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Dominique Strauss-Kahn, the French economist who heads the International Monetary Fund, is under investigation for allegedly abusing his position by engaging in a sexual relationship with a senior official.
The inquiry, confirmed by an IMF spokesman, threatens to destabilise the organisation at a time when it is trying to focus its efforts on helping countries to withstand the global financial crisis.
French officials and politicians reacted angrily to the Strauss-Kahn story, which appeared in the Wall Street Journal, accusing the US Administration of "playing dirty" by "at the very least" pointing reporters to the IMF internal inquiry.
According to the newspaper, Strauss-Kahn had an affair with Piroska Nagy, a senior official in the fund's Africa department who was brought up in Hungary. The affair reportedly ended after her husband, Mario Blejer, a prominent economist and former President of Argentina's central bank, discovered incriminating emails. Nagy then left the IMF and part of the inquiry centres on the possibility that she may have received an excessive payout for a person of her position.
But the handling of the investigation has drawn criticism from the IMF because not all board members were informed about it before the newspaper made its inquiries.
There was also anger in Europe.
"It's just very odd that it comes just at the moment when people are talking about the IMF and its head taking a lead role in creating a new global financial order which will not necessarily be to the advantage of wealthy, right-wing Americans," one French economist and Government adviser said.
Strauss-Kahn, a former Finance Minister, is a leading member of the French Socialist party and is known for his moderate left-wing views.
This is the second time that a major international financial institution has been hit by scandal in recent years.
In June 2007 World Bank President Paul Wolfowitz, one of President Bush's closest allies, stepped down following a scandal over a promotion and pay rise for his long-term companion who worked at the institution.
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