Financial Cure Is Elusive to Global Leaders

After more than a year of dizzying financial turmoil in many corners of the globe, the world’s elite financial policymakers are slowly developing a strategy to cope with future crises--but remain stumped by the crisis at hand.

The government officials whose annual meetings in Washington this week are winding down were confronted by a unique and complex predicament for which history offered no guidance.

“I don’t think anyone has any idea what to do,” one financial official said Tuesday, asking for anonymity to avoid embarrassing his organization.

The officials took heart from one piece of news: Republican leaders in the House of Representatives signaled that they were ready to provide the full $18-billion line of credit that President Clinton had requested for the International Monetary Fund--provided that Clinton pledged to seek specific reforms in IMF practices.

House Majority Leader Dick Armey (R-Texas) signaled a possible compromise by praising Clinton for “finally stepping up to the plate” in seeking reform of the IMF, which has exhausted its reserves on bailouts for countries that have been swamped by financial chaos.

The list of GOP reforms, which include new openness by the IMF and an end to loans at extra-low interest rates, is similar to those that Clinton is pushing.

In another development, Argentine President Carlos Menem predicted that Brazil and the IMF will agree on the terms of an aid package as early as next week. “They’re working rapidly to implement this assistance,” Menem told reporters in Washington.

Despite such movement, a sense of uncertainty and even fear pervaded the series of meetings involving the world’s leading financial officials. Institutions such as the IMF were created in a time when financial crises were national, not global--long before private wealth could race like a wildfire over national boundaries.

Indeed, these very same officials symbolize the financial order that now teeters so precariously, spreading chaos from one emerging economy to another.

“It’s turning into a scary movie where people don’t know what’s going to pop up next,” said Daniel Yergin, chairman of Cambridge Energy Research Associates in Washington.

IMF Managing Director Michel Camdessus described the dilemma in more bureaucratic terms: “We are speaking not just of countries in crisis but of a system in crisis, a system not yet sufficiently adapted to the opportunities and risks of globalization.”

In a speech to the annual meeting of the World Bank and IMF, Clinton stressed the urgent need for action. “We must, we must keep working until we find the right answers, and we don’t have a moment to waste,” he said.

National governments must disclose more information about their financial condition, he said. And developing nations that have fallen prey to speculative attacks on their currencies must embrace free-market economic reforms.

“I am confident that if we act together we can end the present crisis,” Clinton said. “We must take urgent steps to help those who have been hurt by it, to limit the reach of it and to restore confidence in the global economy.”

Later Tuesday, the White House floated the idea of a summit of national leaders in Washington later this year on the global crisis.

In graphic contrast to their uncertainties about how to deal with today’s crisis, officials moved at least partially toward strategies to forestall such episodes in the future.

There appeared to be little controversy over some of these measures, which would include increased disclosure requirements for international investment funds and greater disclosure by governments.

Also facing clear sailing was a U.S. proposal for IMF lines of credit for emerging countries that come under financial siege despite responsible economic policies. Clinton lobbied for the proposal, describing it as “a critical way to prevent the present crisis from reaching Latin America and other regions which are doing well.”

In addition, it is likely that the World Bank and other organizations will upgrade their ability to provide emergency aid to beleaguered developing nations, where conservative economic policies may create social hardship and spark a political backlash.

These strategies are meant to defuse future outbreaks of financial turmoil, not to treat the current one.

“Eventually it will be useful,” said Sung Won Sohn, chief economist at Norwest Corp., a regional bank in Minneapolis. “But our immediate problem is to stop the snowball which is gaining speed.”

Allen Sinai, chief economist with Primark Decision Economics in New York and Boston, said it is unrealistic to expect a quick fix. “No one in the world should expect an overnight pill to deal with the problem we’re facing,” he said. “It just isn’t going to happen that way.”

Governments Try Desperate Measures

He maintained that the focus on the need for global growth policies, the effort to cobble together an aid package for Brazil and the emphasis on the need for Japan to reform its own economic policies could pay off in the future. “It is a plus. It just doesn’t lead to any action right away,” he said.

Officials of the emerging markets have lamented that private investors seem to yank their money out of their countries indiscriminately, punishing nations that have followed responsible policies along with those that have not. The loss of confidence has translated into higher capital costs and higher deficits, slowing economies and sparking social pressures.

The government of Brazil, for example, has to pay investors 20% interest to entice them to buy its bonds, 15 percentage points more than the U.S. Treasury pays its long-term bond holders.

That adds a significant cost to the expense of government. In Brazil, Mexico and Argentina, it makes an already bloated budget deficit bigger still.

Many countries have responded by cutting government spending and raising interest rates in an effort to bring back foreign investment and boost their currencies. But those measures come with the social costs of higher unemployment and economic contraction.

In Mexico, for example, interest rates have doubled recently to 36%, a confusing result for a nation many thousands of miles from Thailand, where the crisis erupted in July 1997. It “is not only difficult to understand; it is also hard to explain,” said Guillermo Ortiz, head of Mexico’s central bank.

Even over the long haul, experts here remained deeply divided over whether to impose new controls on the flow of investment capital into and out of nations. The unfettered flow of capital has been a fundamental principle in the emergence of the modern global economy and has helped countries to grow, just as its rapid movement has proved to be savagely disruptive.

All concerned seemed to agree, however, that there should be better reporting and supervision of investments worldwide so that investors and lenders know who is lending what to whom. The collapse of banking systems in Thailand, Indonesia and South Korea revealed the existence of billions of dollars in loans that even the savviest of financiers were unaware of.

Last week the IMF’s chief economist, Michael Mussa, hinted that some form of regulation might be in order. He pointed out that capital flows into emerging markets fell in one month from an annual rate of $400 billion in July to zero in August.

“Capital is like fire,” he said. “It heats your house, powers your car, makes you warm. But it can also burn you down.”

Times staff writer Art Pine contributed to this report.