OECD says US rescue plan will aid world economy

WASHINGTON (Reuters) - A planned $700 billion U.S. government rescue of the country's battered financial markets was welcome and will help the world economy, the Organization for Economic Cooperation Development said on Monday.

"By putting an end to the deleveraging of financial institutions -- which was occurring at alarming speed through capital losses and credit contraction -- the systemic rescue plan contributes to stabilize the US and world economies," OECD Secretary-General Angel Gurria said in a statement.

The OECD, which is based in Paris, released the remarks via its office in Washington.

"This action will create the conditions for the much needed recapitalization of financial institutions, as they are able to shed troubled mortgage-based assets, raise new capital, regain the trust of counter-parties and thus re-establish "liquid" conditions in bank lending," Gurria said.

His remarks echoed those of International Monetary Fund Managing Director Dominique Strauss-Kahn, who told the Financial Times that "bold steps" by the United States would yield results.

"I am confident that financial systems that had grown too large relative to the economy will stabilize at a more appropriate level. But what about the long-term challenges?" he said in an opinion piece on Monday.

The U.S. Treasury has proposed using up to $700 billion of taxpayer money to purchase illiquid mortgages from banks with operations in the United States.

The dramatic step, which requires congressional approval that is expected later this week, is aimed at shoring up confidence in the soundness of the country's financial institutions after massive home-loan-related losses.

Gurria said the OECD would work with governments, central banks and other international institutions to come up with reforms to tackle the failings that led to the current crisis.

These stemmed from disastrously loose lending standards, lax supervision and some cases of outright fraud.

"This crisis is the result of regulatory failure to guard against excessive risk-taking in the financial system, especially in the US. We must ensure it does not happen again," Strauss-Kahn said.

(Reporting by Alister Bull; Editing by Gary Crosse)