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Learning to Curb Panics

February 10, 1999



Sometimes world financiers may feel like singing "Nobody knows the trouble I've seen."

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First it was East Asia. Then Russia. And last month Brazil plunged back into financial crisis.The Brazilian currency, the real, lost 41 percent of its value against the dollar. Some $17 billion was pulled out of the country last month by those afraid of losing money or hoping to make money from the devaluation. In an attempt to keep capital home, Brazil pushed overnight loan interest rates to 39 percent.

When an International Monetary Fund team arrived in Braslia, markets calmed. The real recovered a fifth of its losses. And a tentative deal was reached with Brazil that should pave the way for the country to receive a second chunk of a $41.5 billion international loan package negotiated last fall.

Brazil is tackling its economic problems more seriously now, trimming a huge budget deficit. The Brazilian Congress passed a stern 1999 budget that includes 8.7 billion reals, or around $4.3 billion, in spending cuts. More will be needed.

Devaluation of the real will encourage exports and discourage imports, returning Brazil's international payments situation to better balance. In 1998, this ninth largest economy in the world had a deficit in its international accounts of $35 billion. That's equal to 4.5 percent of the nation's total output - red ink galore.

Analysts expect Brazil to sink into recession this year. Some US and European firms may take a business hit. It is encouraging to note, however, that East Asian crisis nations, even Indonesia, should start growing again.

But it wasn't easy getting back on track. South Korea's output fell 6 percent last year, Thailand's 8 percent, Indonesia's 15 percent, Malaysia's 7 percent. Such declines are grim. A recession in the United States involves a drop of only 2 or 3 percent.

Korea is leading the pack back. It could have a trade surplus this year of $40 billion. In 1996, it had a trade deficit of $25 billion. This reversal shows what a sharp currency devaluation and other measures can accomplish.

Brazil may not suffer as sharp a recession as those Asian tigers did. It has a large economy, with less dependence on trade.

World financial leaders, private and governmental, are trying to find ways to avoid these international financial conflagrations. Last month a report of the International Institute of Finance urged borrowing countries to provide regular briefings on their problems - and to seek precautionary credit lines from banks as a form of insurance against financial turmoil.

As a start, that sounds reasonable. But more must be done.

Foreign equity investors have lost some $240 billion in East Asia and Russia. Foreign banks have incurred potential loan losses of $50 billion. Net private investments in emerging nations tumbled to about $152 billion last year from $260 billion in 1997. Capital flees with fear.

Brazil is thus a crucial test for global economic cooperation. The IMF, and its backers in Washington and Europe, must move decisively to prevent the crisis from worsening. To show its resolve, the IMF should now release the second chunk of financial backing it pledged earlier.