THE CRISIS GOES GLOBAL
The spreading financial contagion has made concerted action more likely.
Will it work?
By Jonathan Sprague
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Calls for Action More and more leaders want something done - but what?
THAILAND DING, JAPAN DONG, RUSSIA DING, BRAZIL DONG, WALL STREET DING-DONG DING-DONG. The alarm bells are starting to ring too loudly to ignore. The world's economic policy-makers are waking up to the recessionary wave that has swept across half the globe. From simply wagging their fingers at Crisis-hit Asia and Russia and urging more reform, Western leaders have shifted to calling for global efforts to curb the forces wreaking financial havoc. They are also warning their own citizens to prepare for rough seas ahead. The good news: a coordinated initiative to rescue the global economy is now more likely. The bad news: it is motivated by increasingly precarious economic conditions worldwide. The big question: will the effort be too late?
What a difference it makes when the money that's disappearing is your own. Since the 512-point dive by the Dow Jones Industrial average on Aug. 31, which shook markets everywhere, officials and businesses in the industrialized West have become more aware that they are subject to the same financial forces that have devastated less-developed nations. While the Dow has regained most of its losses, confidence in the still-growing U.S. and European economies has taken a knock. Warnings of lower profits due at least in part to the Asian Crisis, already a feature in the U.S., are now emanating from big European companies such as Dutch electronics group Phillips and French telecommunications giant Alcatel. The recent distress calls from nearby Russia and Brazil instead of far-off Asia are another reason Western antennae have become more sensitive.
With the loss of immunity has come concern. "It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress," warned chairman Alan Greenspan of the U.S. Federal Reserve recently. British Prime Minister Tony Blair was more blunt, saying that his government could do little about the "twists and turns of world markets" in an increasingly globalized economy. "In certain sectors," he added, "there will be an impact."
Try all sectors. The International Monetary Fund is slashing its forecast for world growth to 2% this year, against its own April estimate of 3.1%, because of the intensifying financial turmoil. And the United Nations Conference on Trade and Development (UNCTAD) warns that a "full-blown global recession" could hit unless the U.S., Europe and Japan work together to prevent it. "The most important things to be done have to be done by the largest economies," said UNCTAD Secretary-General Rubens Ricupero.
The signs are growing that these economies will try. "There is at last a recognition that without concerted actions, there is no prospect that the recent financial earthquakes will end," notes British economic consultancy IDEA. President Bill Clinton got things started on Sept. 14 by saying the U.S. would work with Japan and Europe to spur growth. Washington, he added, would also expand its efforts to resolve Asia's debt problems, ask the World Bank to shore up Asian social safety nets, and urge readiness to use the IMF's $15-billion emergency fund to stop financial contagion from spreading to Latin America. Most important, Clinton asked Greenspan and Treasury Secretary Robert Rubin to meet with their foreign counterparts within a month to "recommend ways to adapt the international financial architecture to the 21st century." The G7 industrialized nations immediately agreed. They pledged to support "growth-oriented policies" and called for a "cooperative international approach" to help Crisis-hit countries.
Such moves have been a long time coming - at least in the eyes of Asia. "The seven most influential owners of the dancehall have not come forth to take vigorous action, but have largely remained spectators of this dance debacle," said Thai ambassador to the U.N. Asda Jayanma last week. "They have now issued some statements about the bad state of the dance floor, but it remains to be seen who will rectify the situation." What is clear is that the IMF-led approach of giving individual nations aid and advice has not worked. "The West - meaning America, the international agencies and the core Europeans - has been like somebody who goes to church on Sunday, puts 10 dollars in the collection plate and thinks he's solved homelessness and drugs," says Simon Ogus, managing director for Asian economics at Warburg Dillon Read in Hong Kong. "Their attitude seems to be, 'We'll throw a few billion at the problem here and there and hopefully that'll shut them up.'"
What might a newly activist G7 do? Not, it seems, what the Crisis economies want most - coordinated interest rate cuts led by Washington to boost investment and demand. "It's a decision the U.S. Federal Reserve must make itself, without outside pressure; but I still hope such a rate cut will occur," said Brazilian Finance Minister Pedro Malan. But Greenspan, German Bundesbank president Hans Tietmeyer and Bank of England governor Eddie George have all squelched the idea.
IMF-style financial packages have become harder to put together as well. The fading credibility of its policies aside, the Fund is running dangerously low on money. And revelations from Russia that billions in previous IMF and World Bank funds were misused or stolen make fresh funding less likely. IDEA thinks the G7 will put together a $50- to 60-billion swap facility that would allow selected nations, beginning with Brazil, to borrow hard currencies using token collateral. That would lift market sentiment and, by removing Brazil from the immediate critical list, help ward off further turmoil in U.S. financial markets.
Can the world be rescued? Analysts say the speed and virulence of the contagion have stunned markets and policymakers. Talk is even growing of a crisis in global capitalism. "Throughout the developing world, the awakening to globalization's downside has been one of resistance and resignation, a feeling that globalization is a false god foisted on weaker states by the capitalist centers of the West," warned U.N. Secretary General Kofi Annan.
