IMF chief sees risks from surge in capital flows

Asia has emerged as a global economic powerhouse but is faced with policy challenges from rising capital inflows and needs to watch out for possible shocks from Europe, the IMF's chief said on Monday.

Managing Director Dominique Strauss-Kahn admitted to mistakes the International Monetary Fund made in helping several Asian countries overcome the 1997-1998 financial crisis but said its efforts eventually paid off by making the region more sound.

Strauss-Kahn also said during a conference, co-hosted by the IMF and the South Korean government, that it was working on ways to enhance or redesign its existing lending facilities and that details would be available by November.

We may have made mistakes. Who doesn't?, he said during the conference in the central South Korean city of Daejeon. We have learned how big the danger of volatile capital flows is and how big those capital flows may be.

At the same conference, South Korean Finance Minister Yoon Jeung-hyun urged the IMF to take steps to help prevent another financial crisis, repeating the country's call for a strengthened network of financial safety nets.

I belive the IMF has an important contribution to make, by proposing and enacting concrete and realistic measures to strengthen financial safety nets around the globe, Yoon said.

Yoon said efforts from developing countries were not sufficient to withstand external shocks on increases in volume and high volatility of capital flows.

Strauss-Kahn also acknowledged the argument that the IMF's prescriptions offered in return for rescuing Asia's emerging economies of South Korea, Thailand and Indonesia during the 1990s crisis could have been better structured.

We have learned also that we need to focus conditionality on the real problems, not having a long list of conditions that may have little to do with the problems at stake, he said at the conference on Asia's growing role in the global economy.

He warned of remaining downward risks mainly involving the fiscal crisis in Europe.

Obviously Europe is today with low growth and some risks of crisis on the fiscal side, which means that policymakers need to remain attuned to negative shocks including capital inflows, he said.

He repeated his previous view that the U.S. dollar will remain the world's major reserve currency for a long time, saying it will take a long time before alternatives such as the IMF's special drawing rights (SDRs) emerge as a reserve money. (Additional reporting by Cheon Jong-woo; Editing by Muralikumar Anantharaman)