Friday the 13th of January dawned grim at the International Monetary Fund in Washington, D.C. The news blowing in from across the Atlantic, as often happens these days, brought the smell of disaster like an approaching hurricane. The credit scores of France and eight other European countries had just been knocked down. Negotiations to bail out an all-but-bankrupt Greece had stalled, or died—it wasn’t clear which.
At a meeting that morning, the fund’s board heard that European countries were not doing the maximum necessary to stave off a financial implosion that could suck the life out of America’s anemic recovery and bring Western economies again to the brink of recession, or worse.
Christine Lagarde, the former French finance minister who has been at the top of the fund since last summer, sat at the head of the oblong ring of seats in a conference room lined with portraits of past IMF managing directors, all of them men. (Her immediate predecessor, Dominique Strauss-Kahn, resigned in the midst of a sex scandal last May; his painting has yet to be put up.) Lagarde listened calmly as the 24 representatives of 187 different countries took in the bleak news, delivered by one of her key aides. Good, she thought. The staff, which has its antennae everywhere, told what the whole truth is. From her point of view, that made it a positive meeting. “Telling truth is our job,” she said. There is still time to prevent a second collapse, she believes. But not much time.
Lagarde’s mind was already turning to the speech she will deliver in Berlin this week, warning of dire consequences if Europe, America, China, and others do not find better ways to work together to stabilize the world economic system. Nobody at the fund wants to use the phrase “global depression”; instead, they talk about a “defining moment” or a “1930s moment.” But everyone knows what they mean: massive job losses, political unrest, chaos. While Europe is the epicenter of the crisis right now, fund analysts are also looking hard at the U.S., volunteering advice on how to reduce the burden of mortgage debts on homeowners (the IMF suggests bank write-downs) and criticizing the partisan impasse in Congress that has sent repeated shocks through the world economy.
The IMF claims it can chart the way out of the crisis, but the price is high and Americans, especially, are likely to balk. Among the fund’s goals: the creation of a “global firewall” of almost a trillion dollars to protect faltering finances. That would nearly triple the amount of money the IMF has on hand, but it still might not be enough, according to many economists. While Lagarde says she is generally optimistic that the Americans will support the idea, few observers think that would translate into cash contributions. A Treasury official said flatly last week that the United States has “no intention to seek additional resources for the IMF.”
Lagarde, in an exclusive interview with Newsweek, is blunt about the consequences if the world continues to ignore the risks: “loss of confidence that will affect investment decisions, affect employment creation, affect volume of trades” that would hit everywhere, including the U.S. “We had better make sure that we have the buffers and we have the defenses, and that we have built reserves, so that we can resist.”
Until recently, IMF managing directors were virtually anonymous. But Lagarde has become the woman of the moment, the iron lady of the global economy. She is not an economist, and she has never been elected to political office. Her greatest skills, according to those who work closely with her, are her ability to listen, to assess, to pull together a strong team, and to get the best out of a tough situation. “You don’t leave the room until a decision has been reached,” says a former staffer at the French Finance Ministry.
In a post-feminist world where women populate the global ranks of CEOs, prime ministers, and presidents, Lagarde is among the leaders who are not in their positions because of their gender, nor in spite of it. “She is the managing director of the IMF and she is a woman,” says French journalist Gilles Delafon, who coproduced a documentary about the financial meltdown. Lagarde is not embarrassed to be elegant, and even a little ostentatious. Reportedly, when she was minister of finance, there would sometimes be an item on her travel agenda that said, simply, “stone.” That was the interlude put aside for jewelry shopping. More important, she has a keen sense of social nuance as she tries to bring people together.
In the wake of the Strauss-Kahn scandal, Lagarde’s presence certainly transforms the image of the fund. But there are deeper changes afoot at the IMF that set it apart from the institution of even a year ago. Lagarde is not only weathering a crisis, she is accruing authority far beyond the titular roles of the IMF or its managing director—and rapidly climbing the ranks of the most powerful people in the world.
One senior staffer describes the IMF as a health cooperative: members are given checkups, and if they are sick a course of treatment is prescribed, while healthier members help pay the bills. Sounds good. But in practice governments tend to resist the diagnosis and citizens hate the treatment, which often involves painful austerity. “People thought of us as men in dark suits with heavy briefcases who looked like undertakers,” says one woman who works closely with Lagarde. Another staffer said that the IMF used to be known as “the institution that ate babies for breakfast.”
Certainly no one expected that prosperous Western countries might someday have to take the IMF cure. They were money givers, not takers; they issued the orders, they didn’t have to obey them. Then the U.S. financial crisis erupted in 2008 and it became clear that no economy can be quarantined in the 21st century. Now, the IMF acts as a kind of enforcer, pushing European governments and even the bickering American Congress to take their medicine.
In practice, getting cooperation from the IMF’s member countries is more about jawboning than arm-twisting. And this process relies almost as much on the force of Lagarde’s personality as on her position. “The managing director is always talking about numbers,” says Nemat “Minouche” Shafik, a deputy director at the fund, “but she’s also very intuitive about the relationships and the people involved in these issues, which plays a big part in making us more influential.”
