08/18/1998 08:37:15 ANALYSIS-Global financial stability a Holy Grail?

By Linda Sieg TOKYO, Aug 18 (Reuters) - Turmoil in Russia, Asia's prolonged crisis and fears of a domino effect in other world markets are lending greater urgency to debate over how to boost the world financial system's ability to cope with crises. But the search for ways to restore stability by taking some control back from speculators without sacrificing free market efficiency is an arduous one, and experts say success in the quest for the financial Holy Grail is still a long way off. "There is actually more consensus than one might think, but getting it right is very difficult," said one financial expert. "There has been a lot of discussion but we are still quite some way from the international community unveiling a proposal." Concern about a global sell-off in equity markets bubbled up on Monday following Friday's sharp decline on Wall Street. Asian stocks and currencies slipped further after Russia's effective devaluation of the rouble and its announcement of a 90-day moratorium on some foreign debt repayments, although Wall Street then shrugged off the news to close up 1.7 percent and provided comfort for Asian markets on Tuesday. One year after Asia's financial crisis began with Thailand's devaluation of the baht, the region's economic woes have grown into a major global headache. Japan's fragile banking sector is clouding the economic outlook for itself and its neighbours, while fears persist that a fresh round of regional crisis could be emerge if Hong Kong abandons its currency's dollar peg or China devalues the yuan. World financial authorities, economists say, have grown increasingly worried about the ability of speculators not merely to take advantage of weak economic fundamentals but to affect those fundamentals by attacking a nation's currency. "The wheels of international diplomacy turn very slowly, but a lot of concern is building up," said Russell Jones, chief economist at Lehman Brothers in Tokyo. "A number of senior officials...are very concerned that financial markets may be out of control and that there is a need to impose some discipline on the way that the market can target individual countries through speculation, that some ground rules have to be reestablished," Jones said. "That doesn't mean you go down the route of fixed exchange rates, but some mechanism is necessary." Japan's top financial diplomat Eisuke Sakakibara last March grabbed attention when he suggested the time might be ripe for a new world monetary order. Sakakibara, known as "Mr Yen" for his influence in currency markets, suggested in a newspaper interview that world leaders should think about forming a new accord along the lines of the 1944 Bretton Woods Agreement. That pact created a postwar global monetary system based on fixed exchange rates and temporary financing facilities to overcome crises, resulting in the creation of the International Monetary Fund (IMF) and the World Bank. The system came to an end in 1971 with the introduction of floating currencies. The IMF remains a linchpin of global efforts to handle financial crises, but its ability to predict, prevent, and cope has come under heavy fire in the wake of Asia's woes. In April the Group of 22, including countries hardest hit by Asia's economic storm as well as some from Europe, Africa and the Americas, set up working parties to examine three key areas in need of improvement in the world financial system -- making economic data more transparent, beefing up national banking systems and holding private investors more accountable. "The G22 process is still going on and in that sense, they are moving forward to work out new ideas on the international monetary system," a Japanese financial source said, adding that one or two of the three working parties might make final reports after the IMF's annual meeting this autumn. "As a framework, we support the free market system both in trade and capital movements, but as we did in trade liberalisation, we need some safeguards and appropriate attention to the stage of development of the financial sectors in each country," he said. "These two objectives -- management of short-term capital and a free market in capital movements -- are compatible." Figuring out how to make the two mesh, however, is a delicate task both technically and intellectually, and the world financial community's need to respond quickly to crisis flash points has tended to confound progress on the broader problem, some economists said. "There are two problems: the complexity of the issues and the fact that people are busy fighting fires," said Chris Calderwood, chief economist at Jardine Fleming in Tokyo. "You need the shooting to stop before you can sit down and discuss these issues." Leadership to forge ahead with the delicate task, meanwhile, is going to have to come largely from the United States, given Japan's distraction by its domestic woes and Europe's preoccupation with the advent of a single European currency. "The only lead Japan can take is to get on with fixing its own problems, and Europe is going through a period of protracted navel gazing because of the onset of the euro," Calderwood said. "The United States is the only serious player." ((Tokyo Newsroom +81-3 3432 8617 tokyo.newsroom@reuters.com))