INTERNATIONAL

Y2K RISK

Prepared for the U. S. Senate Committee

INTRODUCTION

International Monitoring uses information from sources presumed reliable and builds simple models of Y2K profiles for 140 countries.

All predictions of Y2K's impacts are going to be wrong. This testimony is put forward in the belief International Monitoring has one of the better methods of assessing Y2K impacts.

We believe that our predictions tend to err on the conservative side, in terms of Y2K impact and cost. This has been done in an effort to minimize the threat of Y2K overreaction, which could be worse than the event itself.

It is with these factors in mind that we submit the following testimony.

Fix efforts vary from country to country

Fix efforts vary from country to country. Both positive and negative surprises are found everywhere. On the positive side, the U. S. without a large government awareness campaign, has made significant strides in fixing and planning for Y2K. On the negative side Japan, which was lauded in the 1980's for its long-term planning and vision, has taken action in a remarkably late and haphazard fashion.

Global impact

Our assessment of global Y2K impact includes 3 types of damages: direct, indirect and ambient. These estimated damages will cost $1.1 trillion worldwide. This damage estimate does not include litigation or insurance costs.

Largest risk is in banking

A significant risk, though not included in these cost estimates, is international systemic banking risk. The months of the Y2K period will see institutional banks operating in the riskiest environment ever seen.

INDIVIDUAL COUNTRY PREPAREDNESS ASSESSMENTS

Methodology

International Monitoring makes its Y2K risk assessments using the following steps.

Each country's technology usage is estimated. These estimates include the software, computers and embedded systems in each country.

In the next step, the efficiency of Y2K remediation and the potential errors remaining in each country is estimated.

Assumptions are made in regards to the amount of unfixed and improperly fixed technology. Each country is rated relative to its preparedness efforts to date. The result provides a count of the number of technology errors possible in each country.

These error counts help provide the level of operational infrastructure risk shift. Most large system errors will not be due to computer error alone, irregular operating procedures and human error will be contributing factors.

Infrastructures are domestically interdependent and in some cases internationally interdependent. We use the internal risk caused by technology errors to assign a level of risk ranging from 0 to 9 for each country. This level of risk is the countries IM-Y2K risk rating.

Days of delay &network outage

[chart snipped] (this chart rated utilities, telecom, finance, transportation, and political stress --DG)

LIKELIHOOD OF INTERNATIONAL FAILURES & GLOBAL ECONOMIC IMPACT

International costs

The damage cost estimates for Y2K are based on the IM-Y2K risk level, economic profile and the dependence on trade in a given economy. The map shown indicates countries likely to have the most costly Y2K damages. Darker shades reflect higher costs. Again damages include direct, indirect and ambient damages.

Potential economic impacts due to Y2K

(map snipped. It showed highest damage in North America, Brazil, Argentina, Europe, Asia except Mongolia. Moderate damage was expected for Australia, the balance of South America, about half of Africa, the Mideast, and Scandinavia. Low impact for Western Africa, Greenland, and some former Soviet Republics.--DG)

Global trade

Global trade is vulnerable to Y2K. The chart shown indicates the trade of various countries plotted against the IM-Y2K level of risk.

The darker the shaded region a country occupies, the greater risk to the global trading economy. A country such as China, with import and export trade of $320 billion, poses only a slightly lower risk to global trade than the U. S. with its $1.44 trillion dollars in trade.

Y2K risk (import/export)

[snip. This chart showed the risk of the country vs. the amount of trade generated. While the US was rated less than a 3 and China more than a 6, the US poses more risk to trade interruptions.]

The trade weighted global IM-Y2K rating is 3.8. This number indicates that global international trade will most likely suffer Y2K related delays. The full economic impact of what this rating may mean is beyond current modeling capabilities.

Risk level for larger economies

Y2K is a challenge facing all countries. The chart shown indicates the IM-Y2K risk plotted against economic size. The largest country at risk from this perspective is China, with Japan and Germany following closely.