This week the IMF will publish its report on the 2012 economic outlook, which is expected to predict lower growth worldwide, even in booming India and China. (The fund’s sister organization, the World Bank, forecast recession in Europe, near-stagnation in the U.S. and Japan, and growth slowing down just about everywhere else.) To chart a way out of these doldrums, Lagarde will take her message to the World Economic Forum in Davos, and then to Brussels for a summit of European heads of state on Jan. 30, where presidents and prime ministers will receive her as an equal.
In her high-ceilinged office in Washington, Lagarde smiled as she thought back to the first European Summit she attended as head of the IMF in July. “There I was, walking into this room with heads of state, sitting at the same table, addressing the same agenda, having my views, making my recommendations, and speaking to my ‘peers,’ so to speak. And that was quite interesting. You know the one who had been my boss previously, [French President Nicolas] Sarkozy, was suddenly my peer.” She almost laughed, having fun with the idea. Not the least of Lagarde’s qualities is her relaxed sense of irony.
How she came to wield such power is not only the story of a woman who knew how to overcome obstacles; hers is also the inside story of the crisis itself. As an IMF colleague puts it, “She has seen it from the eye of the storm.” Because the 56-year-old Lagarde has so often held the title of “first woman” in one high-profile post or another, the outlines of her life are well known: the daughter of academics in Le Havre; the exchange student at a posh girls’ school in Maryland; and that same year, 1974, a congressional intern. She started her career as a lawyer in the Paris office of the U.S. firm Baker & McKenzie in 1981. By 1999 she was the first female chair of its executive committee worldwide. In 2007 Sarkozy appointed Lagarde as France’s minister of the economy and finance—another first for a French woman. But all that novelty is not what solidified her reputation. She was, and is, one of those leaders who are created by the crises of the times.
In September 2008, the U.S. firm Lehman Brothers collapsed and the Bush administration let it implode. Lagarde, along with many other Europeans, was stunned by the decision and felt more than a little betrayed. She said soon afterward that she thought Bush made that near-fatal decision because it was an election year in the U.S. At that moment, Lagarde happened to be the minister with the most American touch. She spoke English impeccably. She possessed a long list of high-level contacts in New York and Washington. Suddenly she was indispensable.
Working day and night—especially nights, because it was vital to act before markets opened—Lagarde and other finance ministers scrambled to save Europe’s banks. Often she slept in the French Finance Ministry, in the official apartment overlooking the Seine, and at least once she appeared at a morning meeting still wearing her bedroom slippers.
By the summer of 2009, the worst of the crisis appeared to be over, but the broader economic malaise started settling in. Then the newly elected government in Greece discovered that it was running a deficit almost twice as high as official accounts indicated. The books had been cooked to an extraordinary degree. As investors lost confidence in Greece, a new crisis began to brew in Ireland and Portugal. France and Germany cobbled together bailout packages, but investors were still wary of buying the debts of stricken European nations.
At a summit in the French resort of Deauville in October 2010, Sarkozy and German Chancellor Angela Merkel discussed the possibility that banks, hedge funds, and other private-sector holders of sovereign bonds might have to agree to major losses to keep Greece and other faltering countries afloat. Eventually, much tighter oversight of Athens’ finances included regular checkups by the European Commission, the European Central Bank, and the IMF.
What Deauville did do was expose that the sovereign debt of European nations was no longer quite so sovereign. The Wall Street Journal identified Deauville as the moment when solutions to the crisis began to seem almost impossible.
Lagarde was not at Deauville, and she distances herself from the deal struck there. With an apparent mixture of admiration and irony, she talks about the way leaders “can actually make a difference irrespective of the advice and the advisers and the wonderful background work of armies of civil servants, and I think that is what happened that day.” But she adds drily, “I did not participate in that compromise, and I didn’t prepare for it.”
Early on the Sunday morning of May 15, 2011, while trying to take a little time off with her partner, Xavier Giocanti, Lagarde read a news alert: Strauss-Kahn had been arrested in New York for alleged sexual assault of a maid. It was clear almost from the moment that the news broke that Strauss-Kahn would have to resign, as he did a few days later.
The maneuvering to succeed him at the IMF had begun even before the arrest, since Strauss-Kahn was expected to announce his candidacy for the French presidency in June. Only two days before Strauss-Kahn was jailed, Lagarde had met with British Chancellor of the Exchequer George Osborne over dinner in London. Osborne suggested to Lagarde that if she wanted the IMF post, Britain would back her. “Actually, George put it in my mind,” said Lagarde. “It was something that George had thought about, that’s for sure.”
Now, the race was on in earnest. Lagarde got support from Merkel, with whom she’s on a first-name basis. “They trust each other,” says an IMF staffer. “They speak the same language: both of them like clarity.”
