Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: CIMA who wrote (24057)	12/9/1998 4:54:00 PM
From: goldsnow	Respond to of 116972

Global cash crisis waiting in the wings By Andreea Papuc Financial market traders have dubbed it the millennium butterfly. It is their way of describing the distortion in interest rates on December '99 bank bill futures sparked by concerns about the approach of 2000. The market and banking authorities are anticipating a massive withdrawal of cash from the banking system by people afraid of technological havoc caused by the Y2K computer bug. <Picture> "People are afraid that banks will crash," said Mr Phil O'Sullivan, strategist at Bankers Trust Australia. "The speculation is that what will happen leading into 2000 is that people will be concerned that the banks' computer systems won't handle it, and they will withdraw cash from the banks more than usual and force up short-term rates." The distortion is not restricted to the Australian market. It is even more pronounced in the euro-US dollar and the euro-deutschemark markets. The phenomenon is called the millennium butterfly because of the shape of the graph of 90-day bill futures. This is because the implied rates on the December '99 contract are sharply higher than the September '99 and March '00 contracts and December contracts in other years. Mr O'Sullivan said the M3 money supply measure was typically higher in December anyway because of demand for cash in the Christmas holiday period. Between February 1984 and September 1998, M3 jumped 1.92 per cent on average in December. Next year, however, it is expected to go even higher because of the Y2K problem. Central banks meet the seasonal increase in demand for cash by pumping liquidity into the system. Already the US Federal Reserve and the Bank of England have said they expect larger than usual demand for cash in December 1999. The Fed has announced that it will put an extra $US50 billion ($81 billion) into inventory and the Bank of England has said it may have to print an extra £54.45 billion ($146 billion). "In the long run, one can expect rationality -- and a generous supply of liquidity by central banks -- to prevail, but it is hard to imagine when this anomaly can begin to correct," said Mr Glenn Maguire, senior economist at SG Australia. "Its effects are beginning to be felt in the front of some European yield curves, where there is a small kink in rates roughly corresponding to this point." In the meantime, however, the higher December '99 bill futures are relatively cheap and offer good buying opportunities for those who do not subscribe to the Y2K catastrophe scenario and expect the contract price to come back into line. "I think we've had many years of preparations for it and we've got another 12 months to go, and even if there is a problem with regard to financial flows, the monetary authorities are not going to sit on their hands; they are going to do something about it," said Mr Peter Pontikis, technical strategist at Westpac Banking Corp. "I don't think that part of the spread blowing out is justified and it is not sustainable." Normally the December contract trades about 10 to 15 basis points higher because of the seasonal cash squeeze associated with December. However, in the case of the December '99 contract, the spread over the average of the September '99 and March '00 contracts has blown out to 40 basis points from 22 basis points. The euro-US$ spread widened from under 20 basis points to 80 basis points on Friday. "It's dawned on people that over the end of 1999, banks may just decide not to lend any money at all because they don't want to risk lending money to someone who gets hammered by the Y2K bug," said one market participant. "People are realising that money at the end of 1999 might be pretty expensive." Some people are getting so worried that discrepancies have also become apparent in gold forward prices and even soy bean futures. afr.com.au