BUSINESSWEEK ONLINE : MAY 22, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY Who'd Catch Pneumonia If the U.S. Sneezes When Federal Reserve Chairman Alan Greenspan convenes the Federal Open Market Committee on May 16, policymakers will have more than their home turf to think about. If the Fed overshoots in its drive to raise interest rates, it could slow growth across the industrialized world and push the fragile economies of nations in Asia, Latin America, and Eastern Europe into recession. Among those most at risk: the recovering economies of East Asia. Many are now precariously bouncing back from the 1997 financial crisis, thanks largely to booming U.S. imports. A sharp cutback in U.S. purchases could leave many trading partners with far less wind in their sails. ''Greenspan is the world's central banker,'' says Michael Hartnett, senior international economist at Merrill Lynch & Co. ''If the Fed slows U.S. consumption considerably, it will have a global impact, no doubt about it.'' POTENTIAL VICTIMS. Who is most dependent on the U.S. market? The top seven--measured by exports to the U.S. as a share of total output--are Canada, Mexico, Malaysia, Taiwan, Thailand, Indonesia, and South Korea. But some of these countries are in better shape than in previous crises. Mexico, for instance, while still at risk, has largely weaned itself off the speculative money it once relied on to finance its current-account deficit. Malaysia, for another, is running one of the world's biggest current-account surpluses. Many economists are more worried about countries with big external debts and poor credit ratings. Some are big exporters to the U.S. Others aren't. But if global interest rates climb, these countries' debt-service burdens will worsen. And the rates they pay include a risk premium that grows when the world economy gets shakier. Among the potential victims of a debt crisis, economists say, are Thailand, Argentina, Brazil, Poland, and Indonesia. The Thai stock market recently hit a 14-month low. Investors in Argentina's government bonds are demanding yields 6.7 percentage points above comparable U.S. securities. Brazil's current rebound, too, remains at risk because of its massive external debt. Poland is running a big current-account deficit. And Indonesia's economic situation is complicated by ethnic strife. ''This is a dangerous time,'' warns economist Christian Weller of the Economic Policy Institute, a liberal think tank in Washington. Exacerbating matters for global growth is that the Fed isn't the only one raising rates. Since Jan. 1, central banks have tightened in Europe, Canada, Korea, Switzerland, and Hong Kong. Many analysts are predicting that the European Central Bank will keep raising rates, in part to prop up its new currency. The euro fell from $1.16 at its launch in January, 1999, to below 89 cents in early May, before rebounding to 91 cents on speculation about higher rates. To be sure, some tightening in the U.S. and abroad makes sense. ''Price stability in the U.S. is good for the rest of the world,'' says Harvard University economist Martin S. Feldstein. ''If we don't get it with moderate increases now, we'll have to get it with bigger increases later, which could have destabilizing effects.'' The trick, though, is to finesse a soft landing in the U.S. without causing crash landings overseas. Merrill Lynch's Hartnett says the global economy should stay on course if the Fed manages to slow U.S. expansion to 3.6% next year. But if the Fed tightens too much by mistake, lowering U.S. growth to 2.5% or less, Hartnett says some countries could be knocked into recession. One more thing for Alan Greenspan and his colleagues to fret over. By Peter Coy in New York, with Geri Smith in Mexico City _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Wooing the Worker CHART: As Unemployment Shrinks...Companies Offer Workers More Who'd Catch Pneumonia If the U.S. Sneezes INTERACT E-Mail to Business Week Online

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