A possible Brazilian collapse has been at the top of Washington's economic if not political worry list for at least a year now. Earlier this week it appeared the worst fears were about to be realised. Ever since the global crisis spread from the Far East to Russia and back again, the biggest fear has been a round of devaluations in Latin America.
Such an outcome, it was argued, would not be easily shrugged off by the US. After all Brazil is the world's eight largest economy and one of the US's biggest markets. If Russia, which is miniscule by comparison, could do such damage to the world economy, what havoc could Brazil wreak?
Of course, Brazil is also different to Russia. Its record package of some $41.5 billion (#35.5 billion) from the International Monetary Fund (IMF) was already in place when panic hit and there is some argument that the real economy is soundly based.
Nevertheless, the crisis is the result of years of high inflation of the kind in which many Latin American countries specialise. In an attempt to curb this, the government pegged the exchange rate to the dollar four years ago and also allowed it to depreciate slowly. But this novel solution did not inspire confidence among international investment bankers and interest rates were pitched very high to pay for it.
This not only gave large rewards to foreign banks for speculating in Brazil but also ratcheted up the cost of funding the national debt. The country was in trouble and the IMF had to step in, agreeing its massive package only last November. Since then concerns about Brazil have continued to linger and, when one of the largest states threatened it would not repay its debt to the federal government just last week, alarm bells began to ring. Almost $2 billion left the country on Tuesday; on Wednesday the central bank governor resigned and the currency effectively devalued.
Brazil's other problem is that no developing country has recently managed a controlled devaluation - witness the failed attempts in Mexico in 1994, Thailand in 1997 and Russia only last year. Of course, Brazil does have massive foreign reserves compared with most other countries, but they are already hugely depleted as a result of its efforts to defend the currency last summer.
The biggest worry of the world's economic superpowers is that Brazil's problems could spin out of control, impact on other Latin American countries and cause a re-run of last summer's fears of a global meltdown.
The first countries to suffer would be Argentina and Chile most likely. But there is also the real possibility of the crisis impacting back on Asia and, for many, the Hong Kong dollar may be the next currency to be under threat.
Banks in the US and Europe also have exposure, particularly Spanish banks.
Confronted by potential global crisis the last time around, the US central bank - the Federal Reserve - jumped to the rescue, cutting interest rates, belatedly followed by the European Central Bank. Many believe this will again be the outcome.
But the more fundamental problem is not what is actually wrong with Brazil. Rather it is the fact that stock markets across the world are almost certainly overvalued, fuelled by huge amounts of money chasing a good return and few places to go to find it. The vast sums flowing into US mutual funds as Americans give up on the savings habit, continue to pour in. But a sharp fall on Wall Street could change that.
Furthermore, the US manufacturing sector is already in decline as the impact of the Asian crisis is felt. If Brazil further impacts on orders, the whole US economy could follow manufacturing into recession.
But US and European policymakers will be hoping that this remains only a theory and that, with the assistance of the IMF, Brazil will be able to muddle through. After all, it is possible that this week's devaluation of around 9 per cent is enough for now.
