A European sovereign debt crisis is threatening the economic stability of the euro area, Western Europe and the trans-Atlantic region. Trying to contain it, the IMF has already committed €220 billions of rescue loans to Greece, Ireland and Portugal. More will be needed, certainly for Greece. But now Spain and Italy look vulnerable.
The era when the IMF's policy recommendations for countries in fiscal trouble were informed by a common, American-driven, free market liberal view is long gone. Christine Lagarde, the new Managing Director at the IMF, has been catapulted, alone, into the centre of a maelstrom. She is now one of a handful of key figures whose judgements will determine how the crisis will evolve.
Her position is all the more important because the European Union and the euro area have appeared incapable of decisive action. Its political leaders, especially those in the most powerful country, Germany, are seemingly caught between domestic political pressures and a deep commitment to the euro.
Compounding the challenge, the strengthened G20 has encouraged the IMF to play a bigger role in trying to assess the 'spillovers', the economic repercussions from one to the other, of the economic policies and conditions in the world's biggest countries. There is no sign, however, that the two key countries in the G20 Mutual Assessment Process, the United States and China, are ready to cooperate more closely in the interests of promoting global stability.
Ms Lagarde can build on her predecessor Dominic Strauss-Kahn's political legacy at the IMF. Strauss-Kahn was quick to reach out to emerging market economies, to spot the potential damage to global finance from the American sub-prime debt crisis, and to put the Fund at the centre of efforts to contain sovereign debt crises in Europe.
Lagarde's in-tray is formidable. Divisions over how best to respond to Europe's debt crisis, tensions amongst the IMF's biggest members over how to promote longer term global economic stability, and battles over the rebalancing of power in the Fund itself in favour of emerging market economies, all present daunting challenges.
In the immediate future, the escalation in the eurozone's sovereign debt crisis which, given the vital role the IMF is playing, is the biggest challenge facing both Christine Lagarde and the IMF.
Financial markets are signalling that they have lost confidence in the Italian government's capacity to reach decisions which can help stop the crisis spreading. The IMF has publicly called on Italy to introduce austerity measures to reduce its debt burden.
Eurozone governments are debating whether a formal heads of government meeting this coming weekend could reach decisions which could help ease financial market pressure and restore confidence in the monetary union and its leadership. If this meeting goes ahead, Ms Lagarde will be expected to attend. Unfortunately, she has little formal international consensus behind the use and limits of IMF policy levers to guide her. It is a baptism of fire for the new Managing Director, one which will shape not only her leadership of the Fund but the continuing recovery prospects of the world economy.