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."
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