* Euro zone to heed expert view that banks need capital
* Banks should first try to fund themselves
* Discussed currency and capital flows with IMF, WB, OECD (Adds IMF and OECD chiefs, quotes and details)
By Andreas Rinke and Sarah Marsh
BERLIN, Oct 6 (Reuters) - German Chancellor Angela Merkel said on Thursday Europe should not hesitate to recapitalise its banks if this prevents greater economic damage, and leaders would take very seriously expert advice that the time was ripe for such a step.
She added banks should first tap markets to boost liquidity and then turn to national governments and use the European Financial Stability Facility (EFSF) as a last resort.
“The advice that we are receiving -- that European banks do not have enough capital -- is to be taken very seriously,” Merkel told a news conference in Berlin.
“The situation is such that we in the European Union must take another look, and I believe that if it is necessary, and it is a reasonable investment, we should not hesitate because otherwise the damage that results is of a much higher order.”
“The EFSF is a facility which provides assistance at a point when a country would threaten the stability of the euro and euro zone as a whole, so a strict conditionality comes into play, and under specific conditions countries receive aid.”
Merkel was speaking after talks with the heads of the International Monetary Fund, the World Bank, and OECD in Berlin, on reform of the global currency system.
Asked if the IMF had more funds available to direct towards struggling economies, IMF Managing Director Christine Lagarde said: “If you ask a fund do you have enough resources and are you prepared to give more, I will say, ‘I want more’. Having said that, we do have resources available.”
Merkel said the group had discussed the need for greater regulation of markets and economies by the IMF, how to create a framework to cope with increased global capital flows and the need for a common understanding of when to impose capital controls, which should be a last resort.
She added she expected progress at the Group of 20 nations meeting in Cannes next month, but work would remain after that summit.
OECD chief Angel Gurria said the focus on capital flows was important because transfer of funds from wealthy countries to the developing world was fuelling “property bubbles and stock market bubbles” which in turn drive an appreciation of the local currency -- “the most serious problem of all”.
“This is not in small countries, this is in countries like Mexico, Chile, India or Korea and others which are fighting very hard for their own competitiveness,” he said.
Lagarde said another focus was on efforts to expand the basket of currencies that makes up so-called Special Drawing Rights (SDR), the International Monetary Fund’s unit of account, to include China’s renminbi currency.
Advanced economies have set the condition that the renminbi has to be convertible to join and China has no timetable for announcing such full convertibility.
Additional reporting by Stephen Brown and Brian Rohan; Writing by Alexandra Hudson