By Paul Blustein
Washington Post Staff Writer
Friday, July 18, 1997; Page G01

The U.S. Treasury and the International Monetary Fund are in a state of high alert over a bout of financial turmoil in emerging markets that has sent currencies and stocks plunging from Southeast Asia to Latin America and Eastern Europe.

The wave of speculative selling began in recent weeks in Thailand and spread late last week to nearby countries with somewhat similar economic problems -- the Philippines, Malaysia and Indonesia. Like a virus, it then struck the Brazilian stock market and the Polish zloty with tremendous force Tuesday before moving on to hit markets in Singapore, Taiwan and Greece on Wednesday and Thursday.

Yesterday, Greek authorities acknowledged that they had been forced to use nearly $800 million from government coffers to prop up the drachma against an attack by speculators betting that the Greek currency would fall.

In Taipei, where the New Taiwan dollar hit an eight-year low against the U.S. dollar, Patrick Liang, deputy governor of the central bank, warned yesterday that his institution stood ready to "take necessary measures." And Thai Finance Minister Thanong Bidaya, railing against what he called false "scenarios of doom and gloom," met with Japanese bankers in Tokyo to solicit continued support for Thai borrowers.

The instability is arousing concern among IMF and Clinton administration officials, who harbor painfully fresh memories of the 1994-95 peso crisis that spawned a disastrous recession in Mexico and sent tremors throughout financial markets in the developing world. Officials worry that even if the latest turmoil does not trigger a full-blown economic slump, it could slow growth in some of the world's most vibrant economies, which have become key markets for U.S. exports.

"We're certainly in close contact with the IMF, and they're certainly in close contact with the countries that are affected," a senior administration official said.

"We do take it seriously," said Jack Boorman, director of the IMF's Policy Development and Review Department. "We're concerned for the individual countries, and we're concerned for any possibility that this starts a process of some kind, running from market to market."

The jitters in emerging markets don't appear to have affected big industrial countries' markets much, if at all -- as evidenced by the Dow Jones industrial average's surge past the 8000 level this week. And Boorman emphasized -- as did several private economists -- that this situation differs in several major ways from the Mexican crisis.

While the affected Southeast Asian countries may have become dependent recently on short-term inflows of foreign money -- as Mexico was -- they "are coming off dramatically good performances" based on sound fundamentals and policies including high savings rates, balanced budgets and effective measures to contain inflation, Boorman noted.

Still, the turmoil has provided a grim illustration of how rapidly the "contagion effect" can manifest itself in an era of electronically mobile capital, as a market dip in one country causes investors to dump massive amounts of securities in superficially similar nations.

The IMF, which recently assumed new responsibilities to cope with Mexican-style crises, has dispatched two teams to Thailand to provide advice on the troubled banking system and the floating of the nation's currency, the baht. The IMF's board plans to approve a $1 billion loan for the Philippines today, partly to replenish Manila's official reserves, which were badly depleted after its unsuccessful attempt to fight speculators who were selling its peso.

Thailand was vulnerable because of a sizable trade deficit, large foreign borrowings and a sinking real estate market. On July 2, it abandoned an attempt to defend its currency, which declined by 15 percent against the dollar. Next to fall were the currencies and stock markets of Thailand's neighbors, though their problems were much less severe.

Spurring the stampede was a growing realization that investors had bid up securities in many emerging markets to dizzying heights. In Brazil, for example, the stock market was up more than 70 percent this year before its 8.5 percent fall on Tuesday, which was followed by an 8.8 percent rebound on Wednesday and a 7.2 percent drop yesterday.

"When things are good, and everything is going up, investors get pretty bloody lazy with respect to analyzing credit, and when something spooks them into taking a harder look, you get a reaction -- sometimes an overreaction," said Mark Siegel, managing director at Darby Overseas Investments Ltd., a Washington firm that specializes in emerging-market investments.