BOSTON — The United States and other major nations have been working to fireproof the international financial system.
They are putting in alarm systems, installing fire walls, and strengthening the financial fire department - a.k.a. the International Monetary Fund (IMF).
Will planned changes do the job? Will they prevent the Asian financial fire from spreading, and deter future crises?
"I'm somewhat more confident about the system," says Peter Kenen, a Princeton University economist who helped draft suggestions for reform by the Group of 22, a mixture of major industrial nations and key developing countries.
Reform first, then success
Success, though, depends on implementing some reforms. "Then I would have more confidence," says Professor Kenen.
The first step - strengthening the IMF - is almost done. Last month, Congress approved a $17.9 billion contribution to the IMF - with reform conditions attached.
That will enable the IMF to get fresh funding, totalling $90 billion, from its 182 member nations. The money is earmarked for loans to nations in financial distress.
In a letter to Congress last week, Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan certified that the world's major economic powers had publicly agreed to implement IMF reforms mandated by Congress.
IMF directors of the Group of Seven industrial countries spelled out their agreement in a memorandum to Managing Director Michel Camdesus on Oct. 30.
When enough nation-members approve the changes, probably in a few months, the IMF will get its hands on the money.
With an assurance of those funds, the cash-strapped IMF figures it can assemble a rescue package worth up to $40 billion for Brazil. Money for the plan should also come from the Inter-American Development Bank, the World Bank, the US, and other G-7 nations.
Brazil will have to agree to IMF terms for the loan, including budget stringency. The deal could come together this week or next.
Fire fighting in South America
The goal is to prevent a financial fire from breaking out in Brazil that could spread to other Latin American nations, damaging the world economy.
To Robert Solomon of The Brookings Institution in Washington, the IMF refunding is just rebuilding the "old house" - not the new architecture talked about by President Clinton.
But the G-7 did call for an architectural change - a fire wall - on Oct. 30.
It asked for a new IMF program to provide short-term loans for financially troubled nations, as long as they are pursuing IMF-approved policies.
This idea is a "major advance," says Kenen.
A country in mild trouble could get a promise of IMF help, discouraging a financial attack from foreign speculators and encouraging domestic investors to keep their money at home. It might also give private lenders and other nations the incentive to participate in the loan package.
Many details must be worked out. Does the IMF suggest that a nation apply for a contingency line of credit, or will a nation decide for itself? Will financial markets be frightened by such an application? Should an international agency other than the IMF judge whether a nation needs such a line?
Will nations pay a small annual fee - say half a percent of the line of credit, as do firms that establish such a relationship with a commercial bank?
The goal is to have G-7 leaders approve the plan at their annual summit in Cologne, Germany, next summer.
Other planned reforms include greater openness in the financial operations of nations, financial institutions, and companies. An alarm will sound if the books look bad and remedies can be launched early.