WASHINGTON Rich countries may not be able to resharpen their crisis-fighting tools fast enough to get them ready for the next downturn, leaving them increasingly reliant on cash-rich emerging powerhouses to ensure stability.
Before the latest upheaval struck, advanced economies had enjoyed a relatively peaceful stretch dating back to the early 1990s. Aside from the 2001 recession, which proved to be mild, the financial trauma was largely centered in emerging markets.
That has changed.
As the International Monetary Fund has stressed in the run-up to this week's meetings of world finance officials in Washington, the biggest threats to the global recovery are concentrated in advanced economies now.
Households and governments are shouldering unsustainable debt burdens, and Greece's woes illustrate how quickly such fiscal strains can explode.
Emerging markets, scarred by debt crises of the late 1990s, have built up an estimated $5.5 trillion in reserves as a form of self-insurance against future problems, but the rich world has no such cushion.
Indeed, emergency rescue efforts have driven government debt loads in the United States and Europe near World War Two highs and benchmark interest rates to record lows, leaving little leeway to respond should another crisis strike.
"Emerging countries are becoming a very important force, not only because they're driving the recovery but also because their fiscal policies are much more sound than in developed countries," said Domenico Lombardi, president of the Oxford Institute for Economic Policy and a senior fellow at Washington's Brookings Institution.
"In the case of the next crisis, their role could be even more important in stabilizing the global economy."
Lombardi said the growing influence of the Group of 20 club of rich and emerging economies, at the expense of the rich-only G7, showed this point was well understood. The G20 finance leaders are meeting in Washington on Friday, ahead of the International Monetary Fund's weekend sessions. In past years, it was the G7 that would gather ahead of the IMF meetings.
World Bank President Robert Zoellick underscored that shift on Thursday, saying the world was becoming multi-polar as emerging markets generate a larger portion of global demand.
"I used to attend these conferences and the G7 was the focus because of the key role of those seven developed economies," he said. "Then Russia was added, and the European Commission would take part. That world is gone."
NO WIGGLE ROOM
Major economies have pledged $5 trillion in stimulus spending to prevent the recession from becoming a depression. While economists widely agree that the expenditures were necessary and effective, it will take years to restore public debt to pre-crisis levels.
The economy may not remain stable that long.
"The main concern is that room for policy maneuver in many advanced economies has either been largely exhausted or has become much more limited, leaving these fragile recoveries exposed to new shocks," the IMF warned in its World Economic Outlook, released on Wednesday.
Japan's experience shows how important wiggle room is. Although its banks had little direct exposure to the credit collapse, its economy fell 5.2 percent last year, more than twice the rate of decline recorded in the United States, where the mortgage meltdown originated.
Part of the problem was that the Bank of Japan had very little room to lower already rock-bottom interest rates, and its debt burden exceeded 100 percent of annual output, constraining the policy response.
Those figures look strikingly similar to current conditions in the United States and much of Europe.
For policymakers, who are reluctant to clamp down too soon on lending or spending for fear of killing the recovery, the message may be that it's just as risky to wait too long.
CENTRAL BANKERS, BANK SAVIORS
An IMF official proposed having central banks set higher inflation targets, perhaps 4 percent, as a way to provide more policy room, but central bank officials have been staunchly opposed, saying it would undermine hard-fought credibility.
Tightening regulation of financial firms by raising capital requirements and limiting leverage could take some of the pressure off policymakers, said Torsten Slok, an economist with Deutsche Bank in New York.
By cracking down on excessive risk-taking by banks, officials could help ensure the next crisis is not as severe, which would mean they would not have to employ nearly the firepower used this time to fight then next battle.
U.S. senators are nearing an agreement on a regulatory reform package that could be voted on as early as next week.
Oxford Institute's Lombardi said that reform was long overdue. Because of lax regulation, central bankers were forced to fill the void and essentially keep financial firms afloat through sharp interest rate reductions and emergency loans.
"We're used to thinking of monetary policy as a tool to contain inflation, but what it has done during this crisis was really support the financial system," he said. "This type of support is not likely to be withdrawn any time soon because the financial sector is still fragile."
That suggests interest rates will remain ultra-low for longer than economic conditions alone might warrant. The public debt picture won't be much improved any time soon either, which makes emerging markets' pot of reserves look a bit sweeter.
(Editing by Andrea Ricci)