A crisis of global capitalism, a meltdown, or even the harbinger of a world depression. There has been no shortage of analysts willing to put such tags on the developments in the international economy over the past year.

Whether the more gloomy predictions prove true, or whether EU central bankers prove correct in their almost nonchalant attitude, remains to be seen. But few would disagree that the world economy is facing its gravest crisis for many years.

It all began in Thailand in July, 1997. The crisis then quickly spread to other Far Eastern countries, to Japan, to Russia and Eastern Europe. Now many fear that Latin America could be next and that the developed economies of the US and Europe cannot escape unscathed.

Already over a third of the world's economy is in recession and international policy-makers have so far been one step behind the pace in their attempts to deal with it.

In summer last year, few had heard of the "bhat", never mind believing that the speculation against the Thai currency would have such profound consequences. But when its peg to the US dollar crumbled, it was not long before the same crisis of confidence hit the Malaysian ringgit, the Indonesian rupiah, and the South Korean won.

There were fears that some if not all of the countries would have problems repaying their foreign debt. And local firms were also unable to pay back rocketing loans, while investors fled the tumbling equity markets. Now demand has effectively collapsed in Indonesia, South Korea and Thailand and recovery is thought unlikely next year because of a large debt overhang.

The Far Eastern crisis put pressure on Japan which was already overburdened by a debt-ridden banking sector and was, at the time, beginning a very fragile economic recovery. As the world's second largest economy, its troubles have had a huge and direct impact on the global economy.

Japan is now officially deep in recession. Earlier this month the government's Economic Planning Agency downgraded its assessment of the economy from being in a "quite severe situation" to a "prolonged slump". And Japan now has a higher jobless rate than the US, something few would have believed possible a few years ago.

The Russian rouble was next on the list for speculative attack, and eventually the International Monetary Fund had to pour money in to prop up the central bank's reserves. But this was not enough and amid growing political turmoil Russia announced it was defaulting on debt repayments and effectively devalued the rouble.

The international community sat up and took notice. While Russia is small enough in international economic terms compared with Japan, it is strategically significant.

By the time the Russian political situation had achieved some sort of stability, the contagion had spread. The Russian debt default had persuaded all those who still had money in emerging markets - smaller markets in Eastern Europe, Asia Latin America and parts of Africa - to flee.

Nervous investors tarred all the so-called emerging economies with the same brush. Money which had once poured into the Asian tigers spilled over itself in its haste to get out of there as well as Latin America, South Africa and India.

There are now fears that Brazil could be next and its markets have already seen a substantial outflow of funds. Brazil, which accounts for nearly half of Latin America's output, is now attempting to defend its system with interest rates of 40 per cent, while inflation is only running at 4 per cent.

Investors appear to have Brazil's exchange rate peg in their sights, just as they did the bhat's over a year ago. But it is this peg which is credited with bringing down inflation in one of the world's most inflation-prone countries.

While the West has not yet felt the full chill of the wind currently swirling around the rest of the world, some of the medium-sized countries have been affected. Russia may have been the most prominent victim of a collapse in commodity prices, but others include Australia, New Zealand, Canada, Argentina, Chile, Brazil as well as Finland and Norway.

Even the UK economy, which traditionally moves in synch with the US, is heading for a slowdown, crippled by the strength of sterling.

The crisis has spread across the globe in a number of ways. Lower growth in Asia has affected international demand and acted as a brake on growth. Falling commodity prices - oil is now the same price as it was 15 years ago - have taken their toll on major producers such as Russia.

And, crucially, investor confidence has been hit, as it became clear that the financial structure of many of the Asian economies was unsound and that projects supported by outside investors were not viable. This has led to a wholesale pulling back of funds from anything involving a large amount of risk.

The latest casualties are banking stocks worldwide, with investors now fearing the impact on the financial institutions of collapsing markets and bad debts in many parts of the world.

One massive hedge fund, with a $200 billion (£135 billion) exposure has already collapsed and others are warning of huge losses. Banks themselves are likely to suffer, already Europe's biggest bank - UBS - has warned of a fall in profits as a result of its exposure to collapsed hedge fund Long Term Capital Management, which needed a $3.5 billion rescue package.

Meanwhile the financial markets have been hit hard, with about $4 trillion being wiped off the value of global stockmarkets in recent months, equivalent to Japan's Gross Domestic Product.

The crisis has crippled some of the most successful developing economies. It is imposing very heavy pressure on political and social cohesion in many countries, provoking riots and leaving many people hungry and of course angry.

So far, we have avoided the worst fears of a slump into a major international recession - or even the global deflation forecast by some, with prices generally falling in a 1930-style slump. The US and European economies have remained stable - so far - although the chairman of the US Federal Reserve has recently argued that it is simply "not credible" that the US and Europe can remain an oasis of prosperity. And no-one is under any illusions that considerable risks lie ahead.

So what can be done? For many the solving of Japan's problems is the key to any future recovery.

But the crisis in the Japanese banking sector with its sheer volume of bad loans will be very difficult to clear up. There is still a chance that one of its elite institutions, the Long-Term Credit Bank, could collapse, following Yaminichi Securities, which collapsed earlier this year. The Bank of Japan has already cut interest rates to 0.25 per cent, to little avail.

There is also a possibility that the Chinese could devalue the yeuan, provoking another round of devaluations across the region.

Meanwhile the outlook for the US remains crucial. The pessimists argue that the US economy cannot possibly cope with crisis in the Far East and Japan as well as Latin America. And the latter is more important to it in terms of trade - particularly Mexico.

The single biggest danger is of a stock market collapse in Wall Street. According to investment bank, Goldman Sachs, a 10 per cent decline in prices would shrink growth by almost 1 per cent. And Phillips & Drew go even further. A 50 per cent decline, which would put prices at their historic average in relation to earnings, would put growth almost 7 percentage points behind what it would otherwise have been.

This explains Washington's focus on Brazil: it is now the litmus test for how the contagion will go. If Brazil suffers an Asian-style collapse, then the impact will be profound. If it can be spared, it would benefit all other emerging markets, and with them, the thinking goes, Wall Street.

Developments over the next week will be crucial. The US Federal Reserve Board may today announce an interest rate cut to try to boost growth. Brazil goes to the polls next weekend. And next week the international finance ministers meet.