Christine Lagarde warns US over IMF reform failings

The US risks losing influence at the International Monetary Fund after long-delayed reforms were left out of a 2015 budget deal in Congress.

Christine Lagarde, the fund's managing director, said she had "expressed her disappointment" to the US. The IMF will now explore "alternative options" after Congress ignored a package of governance changes first agreed in 2010.

Congressional refusal to pass the reforms has angered emerging countries and spurred the creation of new institutions, such as a "Brics bank", as developing countries seek a role in global governance to reflect their growing economic power.

The G20 group of leading economies issued an ultimatum in April, urging the US to pass the reforms by the end of 2014. The latest refusal by Congress means the US could be cut out of future reforms altogether.

"Adoption of the reforms remains critical to strengthen the fund's credibility, legitimacy, and effectiveness, and to ensure it has sufficient permanent resources to meet its members' needs," Ms Lagarde said.

"As requested by our membership, we will now proceed to discuss alternative options for advancing quota and governance reforms . . . starting with an executive board meeting in January 2015."

The proposed changes would double the IMF's quota - in effect, its equity capital - to $720bn; shift six percentage points of total quota to emerging markets; and move two of the 24 IMF directorships from European to developing countries.

The new quota would come from converting existing loans to the IMF by the US and other countries. But Republicans in Congress have repeatedly rejected the changes, saying the US should not increase its exposure to the fund.

Ms Lagarde's problem is that the US has veto power over governance changes at the IMF so it is extremely hard to pass reform without a vote in Congress.

Ted Truman, senior fellow at the Peterson Institute for International Economics in Washington, has proposed a "Plan B" but it would mean US Treasury secretary Jack Lew deliberately putting the US veto at risk.

Under Mr Truman's plan, the IMF would abandon the 2010 agreement, and negotiate a new version with a lower threshold for ratification. Mr Lew could agree to that as US governor at the IMF.

With the lower threshold, a reform could come into effect without congressional approval but in that case the US would suffer a permanent loss of IMF voting power.

Trying to force congressional action in such a way is a high risk, and unlikely, strategy for the administration. Mr Truman notes that Mr Lew might have the power to do it but he would probably be forced to resign directly afterwards.

The anger of emerging economies will therefore most likely express itself in rapid development of their alternative institutions, threatening the role of the IMF as linchpin of the international financial system.

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