WashPost. Can a G-7 Initiative End the Global Crisis?
By Paul Blustein
Washington Post Staff Writer
Wednesday, September 16, 1998; Page B09
Okay, so leadership has been asserted. United action has been pledged by
the world's biggest economic powerhouses against the financial crisis
battering economies in Asia, Eastern Europe and Latin America.
But will the new moves under consideration stem the financial turmoil that
has proven so impervious to conventional remedies?
That's the question market analysts, traders and economists are weighing
following President Clinton's speech Monday calling for action on "the
biggest financial challenge facing the world in half a century," which was
accompanied by a declaration endorsing most of his views from the top
economic officials of the Group of Seven major industrial countries.
Amid a general sense of cheer that Clinton and the G-7 were finally
seeking to address the crisis after weeks of appearing paralyzed by
domestic political troubles, many experts are skeptical that Monday's
initiative promises an end to the turbulence anytime soon -- if at all.
The markets' worst fears, they said, may be eased by the clear message
that the Federal Reserve and other central banks stand ready to cut
interest rates if a global recession looms. But some argued that the crisis is
careering beyond the control of the world's governments: the International
Monetary Fund has already committed most of its ready cash for bailouts;
a giant economy -- Brazil -- has recently suffered a massive flight of
capital; and the Russian economy has virtually collapsed despite efforts by
the IMF and others to stabilize it.
"All these guys want to look like they're leading, because the markets
complain there's no leadership -- but what can they do?" said Philippa
Malmgren, senior currency strategist at Bankers Trust Co. in London. "The
G-7 don't have the money to throw at these crises, and especially after
what happened to Russia, no political leader can be seen as throwing good
taxpayer money down an empty hole. I think we've moved from the point
where these countries are too big to fail, to the point where they're too big
to save."
The rhetoric from Clinton and the G-7 did resonate with investors, at least
initially, by underscoring official determination to keep Latin America from
succumbing to the fate suffered by the likes of Thailand, South Korea,
Indonesia and Russia, which have plunged into deep recessions following
sharp sell-offs of their stocks and currencies.
In an effort to dispel fears that the IMF would be too short of funds to aid
Brazil, the president and the G-7 economic officials said they would grant
the IMF easy access to an emergency line of credit, in which about $15
billion remains.
Financial markets in the region responded with a spectacular rally
yesterday, as Brazil's stock market soared nearly 19 percent and Mexico's
nearly 13 percent. "Clinton and the G-7 are trying to draw a line in the
sand here, and the fact that they are focusing on the seriousness of the
situation is clearly very helpful," said Desmond Lachman, head of emerging
markets research at Salomon Smith Barney in New York.
But Lachman and others said Brazil, which last week was losing an
average of about $1.5 billion a day, still faces huge doubts about its ability
to rein in its budget deficit and roll over more than $70 billion in local debt
coming due in the next few weeks. President Fernando Henrique Cardoso,
despite enjoying a solid reputation as an economic reformer, is politically
constrained by a looming election from reaching a bailout agreement with
the IMF -- so the country's markets are by no means safe from a renewed
sell-off.
On some issues, Clinton and the G-7 resorted to gauzy phrases and
proposals that seemed aimed at papering over differences on fiendishly
complex problems.
Clinton called for an international conference in 30 days, for example, to
begin developing proposals to make the global financial system less prone
to crises. And the G-7 agreed on "accelerated efforts to promote" new
approaches for comprehensively easing the crippling debt burdens of
companies in crisis-stricken countries. "This gives an impetus that will make
it possible for us to look hard at ideas that might have been thought
unorthodox or heretical," an administration official said.
As for the hint of a coordinated reduction in interest rates, Hans Tietmeyer,
the head of Germany's central bank, threw cold water on hopes for an
imminent rate cut by by telling a news conference that in Europe, at least,
there was little justification for such a move because the continent's
economies are growing smartly. "It would be wrong to see [the G-7
communique] as favoring a general lowering of interest rates," he said.
In any event, many economists are unsure that a rate cut by the Fed and
other central banks would do much to help countries in crisis escape their
plight.
A cut in the short-term rates the Fed controls probably would cause U.S.
banks to lower their prime lending rates. That could stimulate borrowing
and spending by Americans that would help keep the U.S. economy from
falling into a recession. And avoiding a slump in the United States -- the
biggest market for the exports of many Asian and Latin American countries
-- is crucial to keep the global crisis from worsening.
But with the U.S. economy already robust, a rate cut by the Fed anytime
soon risks being seen as a desperate measure to boost investor sentiment.
"It won't solve Japan's problems, or Asia's problems, or Russia's
problems, or Brazil's problems," Lachman said.
And Malmgren, likening a rate cut to trying to rev up a motor, said: "What
happens if you hit the throttle, step on the gas, and the engine doesn't turn
over?"
c Copyright 1998 The Washington Post Company
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