The Clinton administration aims to lead a campaign against global financial turmoil with a new strategy: give imploding economies much more money, much sooner.
But the world's staggering markets don't need just cash, they need credibility. And officials from major industrialized economies and the International Monetary Fund (IMF) have far less credibility to lend now than they did before the current financial crisis, say IMF critics.
The big economies have doled out more than $100 billion in urgent aid via the IMF to four troubled economies over the past 15 months. Still, the initiatives have largely failed and market chaos has spread - from East Asia to Russia, to the fringe of Latin America.
Now, the Clinton administration is promoting a new emergency line of credit to troubled economies. It is hammering out the plan along with a $30 billion aid package for Brazil, to be announced as early as this week, says an administration source.
IMF critics worry the money will be wasted in a vain effort to defend the overvalued Brazilian currency. "If you defend an overvalued currency, you might buy a little time but you don't get credibility," says Jeffrey Sachs, director of the Harvard Institute for International Development in Cambridge, Mass. "The money just ends up flowing to foreign creditors, who want to get out fast," he says, noting the IMF failed to shield the Russian ruble.
The stakes of IMF initiatives are higher than ever. Since May, the monetary fund slashed its estimate of 1998 world economic growth by one percentage point to 2 percent.
Now, it warns of global recession and mounting uncertainty. Already, more than one-fourth of the world economy is in recession, and the slowdown weighs heavily on the big, comparatively robust US and European economies. US lending, exports, employment, consumer confidence, and broad economic growth have fallen in the past several weeks.
At the heart of the slump is a worldwide credit crunch. Investors in the past year have increasingly abandoned shaky equity and corporate bond markets and fled to safer investments such as US Treasuries.
"Not since the Lord parted the Red Sea and allowed Moses to escape has liquidity dried up so quickly in the emerging world," says Robert Hormats of Goldman Sachs in New York.
Brazil looms as an especially menacing domino for the United States, compared with Russia, and it dominates the Latin American economy, claiming 40 percent of the region's gross domestic product. About 18 percent of US exports go to Latin America. And US financial institutions are closely tied to the region.
"If the Brazilian real is not defended, we will probably see [market] contagion throughout South America and a significant stock market hit in the United States," says Robert Litan, economic studies director at the Brookings Institution in Washington. "The stakes are very high in Brazil," adds Mr. Hormats.
The Brazilian support package could be a dry run for President Clinton's emerging plan to offer loan guarantees and other credits to countries bleeding capital.
The administration offered few details about the scheme, suggesting it would enable countries to quash panic early among investors. Financial officers of the seven leading industrialized economies on Saturday "agreed to explore" the US initiative. Such preventive measures would enable the monetary fund to forgo aid packages that have drawn heavy fire.
The monetary fund has been criticized for requiring aid recipients to endure social discomfort by holding a line on spending and maintaining high interest rates.
But even the IMF's harshest critics acknowledge that it shoulders just part of the blame for the mayhem. Few economists foresaw the imbalances behind the currency speculation that toppled Thailand's economy - the first domino - in July 1997.
No economist has claimed to have anticipated the ensuing global firestorm in risk aversion. "These kinds of things depend more on a kind of crystal ball than on macroeconomic equations," Michel Camdessus, IMF managing director, said Thursday.
The leaders of the most-developed countries haven't handled the tumult smoothly. Dogged by scandal, Clinton has failed to persuade the House of Representatives to approve an $18 billion contribution to the IMF.