The story of how the global economy escaped calamity is at best murky and at worst premature. A year ago, gloom pervaded the annual meetings of the World Bank and International Monetary Fund. Russia had just defaulted. Japan seemed permanently stuck in recession. Many other Asian economies had virtually collapsed. Europe was sputtering, and even the U.S. boom seemed shaky. Since then, the outlook has brightened considerably. Smugness will tempt the economic ministers who reconvene next week for the 1999 IMF-World Bank meetings. They should resist the temptation.

This may not be easy, because there's lots of good news. America's boom rolls on. Europe's economy -- though growing slowly -- has exceeded expectations. Japan may be emerging from recession. And Asia's ailing economies are reviving. The Asian Development Bank's predicts that South Korea's will grow 8 percent in 1999 (compared with a 9 percent decline in 1998), Thailand's 3 percent (1998: minus 9 percent) and Malaysia's 2 percent (1998: minus 8 percent).

But it's not obvious whether the good news represents a real recovery or just a temporary respite from crisis. There's no simple explanation of why last year's worst fears didn't come true. One contributing factor was the Federal Reserve's decision last fall to cut short-term interest rates three times, from 5.5 percent to 4.75 percent. "The interest rate cuts [said] that someone was watching the store," says Morris Goldstein of the Institute for International Economics, a research group.

They boosted confidence: The Fed wouldn't watch idly if the U.S. economy deteriorated. There was another helpful effect. Russia's debt default had frightened big institutional investors (pension funds, insurance companies, investment houses, "hedge" funds). They had assumed that Russia -- because it is a nuclear power -- would be saved from default by Western economic aid. Default seemed impossible. Once it occurred, many other "impossible" things suddenly seemed possible.

The result was a flight from almost all risky investments: lower-grade corporate bonds ("junk bonds"), new stock issues and developing-country bonds. Companies and governments were left stranded. Lower short-term interest rates made it easier for them to obtain bank loans as a temporary substitute for scarce long-term investment capital.

Europe and Japan also pursued expansionary policies. Between December and April, Europe's short-term interest rates were cut from about 3.3 percent to 2.5 percent. In Japan, the government reduced interest rates, raised government spending and adopted a program to rescue the banking system. In short, governments tried to stimulate the world's three largest economies (the American, European and Japanese). Up to a point, they apparently succeeded.

Meanwhile, Asia's recovery derives mainly from the severity of last year's slumps. Recall that its crisis began in 1997 with capital outflows. Asian countries lost foreign exchange reserves as investors converted local currencies into dollars or yen. Countries could no longer afford to pay for imports. Economic growth -- fanning the demand for imports -- had to be cut. The ensuing slumps generated huge trade surpluses as imports declined. Foreign exchange reserves began to rise again. Governments could then expand their economies through bigger budget deficits and lower interest rates. By June, short-term interest rates in Thailand had dropped to 4 percent.

All this is reassuring -- but also incomplete. Outside South Korea, Asia's recovery is weak, says economist Gregory Fager of the Institute of International Finance, a research group set up by major banks. All these economies suffered banking crises, and unless banks shed bad loans and get new capital, they can't lend to businesses, argues Fager. In Thailand, non-performing loans were about half of all loans, he says. In Indonesia, they were about 70 percent. (A non-performing loan means either interest or principle isn't being paid.)

"You've had a breakdown in credit flows," Fager says. Economies can't thrive unless businesses can borrow to expand production and sales. But only South Korea, he says, has moved quickly to restore the health of its banking system.

There are also other negatives for the world economy. Much of Latin America is in recession. Argentina's slump is especially severe. China's economy is slowing. A devaluation of its currency -- to spur exports -- could hurt other Asian economies by undermining their exports. Nor have international credit markets generally reopened to developing countries. The gap (or "spread") between interest rates on U.S. Treasury bonds and bonds for developing countries exceeds 10 percentage points. At those rates, it's too costly to borrow. The impending default of Ecuador on some bonds will not improve the climate.

But the largest uncertainties involve the United States, Europe and Japan. Together they constitute roughly half the global economy. As they go, so goes the rest of the world. Broadly speaking, it's possible to imagine two outcomes -- one benign, the other not. In the first, the U.S. economy gracefully slows down. There's no stock market crash. Meanwhile, Europe and Japan gradually strengthen. Developing countries slowly recover, because there's robust demand for their exports from the major industrial countries. The better they do, the easier it is to fix their banks and restore their international credit worthiness.

Now switch to the more menacing possibility. The U.S. boom halts. With or without a stock market crash, American consumers become less exuberant and stop spending so much. The economy founders or enters a recession. Europe and Japan turn out to be highly dependent on the American boom -- and especially its demand for their exports. Without that demand, their economies stumble. (Even now, optimistic forecasts for Japan's economy in 2000 show growth of only one percent to 2 percent.) The result is a disaster for developing countries. Their exports stagnate, and they can't borrow on international markets. They relapse into crisis.

No one knows which outcome is more likely -- which is why the good news is cause for satisfaction, not rejoicing. Although the world economy may have escaped calamity, the neighborhood is still dangerous.