IMF says Brazil capital tax not enough on its own

SAO PAULO, Oct 23 (Reuters) - Brazil has a right "to defend itself" against steep currency appreciation but the country's new capital inflows tax is at best a short-term solution, insufficient on its own, a director at the International Monetary Fund said on Friday.

"The best solution would be a global solution," Nicolas Eyzaguirre, director of the IMF's Western Hemisphere Department, said at a press event in Sao Paulo, Brazil's financial capital.

"When others don't behave themselves by the (traditional) rules, we can't operate in orthodox ways," he added.

But Brazil's new tax -- announced on Monday and implemented on Tuesday -- should only be one of several measures to address concerns within the Brazilian economy, such as the advance of the currency, the real (BRBY), he said.

The real has gained 35 percent in 2009 through Thursday's close on the back of strong inflows. The currency was up 0.93 percent to 1.71 per dollar in afternoon trading on Friday.

Foreign money has flooded Latin America's largest economy this year as the country rebounded from the global financial crisis faster and harder than more developed economies.

But the appreciation has a downside, such as out-sizedeffects on exporters, who find Brazilian products more expensive to sell abroad.

The tax has come in for criticism from some quarters -- including Eyzaguirre himself shortly after its announcement. For more see [ID:nN19264977].

"These kinds of taxes provide some room for maneuver, but it's not very much, so governments should not be tempted to postpone other more fundamental adjustments," Eyzaguirre said on Monday.

"Second, it is very complex to implement those kinds of taxes, because they have to be applied to every possible financial instrument," he added then.

Also on Friday, IMF Managing Director Dominique Strauss-Kahn said he wasn't afraid other countries would follow Brazil's lead.

Asked if he was concerned about other countries imposing a tax on capital inflows, he said: "No, I'm not afraid and it's not that important. I am not sure if it's that effective or manageable," he said in Oslo. [ID:nLN394675]

Eyzaguirre said a better option would be a global insurance mechanism to safeguard world liquidity. That would also help countries with large reserves, such as Brazil and China, to put those reserves to work on developing their economies, rather than holding the currency in case of emergency, he added. (Reporting by Luciana Lopez and Paula Laier; Editing by James Dalgleish)