South Korea Bailout Calms Immediate Fears,

The bailout package devised for South Korea by the International Monetary Fund has allayed some worries about the Asian financial crisis, but economists caution that the waters are far from calm.

"Even the robust economies in the region will suffer ongoing attacks on their foreign exchange and stock markets," said Gary L. Ciminero of Independent Economic Advisory, Providence, R.I.

Bruce Steinberg, chief economist at Merrill Lynch & Co., who visited the region last month, said he expects a sharp slowdown in growth "that has deflationary implications for the rest of the world."

IMF support has been established for Thailand, Indonesia, and Korea, but Mr. Steinberg cautioned that arranging bailouts "is much easier than actually making the changes to economic structures" that such programs require.

"Korea, the 11th-largest economy in the world, is particularly worrisome," he said. "Most financial groups and many industrial groups are basically bankrupt. To our knowledge, nothing like this has ever happened before."

Nicholas S. Perna, chief economist at Fleet Financial Group, said the IMF should eventually be able to stabilize South Korea "but not without major costs. There is the loss of face for a nation that has gone from rags to riches in just a couple of generations."

Austerity will crimp the domestic economy, and Korean workers will have to take sizable real wage cuts, he said. "All in all, it could take years for Korea to get back to normal - whatever that is."

The bottom line here, most economists think, is that the U.S. economy will slow next year without the Fed's having to raise interest rates, because inflation will remain quiet.

"Deflationary winds blowing out of Asia are bound to push the U.S. inflation rate closer to zero in 1998," said Edward Yardeni, chief economist at Deutsche Morgan Grenfell. "The CPI rate should be down to 1.5% next year and to 1% in 1999," he said.

Corporate profits are also likely to be depressed. "S&P 500 earnings should be up only 5%, though even weaker performance is possible," he cautioned.

"The good news is that the Federal Reserve is likely to lower interest rates in 1998," Mr. Yardeni said. He expects a cut of 50 basis points in the federal funds rate and a 100-basis-point decline in the 30-year bond yield.

Among major industrial nations, the biggest negative impact is likely to be on Japan, said Henry Kaufman, president of Henry Kaufman & Co., an economic consulting firm in New York.

But more generally, "we don't know the extent to which excesses are looming in our financial markets," he said in a recent speech.

"A global financial reassessment is in place," Mr. Kaufman said. "A further deterioration in financial conditions outside the United States may expose some financial weakness inside the United States."

Mr. Kaufman, who is among Wall Street's most senior observers, warned that promoters of modern investment alternatives almost insist that reasonable financial behavior is defined as greater risk-taking. And few regulators have been wise or brave enough to challenge that view, he said.

Among what he called barriers to reasonable financial behavior are beliefs that:

*A rising trend of stock prices will continue more or less indefinitely.

*Risks are knowable and can be calculated on historical data, a notion belied by the oil shocks of the 1970s and Asian crises.

*Markets are efficient, liquid, and symmetrical, an idea he called "simply fallacy in troubled times."

*Wall Street analysts' recommendations are unaffected by their employers' striving for lucrative business relationships with companies or governments being reviewed.

*Credit quality of companies or even governments is measurable on a timely and sound basis, which borrowers' desire to delay or dilute bad news compromises.

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