But there was a hitch. Lagarde was France’s highest-profile minister, and Sarkozy was reluctant to see her go, especially as he headed into an election year. “I think Sarkozy was not over the moon,” says Lagarde. “I think those who talked to him included [British Prime Minister David] Cameron and Merkel.” After weeks of gathering support from powerful emerging economies, which would have preferred to see a non-European in the post, Lagarde finally got the IMF job.
The organization she took over had already undergone a radical transformation. As recently as 2007 it seemed moribund. As one veteran staffer recalls, “People here, inside the building, were asking ‘What are we here for?’” But when the 2008 crisis hit, Strauss-Kahn maneuvered the IMF to center stage. By the time of Lagarde’s ascension, European leaders had accepted the previously unthinkable notion that the IMF would help oversee Greek compliance with strict guidelines, and that it might contribute to the “firewalls” to protect countries from runaway speculation in government bonds.
But Lagarde’s approach to running the IMF was quite different than Strauss-Kahn’s. And her first encounters with the 24 board members were a bit awkward. The sessions always tend to be a little ritualized, “like Kabuki,” says a woman who has attended many of them. And there was the question of how to address Lagarde: Chairman? Chairwoman? Chair? She settled on Madame Chairman.
“I don’t know if it’s male versus female, but I am told my management style is more inclusive,” says Lagarde. It has to do with forming a team’s view, having a consensual approach, “‘wasting time’ on occasion” to build consensus so that “you will not need to waste it in convincing people to implement.”
“Even if it means not appearing as decisive—you know, ‘This is my way or the highway’—I don’t work that way,” says Lagarde. “At the end of the day we have to reach a compromise and a common platform, but I think it has to include as many people as possible.” She pauses for a second. “I leave aside the bastards, because that’s one thing that I don’t compromise with: people who lie, people who cheat, people who are not with the group and behave like parasites. That, I can’t stand.”
“She stepped in at the most difficult time,” says an IMF veteran who’s worked closely with Lagarde. “I’ve never seen it this bad.” At the European summit in July, Lagarde carried a bleak message about the seriousness of the European debt crisis. “She was the one who opened their eyes to the magnitude of the problem,” says the IMF old-timer.
Lagarde went to the Federal Reserve’s annual symposium this past August in Jackson Hole, Wyo. She and Giocanti took long walks under the looming Grand Tetons—so long that at one point they got lost. But when she warned that Europe’s banks simply didn’t have enough ready money to withstand the crisis, she made headlines around the world. “I’d say in August she established her truth-telling reputation with a bang,” says one of her colleagues at the fund.
Yet the economic skies over Europe continued to darken. Greek Prime Minister George Papandreou stunned G20 leaders in Cannes in November by announcing he’d have to put new austerity measures to a referendum. Sarkozy and Merkel warned he’d have to decide whether to stay in the euro zone or leave it, with potentially disastrous effects. Behind closed doors, Lagarde was among those who pushed Papandreou to reverse course, while her aides waited nervously. “I walked around Cannes very scared, very, very scared,” remembers one. “I panicked. It felt like Sarajevo 1914, like this weird small thing could trigger Armageddon.”
Then there was Italian Premier Silvio Berlusconi, he of the call girls and the good times, who might seem to fit Lagarde’s definition of a bastard. “To have had him say at a press conference that there was no crisis in Italy because the restaurants were full, the planes were booked, and the situation was fine—where was he?” Lagarde asks, looking back. “I don’t think he understood the risks his country was headed towards.”
Within weeks, Papandreou and Berlusconi were both out of office, replaced by technocrats who could at least comprehend the gravity of the situation. “We put the genie back in the bottle,” said the IMF aide who panicked at Cannes. “But sometimes it feels like we are just lurching from European summit to European summit.”
Before the next one, Lagarde has to hope that her warnings will set Europe and the rest of the world back on track. Her intention is not to instill fear—there is plenty of that without her. It is to create a situation where the global economy can move forward with some modicum of stability built on stronger growth, better protection for countries in trouble, and deeper integration of the European Union as one cohesive whole when it comes to monetary and fiscal policy—a course that 26 of the 27 members of the Union signed onto in December. “That’s the European way,” says a senior German diplomat. “Usually it moves only in a crisis. It happens late, but it does happen.” But as the chief economist of the IMF, Olivier Blanchard, pointed out, the effect of summits that promise a lot and deliver much less is to drive markets down and deepen the problems they were supposed to solve. As Blanchard put it, “the proverb, ‘Better to have tried and failed, than not to have tried at all,’ does not always apply.”
In the United States, Lagarde is hoping the debate over taxing and spending moves out of the Manichaean realm where one policy is considered good, another evil. Indeed, the markets themselves tend to be “schizophrenic,” to use Blanchard’s term. They like the idea of austerity and debt reduction, but react with consternation when that leads to slower growth.
The word Lagarde keeps coming back to is “confidence.” Without it, nothing works. And confidence comes from leadership. In her no-nonsense way, that is precisely what she aims to deliver—not only for her institution, but for the world.