Even so, the world is probably safe for some time. IMF managing director Michel Camdessus dismissed fears of a "free fall leading to a global recession," saying that the "most likely hypothesis" for 1999 was slower growth rates than expected a year ago. Australian business consultancy Carroll Partners estimates there is only a 10% chance of global economic meltdown, against an 85% likelihood of muddling through with a 3-to-5-year structural slowdown. Russell Jones, chief economist at Lehman Brothers in Tokyo, says that while Asia itself verges on depression, the world will not suffer a 1930s-type collapse without huge and unlikely policy errors in the U.S. and Europe.
That offers scant comfort to Asia and other beleaguered regions. "So it's maybe a growth-recession for the developed world," says Warburg's Ogus. "But the avoidance of a full-blown recession is basically taken out of the pound of flesh of the developing world." Asia will face a tough time even if Latin America stabilizes and Wall Street calms down, because the region needs not only stability but expansion, if not at home then in the G7 countries. Slowing growth in advanced economies means Asia will have even more difficulty finding markets for its exports. Such a prospect would also heighten concerns in the target markets about jobs and feed protectionist instincts. Already, American steelmakers and unions are complaining about cheap imports from Asia and Russia. And credit, the life blood of commerce, will not start flowing again until a way can be found to tackle Asia's crushing debt burden.
So what does Asia need from the world's economic powers-that-be? A coordinated attempt at global reflation through interest-rate cuts and monetary expansion would be helpful - unlikely though that seems in the immediate future. "The big boys have to be willing to ease macro policy as soon as they see evidence in their own economies that they are going to slow significantly," says Lehman's Jones. But so far the G7, while acknowledging that the main problem today is weak demand rather than inflation, remain reluctant to stimulate their economies. Japan is a special case, and a critical one given its huge weight Asia. Tokyo's stimulative monetary and fiscal efforts have produced few results so far. It needs to take effective action to clean up its debt-strangled financial system - an unpromising prospect.
The rest of Asia also needs help to lighten its debt. Clinton did promise to find ways to help Asian corporations "emerge from massive debt where individual firms have been swept under by systemic, national economic problems rather than their own errors." That should include large debt write-offs by lenders, say analysts, who argue that while Asia may have dug itself into a hole, the lenders should not expect full payment on the shovels they helped finance. But support for such a move remains thin in Western capitals, and will likely lessen even more if their home economies weaken. Most of all, Asia requires strong leadership in the industrialized nations to make decisions on economic policy that display an awareness of global inter-connections. The prospect, however, seems to be foundering on a scandal-tainted president in Washington, a lame-duck prime minister in Tokyo, and a chancellor fighting for his political life in Bonn.
In the meantime, Asia can only keep working on the underlying structural problems exposed by the Crisis. It can draw up bankruptcy codes, withdraw life-support from terminally sick corporations and banks, and establish prudent systems to supervise the process. The region could also string together safety nets to soften the worst of the inevitable business and social disruptions.
Fred Bergsten, director of the Institute for International Economics in the U.S., also recommends efforts at monetary expansion and credit easing, as some nations are already trying on their own. "The key point is that if they do it together, they do not run the risk of tilting capital to their neighbor," he notes. Most of all, analysts say Asia has to avoid making mistakes, as many fear Malaysia may have done by imposing currency controls, while they wait for the world to take notice. "I think Mr. Greenspan will rescue the world eventually," says Warburg's Ogus. "But if he does it now, it's going to be very different than if he does it in six to 12 months' time."
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CALLS FOR ACTION
This is the biggest financial challenge facing the world in a half-century, and the United States has an absolutely inescapable obligation to lead . . . We must find ways to tap the energy of global markets without sentencing the world to a cycle of continued extreme crises
- Bill Clinton, U.S. president
I would certainly say that in East Asia, and increasingly in the rest of the world, deflationary forces are continuing to emerge. There is no evidence to suggest that the process which began somewhere over a year ago has stabilized and, indeed, I think it clearly has been moving in our direction
- Alan Greenspan, U.S. Federal Reserve chairman
We are now looking at a broader crisis in the emerging markets than we were looking at only a couple of months ago. And we are starting to see some of the ramifications for several of the mature markets
- Charles Adams, research department assistant director with the International Monetary Fund
In the aftermath of the East Asian financial crisis, the world economy is on a knife-edge . . . Unless the region switches from deflation to reflation, and European countries and Japan boost global demand for goods and services, there could be a full-blown global recession
- United Nations Conference on Trade and Development
The crisis [threatening Latin America and world markets] could get worse if the international financial community does not take coordinated global action. At this point we need firm action on an international scale
- Pedro Malan, Brazilian finance minister
The global capitalist system which has been responsible for the remarkable prosperity of [the U.S.] in the last decade is coming apart at the seams . . . Instead of acting like a pendulum, financial markets have recently acted more like a wrecking ball, knocking over one economy after another
- George Soros, international financier
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