Y2K fears have come and gone in the U.S. -- with the exception of a few survivalist groups. However, among foreign investors in Latin America, Y2K fears persist.
Despite rallies in Latin American bond and equity markets, fund flows have remained low and, in some cases, turned into outflows in anticipation of Y2K. The fear is Latin American countries are unprepared for the turn of the millennium and will face massive computer and telephone failures, as well as electricity outages. The combination, of course, could cause debt payments and business activity to grind to a halt, not to mention urban unrest -- one of the great turn-of-the-century fears.
Worries that this scenario will materialize are largely unfounded. Y2K fears have subsided in the U.S. because the level of preparedness is deemed sufficient to prevent an all-out collapse. While there are notable exceptions such as Ecuador, Latin America's most important countries -- Mexico, Brazil and Argentina -- are, to varying degrees, prepared.
Following the Fed's Lead
, the central banks of Mexico, Brazil and Argentina have been keeping an eye on their respective Y2K issues. The techno-savvy central bank of Mexico, known as
, has led the Mexican effort. Banxico has been applying the Federal Reserve's method of forcing banks to be the vanguard of the Y2K effort.
The banks, despite their tight liquidity constraints, have been making provisions for Y2K emergencies, preparing their computer and payment systems and testing preparedness. (An update on Banxico's Y2K progress is available at its
Brazil's central bank has also been active. The country's financial markets are much more dependent on technology than most of the other Latin American countries thanks to years of hyperinflation and indexing. Those phenomena encouraged banks to use information technology to ensure rapid financial transactions, while businesses use computers to keep track of hourly wage and price increases.
Greater use of technology left Brazilian financial institutions potentially more vulnerable to a Y2K breakdown than other Latin American countries. Despite the currency devaluation in January 1999, the government, banks and financial markets have been working to prepare the country's markets and payment systems for the Y2K bug.
Luckily for Brazil, there is a resident technology community that has been readying the country for Y2K. To see more about how Brazil has prepared, visit the Web sites of the
National Development Bank or the
While Argentina may be the least prepared of the three, the central bank recently reported that the financial community is ready for Y2K. The bank set fairly detailed and stringent guidelines for compliance, which appear to have been largely met by the financial community. (It doesn't hurt that many of Argentina's biggest banks are controlled by foreigners who stress their own high levels of Y2K compliance.) The central bank has been keeping investors apprised of the financial system's progress through its
Major Companies Brace Themselves
What about other Latin American companies? All the major ones, particularly those that have ADRs and U.S. dollar-denominated debt trading on U.S. markets, have Y2K statements explaining their preparations for the millennium bug; Latin American corporations, with a few exceptions, are generally well prepared.
Mexican companies, in particular, have an added incentive -- and assistance -- in ensuring the Y2K bug does not interrupt their operations. Mexican companies and factories linked to U.S. companies have been preparing for Y2K in order not to interrupt shipments to their U.S. clients and counterparts.
Importantly, Latin American companies are generally much less computer dependent than those in the U.S. And even if computers fail Jan. 1, it does not mean that operations will cease.
As to the loss of national electricity grids, remember that Latin American countries have a good deal more experience in this area than the U.S. and are more accustomed to power and telecommunications shutdowns. Even in the worst-case scenario, panics are unlikely and it may be only a short time before operations are up and running.
Scott Grimberg is the emerging-market fixed-income strategist for Miller Tabak Roberts Securities. At the time of publication, he held no positions in the instruments discussed in this column, although holdings can change at any time. The opinions expressed in this article are Grimberg's and do not necessarily reflect those of Miller Tabak Roberts Securities. While he cannot provide investment advice or recommendations, he invites you to comment on his column at firstname.lastname@example.org.