World Takes Step Back From Financial Brink

After more than a year of shocks and spasms, an eerie calm has descended on the global financial system, leading many to wonder if the fierce turmoil menacing the global economy has vanished as abruptly as it arrived.

The U.S. stock market has climbed partly back from its own panicky plunge, the International Monetary Fund is flush with cash once again, and Brazil--viewed as the next domino in a grim series of collapsing economies--is about to receive a huge infusion of rescue money.

Some of the beleaguered Asian nations show signs of stabilizing, interest rates have been slashed in the United States and Europe, and at the moment there is no obvious new catalyst for chaos. All this has transformed the spirit of investors in the last several weeks.

Yet for all the reassuring news, economists remain concerned about several ticking bombs in the global system.

The future of Japan’s economy and the success of its plans to fix its banking system remain huge questions. It is far from clear that the IMF rescue plan for Brazil will end that nation’s crisis. China’s economy has shown growing stress that could flare up in harmful ways. And the U.S. stock market, a bellwether of renewed optimism, remains at levels some experts believe are unrealistically high.

While the attitude of investors has been transformed in recent weeks, the market’s continued jumpiness over whether the Federal Reserve will lower interest rates again this month speaks to a still-unsettled world picture.

“We are back from the brink--but it doesn’t mean that there isn’t another brink out there,” cautioned Alan Stoga, a former Treasury Department official and president of an international consulting firm.

Added Jeffrey Shafer, a vice chairman of investment firm Salomon Smith Barney: “It is very fragile. We have to nurture this along.”

But global psychology has been dramatically transformed by a set of developments involving national policies and economies.

Although Europe first greeted U.S. calls for interest rate cuts with decided aloofness, a handful of European nations have independently reduced their rates in recent weeks, with the notable exceptions of Germany and France.

More basically, two interest rate cuts by the U.S. Federal Reserve helped assure investors in the United States and overseas that the world’s most influential central bank was sensitive to signs of an emerging credit squeeze and committed to maintaining America’s role as an engine of growth.

Fed’s Help in Fund Bailout Is Defended

Even Fed Chairman Alan Greenspan’s role in designing the bailout of a huge investment fund that had been hammered by shifts in the global economy--a move that enraged free-marketeers--drew some praise as evidence that the Fed would take action to stabilize the agitated financial markets.

“The Fed’s actions were absolutely critical to reminding people that there was somebody home,” said Stoga, maintaining that taken together, the upbeat series of developments “told people that this [crisis] is not a bottomless pit--the economy is still there.”

Most recently, the Commerce Department’s report that the U.S. economy expanded by more than 3% in the July-September quarter heartened those who feared that an expected slowdown was on the verge of becoming something much more serious.

“I don’t think this [global financial system] is going to go totally down the tubes,” said Jagdish Bhagwati, an economist at Columbia University, who believes that global policymakers have now learned the importance of acting decisively to combat the crisis. “I don’t see any reason why it should.”

The ticking bombs:

* The future of Brazil. The IMF may announce an aid plan for Brazil, perhaps in the $35-billion to $40-billion range, as early as this week. But it remains unknown whether Brazil has the political will to push through the financial reforms demanded by investors, who have removed some $35 billion from the country since last summer.

Brazil’s latest fiscal austerity program, combined with anticipation of the IMF rescue plan, has soothed investors, and the currency outflow has reversed in recent days. Still, a renewed run on the Brazilian real could inflict serious damage on South America’s most influential economy, forcing a painful increase in already-high interest rates and spreading recession throughout the continent.

* Japan’s commitment to reform. Investors and political leaders have been somewhat encouraged by Japan’s announced plan to repair its battered banking system with half a trillion dollars. But many doubt Tokyo’s willingness to clean house, a painful exercise in genuine reform that would lead to bankruptcies and layoffs. “The restoration of growth in Japan . . . is absolutely essential to the restoration of growth in the rest of Asia,” President Clinton said Tuesday. “The rest of us look to Japan to move quickly.”

* China’s economic health. While the emerging giant of Asia has been spared the distress suffered by its smaller neighbors, investors have shifted $30 billion to $40 billion out of China’s currency in the last year, requiring officials to take increasingly costly measures to protect it from falling. “All this suggests that China has some hard times ahead of it,” said Nariman Behravesh, chief international economist at Standard & Poor’s DRI consulting firm in Lexington, Mass.

* Financial turmoil on Wall Street. The stock market’s recent rally has returned it to heights that some analysts consider untenable. Indeed, the Dow Jones industrial average is now 2,482 points higher than it was that long-ago day in December 1996--when Fed Chairman Greenspan warned of “irrational exuberance” on Wall Street.