TOKYO (Reuters) - Developed countries may slip back into recession if they abandon strategies deployed to battle the global financial crisis too early, the head of the International Monetary Fund warned on Monday.
Recovery in private demand and employment are necessary conditions for governments to begin unwinding policies designed to support their economies, though the right timing depends on specific conditions in each nation, Dominique Strauss-Kahn said.
"Recovery in advanced economies has been sluggish," he told reporters in Tokyo. "We have to be cautious because the recovery has been fragile."
Marek Belka, the head of the IMF's European department, echoed Strauss-Kahn's comments, saying the continent's economy was not yet on solid ground.
"We are no longer at the edge of the abyss that loomed in early 2009, with all but a handful of Europe's economies now pulling out of recession. But it is less clear that we have reached safe ground," Belka, Poland's former prime minister, wrote in a blog (blog-imfdirect.imf.org/).
"It is important for fiscal and monetary policies to continue to support the recovery," he wrote.
Strauss-Kahn said Japan's experience with its own financial crisis since the late 1990s shows that recovery begins only when companies and banks have cleaned up their balance sheets, adding that many impaired assets around the world have not yet been disclosed.
Tackling high levels of public debt, which many developed countries have piled up to save their economies, will become top priority for many governments, he continued.
Governments have committed trillions of dollars in stimulus and guarantees, and central banks have slashed interest rates to record lows since the financial crisis intensified after the collapse of Lehman Brothers in September 2008.
But Strauss-Kahn warned that ending economic stimulus prematurely could be extremely costly, leaving countries with a renewed downturn and unable to cope because they had already used up their fiscal and monetary arsenals.
"It would be difficult to find new tools," he said.
"The best indicator (for the exit timing) is private demand and employment ... In most countries, growth is still supported by government policies. For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn't exit," he said.
The IMF in October forecast the global economy would resume growth in 2010 by expanding 3.1 percent after contracting in 2009.
Strauss-Kahn reiterated that the world economy has been stronger than expected, led by emerging economies in Asia, adding that the IMF sees China's growth this year close to the pre-crisis levels.
Strauss-Kahn also voiced his support for regional frameworks to contain financial crises, such as an Asian fund created last year.
Thirteen East and Southeast Asian countries set up a $120 billion emergency fund for use in an economic downturn, the first independent move by Asia to shield itself from financial crisis.
Known as the Chiang Mai Initiative, the fund has evolved from a string of bilateral currency swap agreements signed by Asian nations.
The idea of creating an Asian fund fell through a decade ago, when Japan proposed the creation of an Asian Monetary Fund after the Asian economic crisis in 1997-98, as Western countries saw the move as undermining the role of the IMF.
Strauss-Kahn, then France's finance minister, also opposed the idea at the time.
"I've changed my mind. I think that regional institutions are welcome. There's no reason why we shouldn't have regional funds helping to do the same job as what we are doing, if we can work together," he said, adding that it is important that such a regional body work with the IMF.
Additional reporting by Jeremy Gaunt in London; Editing by Chris Gallagher and Tomasz Janowski