GDP (PPP) vs. IM-Y2K risk rating

[chart snipped. This chart indicates that we're all screwed--DG]

China & Japan

In reference to Gerald Segal 's recent article in foreign affairs, China is too often over-rated. China is a "paper dragon", at great economic and political risk from Y2K. The Chinese economy has far under-performed state published growth rates, and is seeing decreases in Foreign Direct Investment (FDI). A recent report indicated only 33%of foreign firms operating in China made profits. This shaky economic profile reflects a country at an economic crossroads. Y2K is ill timed for China.

Japan 's technology sensitive economy and lateY2K start are a potent mix. These factors combined with a high debt load in the government and private sectors, paints a very unhappy picture for the Japanese economic recovery.

Y2K Political &security risk

We have made a quantitative approximation of Y2K political strain by using data provided by The PRS Group. The PRS Group uses a numerical rating ranging from O-100% to assess national stability. The higher the figure, the more stable the political and security environment.

We have plotted The PRS Group 's political rating weighted in conjunction with the IM-Y2K risk ratings. The map shown indicates countries that could be under political and security stresses during the Y2K period.

[map snipped. The US looks better than Mexico, but not as good as Canada or Great Britain--DG]

Russia is at great risk. India, China and Pakistan are at high risk as well. In the Middle East, Egypt and Turkey pose the greatest potential for instability. NATO looks very stable. Some APEC countries will be at serious risk.

Central and South American nations could fall under moderate stresses.

Institutional banking

International institutional banking is a global network. International Monitoring believes threats to international banking could pose the greatest Y2K risk. A separate 44-page section of the statement has been submitted that covers these risks.

At this point, we do not feel it is prudent to publicly discuss the detailed risks faced by international banking in a broad media forum such as the one before us today.

A rapid change in the awareness of Y2K risks could affect amounts measured in the trillions of dollars and put international finance itself at systemic risk. Y2K will shift banks operating and market risk environments significantly. We strongly advise regulators and those providing fiscal oversight in the public and private sectors to consider the implications of these risks.

ACTIONS THAT CONGRESS OR OTHERS CAN TAKE

Domestic

The United States is at risk from a sudden shift in belief. Current public consensus appears to be guarded optimism. The administration's Y2K Czar has put forth an optimistic Y2K message.

We view the Czar's optimistic message as potentially reckless. At best an overly optimistic message could lead to disregard of Y2K by organizations at risk. At worst it may cause the administration to lose credibility in the face of a minor crisis. A loss of credibility would mean an inability to reduce fear and uncertainty should a large crisis emerge.

The U. K. is doing an excellent job of communicating caution and expressing real concern about the issues at hand. The message has been bolstered by an extensive media campaign, which has heightened awareness without raising undue alarm. The U. S. should consider a similar strategy, involving a national campaign designed not to fan the flames of fear, but rather to make people aware of the issues at hand.

International

The U. S. State Department 's recent travel advisory was less than informative. One can only assume the state department's longer-term objectives over-ride the near term Y2K risks facing American 's abroad. The U. K. foreign office took the path of not singling out countries, but instead suggested its citizens should consider staying at home.

The opportunity for a Y2K travel advisory from the state department could still serve as a signal to various nations that better efforts on Y2K are required. The current message reflects a lack of leadership in risk prevention and open communication.

The U. S. should consider the financial liquidity threats that international economies may face and should consider economic response policies in advance. Signaling to the markets via policy statements, the fiscal intentions of the U. S. can be just as effective in forestalling a fiscal crisis as actually following through on those intentions. An ounce of fiscal policy prevention is worth many pounds of cure.

Institutional banking

Institutional banking is going to experience a dramatic shift in risk. The likelihood of serious liquidity threats can be minimized by a strong, clear, communicated policy.

The committee should consider consulting quietly with the Fed and other central banks about a coordinated liquidity crisis response policy. There is no lender of last resort for the global financial system, but early intervention may limit damages.

