All quiet on the economic front as crises pass

Just six months ago, all the talk was of the impending financial "meltdown". The world's economic system was in crisis. Russia had just defaulted on its debt, the East Asian countries were lurching from one crisis to the next and there was talk that Brazil would be next. And if that were to happen most forecasters believed the whole system would have been thrown into chaos.

Even US President Bill Clinton described the situation as the "worst in 50 years" as financial markets collapsed and a massive US hedge fund, Long Term Capital Management, went belly up.

But just six months later as the IMF and World Bank meet again for their six-monthly gathering, all is quiet. The sense of crisis has disappeared. Over recent months, senior government officials from the main industrial nations have been putting finishing touches to projects which were started at the height of the storm.

New proposals are being tabled on the so-called global financial architecture - the way the world economy is regulated and governed - but having been the focus of heated debate late last year, these issues are no longer capturing much attention.

So what has changed? Developed country stock markets have reached record highs, the Dow even holding above the key 10,000 mark. But it is the seemingly remarkable recovery of the emerging economies which is the real story. Reflecting this, financial markets in these economies are also on something of a roll. Hong Kong's equity market has hit an 18-month high and even Russia's market has recovered a little. In East Asia the economies of Thailand, South Korea, the Philippines and Malaysia also all appear to be on the mend.

Brazil is perhaps the most positive "story" for many of those gathered in Washington. The stock market is now some 70 per cent higher than it was when the government devalued the real early this year.

Even long-term interest rates or bond yields in the emerging economies are falling as governments and even companies begin to borrow abroad once again. Some people are even looking at a so-called "V shaped" recovery, where the economies recover as quickly as they collapsed. However, many others point out that while foreign funds are returning to the emerging markets they hardly represent a flood and certainly are nowhere near the volumes which poured out over the past two years.

The IMF itself is cautiously optimistic. It is predicting developing country growth of 3.1 per cent in 1999 compared with 3.3 per cent in 1998, still the lowest figure in a decade but set to rise to 4.9 per cent in 2000. Global growth, it estimates, will be 2.3 per cent again with a bounce back next year. As IMF managing director Mr Michael Camdessus says "we have come a long way".

But how has all this happened? The IMF itself would like to take some of the credit and perhaps some is due, but the US central bank, the Federal Reserve, perhaps deserves the most applause.

The Fed's chairman, Mr Alan Greenspan, is for many the hero of the times. The 73-year-old made the crucial decision to sanction the bail-out of the LTCM hedge fund, a high risk investment fund. By doing this he removed an incredible $100 billion (€94.3 million) of open positions on the money markets. Left unchecked, these positions - effectively representing the financial exposure of investors - would have been likely to have caused chaos, if not collapse, across the system.

At the time some believed the bail out of LTCM was almost a step too far. Effectively the US taxpayer bailed out extremely sophisticated New York whiz kids who had previously made a fortune with their own brand of derivatives trading. The authors of the trading system had even won a Noble prize for the mathematics involved. The problem was one of "moral hazard" - if the Fed bailed them out it would only encourage other institutions to take on similar risks in the knowledge that if the worst were to happen, the Fed would step in. But it now looks almost certainly to have been the right decision.

Mr Greenspan also took the opportunity to cut interest rates three times in October and November. And he used that IMF meeting six months ago to put pressure on Mr Wim Duisenberg, the president of the European Central Bank, to cut rates when he had the opportunity. That pressure bore fruit in December, although the German government can also claim to have a hand in the move.

The US interest rate cuts worked well. They allowed the US consumer to continue taking on the burden of the slowdown in the world economy and to continue to buy in serious amounts of imports. They also helped the Dow Jones to well over the levels called "irrational exuberance" by Mr Greenspan almost two years before. But this seems merely to be a footnote. As one Fed insider remarked recently they have now almost given up worrying about stockmarkets having been repeatedly proved wrong in their predictions of an imminent bust.

Of course there will also be other consequences over the longer term. The US balance of payments deficit or surplus of imports over exports is now a remarkable $310 billion, from $155 billion in 1997 and there are worries that this could add to protectionist voices within the Congress. And there are worries about the trade relationship between the US and Europe. But compared with the possibility of a global depression six months ago, such worries seem to pale into insignificance.