Tuesday, August 18, 1998

Russian devaluation shows solutions for global economy running out

By MARTIN CRUTSINGER

Associated Press

WASHINGTON -- Russia's ruble devaluation, just a month after promises of an additional $22.6 billion from the International Monetary Fund, dramatically underscores the fact the United States and its rich allies are rapidly running out of solutions to halt a deepening global economic crisis.

U.S. officials insist the key, as always, is for the countries in trouble to take the painful reform steps necessary to put their economies back on track.

But critics note, so far, more than $100 billion in bailouts assembled by the IMF for troubled Asian nations, and the additional support Russia received last month, have not restored confidence.

Russia's economy hit more turmoil Monday when the government of President Boris Yeltsin, after spending billions of dollars in recent months to prop up the weak ruble, announced it was letting the currency's value drop by one-third and would impose a 90-day moratorium on repaying some short-term debt to ease a cash crunch.

Russia has become the latest victim of a crisis that began 13 months ago in Thailand and has pushed a number of Asian countries, including Japan, into severe recessions and rattled stock markets from Hong Kong to New York.

Emerging markets such as Russia have been particularly hard-hit. The spreading troubles have prompted investors to panic and try to cash out holdings at the first sign of new troubles. The U.S. economy has been jolted as well. The Dow Jones industrial average is down 760 points from its July high on fears that Asia's troubles will cut into American companies' profits.

"The Asian situation is the worst economic event the world has faced since the 1930s," said Allen Sinai, chief economist at Primark Decision Economics. "There is a risk of a global recession."

A growing number of critics contend those unending economic troubles show the old-time austerity religion preached by the IMF and backed by the Clinton administration isn't working.

"The whole purpose of an IMF program is to make up for foreign capital that is pulled out of the country," said Lawrence Chimerine, economist at Economic Strategy Institute, a Washington think tank. "It is silly to impose higher interest rates that make the domestic economy weaker and give you more problems."

But the Clinton administration continues to insist the only way for countries to restore market confidence is to tighten their belts.

"We believe it is critically important that the Russian authorities move quickly to take actions to restore confidence," Treasury Secretary Robert Rubin said in a statement Monday.

Russia's latest turmoil comes just two weeks before President Clinton is scheduled to meet Yeltsin in Moscow. The two leaders spoke by telephone on Friday.

A senior administration official, speaking Monday on condition of anonymity, said Russia had sought additional international support to stave off a devaluation. But the unanimous view of G-7 officials was that the critical element to stabilize Russia was reform inside the country -- not extra money, the official said.

In return for the $22.6 billion IMF commitment last month, Yeltsin's government agreed to austerity measures, including stepped-up efforts to collect taxes. But the Russian parliament has failed to approve those measures.

Even with the focus on Russia, the Clinton administration and private economists continue to believe the key to resolving the Asian crisis lies with Japan, the world's second-largest economy. It must take steps to get its economy growing again, these officials believe.

New Prime Minister Keizo Obuchi has pledged to accelerate efforts to jump-start Japan's economy and deal with more than $600 billion in banks' bad loans. But so far, financial markets have remained skeptical about how fast and how far Obuchi will go.

Until Japan halts the slide in its own currency and resumes economic growth, its troubled Asian neighbors are not likely to stabilize, said Daniel Tarullo, who until March coordinated the administration's response to the Asian crisis inside the National Economic Council.

"Far and away the most important thing that can happen is a set of sustained, forthright actions by the Japanese government," Tarullo said.