Sex charges threaten attempts to stabilise euro

Could the health, even the existence, of Europe's single currency be at threat because of what happened between a man and a woman in a New York hotel last weekend?

A hypothesis that just a few days ago would have been mocked as byzantine is being weighed carefully in Europe's money markets.

Attempts to resolve Europe's debt crisis have been badly complicated by the arrest of International Monetary Fund (IMF) chief Dominique Strauss-Kahn, who has been charged with sexually assaulting a maid in a Manhattan hotel.

Over the last 18 months, Strauss-Kahn has been the driving force behind a package, jointly pledged by the IMF and the European Union (EU), to bail out Greece.

He not only lobbied for support on the IMF board for this risky strategy, sometimes braving criticism from powerful voices.

He also coaxed the EU to sign up, smoothing over German demands to tighten the austerity screw on Greece in exchange for the cash.

The bailout is now at a turning point, and its key architect is absent. Press reports say donors are divided over which path to take and markets fear a contagion of uncertainty could infect other sickly euro economies.

"This comes at a bad time for the eurozone," a diplomat in Brussels said.

"DSK's absence leaves a void that is hard to fill," the French business daily les Echos said, while the Financial Times headlined: "Greek talks in disarray."

Before his arrest, Strauss-Kahn had been due to meet German Chancellor Angela Merkel and then head to Brussels for a two-day meeting with finance ministers of the eurozone.

The Brussels talks went ahead with a lieutenant to Strauss-Kahn, deputy managing director Nemat Shafik. One of the meeting's first acts was to formally seal a €78 billion ($141 billion) EU-IMF bailout for Portugal. In Washington, the IMF said it had approved a new slice of €1.58 billion in aid for Ireland.

The more urgent problem, though, is Greece, whose finances are in a deep mess despite the €110 billion joint bailout a year ago.

Rescuers have to figure whether Greece deserves the next tranche of aid or whether it needs to do more - or whether it might be simpler for it to restructure its debt, for instance by extending its payment timetable.

The first option would be unpopular with eurozone voters, especially in Germany, who were already deeply reluctant to stump up for the first bailout.

The second would be hated by investors who have bought Greek bonds, and could have a ripple effect for debt raised by other spendthrift euro countries, notably Portugal, Ireland, Spain and even Italy.

Without the conciliatory presence of Strauss-Kahn, the IMF and Germany could ratchet up pressure on Athens to cut state spending and sell off state assets, say some analysts.

IMF and EU experts are currently in the Greek capital, poring over the Government's books.

The next slice of aid, worth €12 billion, will help meet immediate needs. Without it, Greece would default on its loans, a massive blow to the eurozone's credibility.

"DSK's absence could add further delay to decision-making within Europe, which is totally divided," the French website Mediapart said.

"This leads to the risk of being exposed once more to the immense pressure of the financial market, the risk of causing an implosion of the Greek economy and perhaps a breakup of the euro zone."

A suave orator, Strauss-Kahn, as French Finance Minister in the late 1990s, helped craft the plan that transformed the euro from a virtual currency into a world-class money now shared by 17 economies.

The fund has allocated nearly €74 billion - nearly a third of its current lending - to Europe's three lame ducks: Greece (€30 billion), Ireland (€17.5 billion) and Portugal (€26 billion). It has dished out €13.5 billion to Hungary, €4.4 billion to Latvia and €15.6 billion to Romania, as well as revolving credit of US$20.6 billion to Poland.

The United States and Canada have at times been concerned about the scale of this commitment, while large emerging countries have criticised the IMF as indulgent, according to diplomats.