By Paul Blustein
Washington Post Staff Writer
Friday, October 23, 1998; Page F01

The global financial crisis, which a few weeks ago seemed spiraling out of control, has suddenly eased on a number of fronts -- raising the tantalizing prospect that its worst period may have passed.

A spate of positive developments has occurred in just the past few days, and these go well beyond the news familiar to most Americans, such as the Federal Reserve's interest rate cuts, or the seven-day rally in U.S. stocks, or the agreement by Congress to help replenish the International Monetary Fund's depleted cash reserves.

Just as potentially important -- and possibly much more so -- is Japan's decision to shore up its banking system with public funds, and a dramatic strengthening in the Japanese yen against the U.S. dollar that has helped bring money flowing back into some of the world's most battered stock and currency markets. Over the past month, Thailand's main stock index has soared 44 percent, Hong Kong's 35 percent and South Korea's 31 percent. Even the Indonesian rupiah, which depreciated to a sliver of its former value during the riots that swept the country earlier this year, is up more than 50 percent against the dollar since late September.

As a result, the current atmosphere contrasts sharply with the despair that pervaded the gatherings of bankers and economic policymakers attending the annual meeting of the IMF and World Bank earlier this month, when talk of worldwide recession filled the air, along with grim allusions to the 1930s.

"Things are looking a lot better than they had been," said Adam Posen, a scholar at the Institute for International Economics. Agreed David Hale, global chief economist at the Zurich Group in Chicago: "We are potentially turning the corner."

Others are more cautious. "I guess the way I'd put it is that the unremitting torrent of bad news has let up, and that's good news," said Daniel Tarullo, who until earlier this year was the chief White House adviser on international economics.

Reasons abound for skepticism about a turnaround. Indeed, Clinton administration officials, who recall how the crisis seemed to abate last spring only to take a severe turn for the worse in the summer, refrain from statements smacking of a claim that the situation has bottomed out.

"While some good things have happened, there's a lot to do, and as I've said many times, these problems developed over a long period of time so it's going to take the world time to work its way through them," Treasury Secretary Robert E. Rubin said in an interview yesterday. "I think a lot of the right kind of things have been in motion -- and over the last few weeks you've seen some evidence of that. But again, there are great challenges ahead."

Those rallying Asian markets are still far below their highs, after all, and much of Asia is undergoing a gut-churning, politically destabilizing recession that appears certain to persist for at least another year -- and possibly much longer. Thousands of companies in the region are laden with debt they can't repay, and few have undergone the painful process of restructuring themselves to become financially viable.

Meanwhile, pitfalls loom that could easily cause the crisis to intensify anew.

In Japan, the banking system could suffer a disastrous run if, as some experts fear, the nation's notoriously timid politicians balk at aggressively implementing the new banking-rescue plan. In the United States, jittery financial markets -- particularly those for corporate debt, high-yield junk bonds and bonds backed by mortgages and other assets -- still haven't returned to normal and could plunge into renewed turmoil. In Brazil, President Fernando Henrique Cardoso's plan to protect the nation's currency with tens of billions of dollars in IMF support could fall apart because of political opposition to his drastic budget-cutting program.

Still, according to a number of experts and policymakers, the latest news provides at least a basis for hope that the crisis may have passed its most terrifying point, even though millions of people in the worst-afflicted countries continue to suffer deprivation and shattered dreams.

Particularly welcome to many observers is the startling drop in the dollar -- and rise in the yen -- to about 117 per dollar, compared with 147 yen in mid-August. Although the yen's value may ebb, the Japanese currency has strengthened enough that one of the big worries hanging over the markets has all but evaporated for now -- the danger that a weakening yen would trigger a new round of devaluations of neighboring countries' currencies.

At the IMF, there is a palpable sense of relief, and not only about Congress's approval of Washington's contribution. Stanley Fischer, the IMF's deputy managing director, said in an interview last week, shortly before the Fed's interest-rate cut: "We are seeing some encouraging signs around the world, including in Japan and East Asia -- including Indonesia -- and it's clear that Brazil is moving pretty rapidly" toward getting its fiscal house in order.

The outlook is more guarded among administration and Fed officials, in large part because of worries about Japan's bank plan. Its success or failure will determine whether the world's second-largest economy stages a healthy recovery or continues to weigh down neighboring countries that are economically dependent on Tokyo.

"In recent days there have been encouraging steps with the passage of key banking reform legislation," Deputy Treasury Secretary Lawrence H. Summers said in a speech last week. "But after so much delay, observers will be forgiven for waiting to see the speed and effectiveness of its implementation."

Another source of both hope and concern is Brazil. The IMF and Treasury see Brazil as a firebreak, where the battle to keep the crisis from spreading to Latin America -- and from there to the rest of the world -- could be won or lost.

On Tuesday, the IMF and the Cardoso administration announced agreement on the broad targets for a three-year plan to cut Brazil's gaping budget deficit, and yesterday the IMF's Fischer disclosed that the fund would contribute roughly $15 billion to a loan package of perhaps $30 billion that will be finalized next week.

But Brazil's state governors exercise enormous influence over government spending, and several critics of the president are favored to win in elections this Sunday. Their opposition could destroy Cardoso's plan -- and with it, the IMF's already damaged credibility.

Small wonder, therefore, that some analysts instinctively cringe at suggestions of an end to the crisis.

"In the penultimate scene of 'Saving Private Ryan,' the soldiers are resting at a bridge, waiting for this onslaught," said David Rothkopf, who heads the Newmarket Company, a firm that advises corporations on emerging markets. "That may be the better analogy to what is happening now."