Foreigners Begin Moving Cash to U.S. as hedge against Y2K
By Patrice Hill
THE WASHINGTON TIMES
Predictions that the year-2000 computer bug will rain doom, gloom and recession on the United States are giving way to forecasts that the changeover will be largely uneventful or even shower Americans with surprising benefits. The increasing optimism among economists stems from the high state of preparedness of U.S. banks and securities markets, which have made widely publicized efforts to update and test their computer systems to ensure a seamless transition to the new year. Tentative evidence suggests that foreign investors are starting to funnel money into American banks and securities out of fear their counterparts overseas are not as well prepared as the United States.
Only one in 10 citizens of Poland, for example, believes his money is safe in Polish banks despite assurances from bank officials, a recent survey found. Other developing countries in Eastern Europe, Latin America and Asia -- and even some major industrialized nations -- are plagued with similar uncertainties.
The result could be an unexpected windfall for Americans, analysts say, if shaky investors pull out of other countries and pour money into the United States for safekeeping. "I would expect a 'flight to quality,' but not on a massive scale," said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis. "It's a very legitimate concern and response on the part of foreign investors. If I were a huge financier from Saudi Arabia, I would want to hedge my bets so that at least I would have enough cash to move around." Any such move would benefit the U.S. economy in the short run through lower interest rates, he said. But it also could cause disruptions and volatility in the financial markets that "are not necessarily desirable." While so far there's little evidence that money is pouring into the United States, Mr. Sohn said "we might see more of that toward the year end." No one is predicting an event as big as the financial panic in 1998, when investors withdrew en masse from crisis-stricken developing markets in Asia and Latin America and dumped cash into U.S. stocks and bonds in a tumultuous stampede that rocked global markets. That flood of money from overseas helped draw interest rates in the United States down to record lows, stimulating robust economic growth and an American spending spree that persists. But the potential for an exodus of investors who are jittery about what the new year will bring remains great in developing countries from Latin America to Eastern Europe where little
has been done to upgrade older computer systems that don't
recognize the 2000 date.
Those systems are in danger of going on the blink Jan. 1
because of a cost-saving shortcut used years ago by software
programmers: designating the year with only two numbers. The
older systems assume the year 00 is 1900 and could shut down
or malfunction unless they are reprogrammed and tested.
Even bankers from highly developed countries like
Germany, Japan and Italy grumble privately that they have
been troubled by public concerns about their preparedness.
The bankers are worried that they may lose customers to their
U.S. competitors and are trying to catch up.
Lawrence Gershwin of the National Intelligence Council,
which represents 12 U.S. spy agencies, told Congress that "we
expect to see safe-havening of financial assets" as well as the
diversion of computer traffic and international trade into U.S.
facilities from overseas -- all possibly benefiting the United
States.
"Some foreign governments and businesses will look to the
United States and its better-prepared infrastructure to
overcome Y2K problems abroad," he said, noting that the
biggest problems are expected in China, Egypt, India,
Indonesia, Russia, the Ukraine and other East European
countries.
Edward Yardeni, chief economist with Deutsche Banc
Alex. Brown in New York, said investors are likely to flee into
U.S. markets once year-2000 problems emerge. "We see a
tremendous amount of complacency" about the year-2000
changeover, which is likely to dissipate suddenly come the new
year, he said.
The primary beneficiary of any worldwide panic is likely to
be the U.S. Treasury Department and its bonds, which are
considered the safest and most liquid investments in the world,
he said.
"I doubt the U.S. stock market would benefit," he said,
despite the drop in interest rates. Companies and consumers
will not benefit as much as the Treasury from the fall in rates
because their borrowings are perceived as riskier and more
prone to payment disruptions.
Already, year-2000 anxiety contributed to the spike in the
interest rates paid by U.S. companies and homebuyers this
year. Some corporate borrowing rates have risen to record
levels above Treasury rates as investors fleeing millennium-bug
risks seek the safe haven of government bonds.
While less creditworthy American borrowers already are
paying a price for year-2000 skittishness, borrowers in other
countries are paying a heavier penalty.
Money flows into the developing world dropped to a trickle
last year in the wake of the Asian financial crisis and have
stayed at depressed levels this year partly out of concern that
the emerging economies have not prepared for the millennium
bug, according to an International Monetary Fund report on
capital flows last month.
"Emerging markets will remain unusually susceptible to
ongoing shocks," including "indications of Y2K problems," the
report said. To help address shortages of money that may
occur next year, the fund has set up a special lending facility for
its 182 member countries.
American investors and banks have been among the most
skittish about putting money in countries prone to year-2000
problems. U.S. mutual funds that invest in emerging markets
typically warn their customers that the risks are higher overseas
and the value of their portfolios could plunge if difficulties
develop.
Mr. Sohn of Wells Fargo said the high state of alert in the
United States about the computer glitch already is helping to
draw customers to American banks.
The Federal Reserve imposed strict deadlines on U.S.
banks to ensure they were ready for the changeover and has
broadcast its own plans to make ample cash and loans
available to banks that encounter disruptions or problems in
getting payment from borrowers at home or overseas.
Japanese customers jumped at the chance to do business
with American banks when Japan deregulated its banking
system for the first time this year, Mr. Sohn said, not only
because U.S. banks are ready for 2000, but also because they
are not weighed down by a mountain of bad loans like most
Japanese banks.
"Customers are moving to American banks because of the
credit risk in general," he said, noting that one of America's
largest banks has been a prime beneficiary of Japan's woes.
"People are lining up at Citibank trying to deposit money and
buy investment products," he said.
"I've seen some statistics which would indicate that the
Japanese banks are not as far along as American banks are in
getting ready for Y2K, so consequently there could be some
problems in Japan. Some smart institutional investors could be
shifting money out of Japan into U.S. Treasuries," he said.
In South Korea, the threat of bank failures in the wake of
the Asian crisis has caused a run on many domestic institutions.
But one large state bank that went bankrupt suddenly gained
customers this year when the government said it would sell it to
an American company, Mr. Sohn said.
On a recent trip to China, he asked central bankers whether
they were ready for the computer bug and was "taken aback"
when they said they were postponing work on the issue
because they have more pressing problems to solve at the
country's insolvent state-owned banks.
"China's not as exposed to the Y2K bug as America is,"
Mr. Sohn said. "They're less computerized and less sensitive to
the bug, so it's not going to be a catastrophe if a problem does
arise."
A leading year-2000 expert, Bruce McConnell of the
International Y2K Cooperation Center, warned that in many
ill-prepared countries the real danger is not a sudden
breakdown in banking, power or phone service Jan. 1, but a
slow deterioration of services across the economic spectrum.
"What is likely in countries with numerous Y2K failures is a
growing slowdown in commerce" resulting in both degraded
infrastructure performance and shaky consumer confidence, he
said.
The United States is likely to benefit not only as businesses
and investors flee in anticipation of problems, but when any
prolonged shutdowns occur in other countries, analysts said.
"Some of it's quite dismal," said Don Meyer, spokesman for
the Senate Special Committee on the Year 2000 Technology
Problem, noting that resentment is likely to grow in the Third
World if the United States is perceived as benefiting from
problems in developing nations.
"We know that the problem isn't necessarily the Y2K
problem itself, but the human reaction or perception of it," he
said. "That could be more potentially damaging to economies." |
