF and World Bank leadership between them.

“It would be preferable if we continued to hold these posts in the future,” Reynders told reporters in Brussels. Robert Zoellick, a former U.S. deputy secretary of state, is the World Bank’s president.

Policy makers such as Brazilian Finance Minister Guido Mantega say the choice should be based on merit, and that candidates from developing economies should also be considered for the posts.

Potential candidates to succeed Strauss-Kahn include Singapore Finance Minister Tharman Shanmugaratnam, former South African Finance Minister Trevor Manuel and Kemal Dervis, who was Turkey’s minister of economic affairs at a time his country got IMF aid, according to Eswar Prasad, a senior fellow at the Brookings Institution in Washington and a former IMF official.

Brown Support

Former U.K. Prime Minister Gordon Brown has told friends that he has global support for his candidacy for the top job at the IMF that could prevail over Prime Minister David Cameron’s opposition, the Financial Times reported, citing unidentified colleagues.

France’s Lagarde, speaking to reporters in Brussels yesterday after a meeting of European Union finance ministers, said the events surrounding Strauss-Kahn’s arrest were “painful,” and she declined to comment on speculation that she may be a candidate to succeed him.

“To see Dominique Strauss-Kahn in handcuffs on television this morning has deeply saddened me,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels. “It was deeply sad and traumatic.”

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International Monetary Fund Managing Director Dominique Strauss-Kahn’s arrest is an embarrassment that won’t derail attempts to bolster aid for Greece as officials head to Brussels for crisis talks, economists said.

Strauss-Kahn, 62, had been scheduled to meet German Chancellor Angela Merkel today and then attend discussions with euro-area finance ministers in Brussels tomorrow as officials consider further support to stave off a Greek default. He has been charged with attempted rape and a criminal sex act on a woman in a New York hotel. Strauss-Kahn denies the charges.

“Its incredibly embarrassing, and not the IMF’s or Dominique Strauss-Kahn’s finest hour, but I don’t think this ought to undermine what’s going on,” Peter Westaway, chief European economist at Nomura International Plc in London, said in an interview. “I don’t think it will affect negotiations on Greece. In the end, issues for Greece and policy making are more important than that and they’ll carry on.”

European officials are working to prevent the region’s first default as Greek ministers plead for terms to be relaxed on 110 billion-euros ($155 billion) of aid from the IMF and European Union in a debt crisis that has also engulfed Ireland and Portugal. Economists said that talks to reconsider Greece’s aid terms are taking place between institutions rather than individuals and so can endure such turmoil.

“It’s not a fatal blow to the Greek situation,” James Nixon, chief European economist at Societe Generale in London, said in an interview. “Any of these negotiations are larger than a single person.”

EU-Led Aid

The Greek government said in a statement that it “operates institutionally and continues without interruption implementing the program for the country to exit the crisis.” The EU has led efforts to aid Greece and has contributed two-thirds of the funds committed to the rescue of the nation’s economy.

The IMF will be represented at Monday’s euro-area finance ministers’ meeting by Deputy Managing Director Nemat Shafik, who oversees the organization’s work in a number of EU nations, IMF spokesman Bill Murray said in an e-mailed statement today.

Seventeen nations use the euro.

Greece is seeking an extension to the loans and has argued Europe should issue common bonds to stem the region’s fiscal crisis. Eighty-five percent of those surveyed last week in a Bloomberg Global Poll said the country won’t honor its debts, with majorities predicting the same fate for Portugal and Ireland.

Greek Position

Greek Prime Minister George Papandreou on May 13 opposed a debt restructuring, appealing to claims made by the IMF that the country’s debt “is sustainable.” Germany opposes a common-bond issue, saying such a move would weaken member states’ incentives to cut their deficits.

It’s too early to say whether Greece needs more help with its debt crisis, though “extra measures” may be needed if the country can’t return to financial markets next year as planned under the European-led aid program agreed last year, German Finance Minister Wolfgang Schaeuble said in an interview with ARD television in Berlin.

It’s “disappointing” that Strauss-Kahn’s meeting with Merkel is cancelled because the IMF had been pressing for stronger measures that may involve the possibility of a restructuring of Greek debt, Societe General’s Nixon said.

“The meeting could have been quite important in injecting some realism in the discussions and presumably now that voice won’t be heard,” he said. “The IMF have been pushing for a more realistic position, and presumably the gravity of that voice has been lost.”

‘Leadership Vacuum’

Eswar Prasad, a senior fellow at the Brookings Institution in Washington, said that Strauss-Kahn’s arrest may still unsettle investors at a time of tension because of the region’s debt crisis.

“Just the perception that DSK’s departure could create a leadership vacuum at the IMF and shift the institution’s attitude towards Greece and other weak European countries may be enough to roil markets and raise uncertainty at a vulnerable time for the euro zone,” he said.

Hotel Incident

The charges against Strauss-Kahn stem from an incident that allegedly occurred yesterday against a 32-year-old female at a Sofitel hotel in midtown Manhattan, the New York Police Department said in an e-mailed statement early today. He will appear in a Manhattan court later today, police Deputy Commissioner Paul Browne told BBC television in an interview.

Strauss-Kahn played a key role in efforts to stem the European debt crisis which started last year in Greece, with a pledge to contribute about a third of future bailouts in the region by the EU. His term at the IMF is scheduled to expire next year. Speculation in France had mounted that he would leave early to stand for president.

The charges against him won’t affect moves to extend aid to Portugal, which is implementing austerity measures to qualify for an international aid package of as much as 78 billion euros from the EU and IMF, said Gilles Moec, European economist at Deutsche Bank AG.

“The progress can continue and there should not be a change in its dynamics,” he said in an interview.

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