Poor funding of rich seen as unsustainable, risky

DAVOS, Switzerland, Jan 28 (Reuters) - Massive flows of capital from the emerging to the developed world are unsustainable and risk damaging poorer countries as they try to catch up, leading finance officials said on Saturday.

Speaking at the World Economic Forum in Davos, European Central Bank President Jean-Claude Trichet said that the current global investment pattern was "profoundly abnormal" and in no country's interest.

"It is not sustainable in the long run that the emerging world would finance the industrial world. It doesn't correspond to the interest of the emerging world, neither to the interest of the industrialised world," he said.

In a similar vein, Indian Finance Minister Palaniappan Chidambaram said countries like his, one of the emerging stars on the global economic scene, were under threat.

"Global imbalances are deepening and that has serious consequences for developing countries like India," he told the same panel.

">The United States is currently seeing huge inflows of capital from the developing world, notably China, that are financing its current account deficit, bolstering the dollar and keeping long-term interest rates low though bond purchases.

The danger to the world economy is that when the inflows eventually dry up there could be sharp economic amd market dislocations.

"There are potential triggers that could create serious consequences for the global economy. The first is a southward movement of the dollar, the second is an unexpected increase in U.S. interest rates ... Thirdly, (a spiral in) energy prices... will lead to inflationary expectations," Chidambaram said.

Trichet said Europe could not be expected to play a major role in correcting global imbalances, adding that without an inflow of petro-dollars in the wake of soaring oil prices, real rates could be a lot higher.

"The enormous additional pot of savings that has been accumulated by the oil exporting countries (as oil prices have risen)... has apparently a good influence on the financial market (but) it has, of course, a very depressing influence on the economy as a whole," he said. The growing significance on the world economic stage of the emergence of countries such as China and India has been a major theme this week at Davos.

U.S. officials have been keen to say that they are not expecting any immediate change in the flow of funds from China in particular and that U.S. financial markets are robust enough to handle a change.

There are some concerns on the bond market, however, that China is losing some of its appetite for Treasuries.

India's Chidambaram, meanwhile, said that he expected flows from China would change as local consumption grew.

"I think the direction of exports will change. A country like China will be forced to stimulate domestic demand ... I'm not judgmental about China. The people of developing countries have to have a higher consumption of goods and services," he said.