SUMMARY

We believe Y2K will be the second most costly accident in history. Barring nuclear and major chemical failures, loss of life will be minimal in the U. S.

Countries under current political and economic strain may find that strain increased. Loss of life due to technical failures and/or civil unrest or related issues in foreign nations can not be ruled out.

China and Russia are both considered at accelerated political and economic risk due to Y2K. The events surrounding the Y2K period will not exclusively target these countries, but could put mounting stresses on them.

The largest Y2K threat facing the world may be international financial liquidity. Perceptions of increased risk, leading to increased credit prices could affect the already meager Asian economic recovery.

A flight to quality from traditional assets could lead to traditional stores of value, such as gold and the U. S. dollar experiencing increased demand and price volatility. Implementing effective domestic economic policy could be difficult as U. S. rate policy serves as a reference point for a significant amount of global obligations.

The best action we can suggest to the senate committee is a policy of broad public communication about the real potential for errors and large system failures. This should involve a cautious, but not inflammatory tone. Y2K will hit in unsuspecting and surprising ways. A calm considered response by all involved will hopefully limit the depth and duration of the impact.

-- Dog Gone (layinglow@rollover.now), October 15, 1999

Answers

We view the Czar's optimistic message as potentially reckless.

My favorite line.

-- Dog Gone (layinglow@rollover.now), October 15, 1999.

Dog One is on top of it. The 2 biggest y2k impacts will be in the oil sector and systemic global financial defaults.

-- Downstreamer (downstream@bigfoot.com), October 15, 1999.

Ultimately, I find reports like this frustrating. They only tell us that their *inputs* are "estimates" of the size of the task in each country, and "estimates" of how efficient the repair efforts have been, and "assumptions" about how much has been done. Given these inputs, they probably run various computer models trying to arrive at a range of probable impacts.

But garbage in, garbage out. How can we evaluate their conclusions not knowing who did these estimates, and what they're based on? From all I've read, most countries are informational black holes. Has IM done on-site evaluations? surveys? SWAGs based on God Only Knows? In the absence of anything resembling hard data, the IM estimates must necessarily be largely fictional, whether good or bad.

I don't question IM's concerns about possibilities. Possibilities are qualitative. Probabilities are quantitative. I'm not comfortable with quantities based on estimates without data.

-- Flint (flintc@mindspring.com), October 15, 1999.

Dog Gone

Good work, did you type it out yourself or is there a URL?

Flint

You may have a point, but it you read the following two documents from the same hearing you are left with an impression that the international situation is very grim. Of course the CIA and the State Inspector General have absolutely no sources of data eh? Really you are quite correct,

 Jacquelyn Williams-Bridgers, State Department Inspector General

 Foreign Preparedness for Y2K (CIA Testimony)

And  a snip from the CIA Testimony;

"Challenges for Intelligence

Y2K is a particularly challenging issue for analysis because of the uneven understanding around the world of the vulnerabilities of computer hardware and software, the unpredictability of cascading failures among interconnected systems, and the self-interest at all levels in either overstating or minimizing Y2K preparedness.

We have seen in recent months an increasing number of statements by countries and commercial enterprises that they are now prepared for Y2K, and we expect to see more such claims in the remaining three months of the year. While progress has certainly been made on many fronts since I testified to this Committee in March, not all of these readiness claims are credible, and it is a challenge for us to sort out the truth. Commercial enterprises marketing Y2K remediation services and governments soliciting external assistance have an incentive to overstate the Y2K problem. At the same time, fear of stimulating panic, sensitivity about disclosing security vulnerabilities, and concerns about legal liability are incentives to downplay the risks of Y2K failures.

In some cases, our uncertainty about Y2K preparations in a country or sector has led us to conclude that there is an increased risk of failures. For example, in open societies with high popular interest in Y2K issues, a paucity of information about efforts to prepare public services is likely to indicate that authorities have paid insufficient attention to potential problems.

Y2K has a unique capacity to produce multiple, simultaneous crises. Its probable impact, however, is difficult to assess. We have an uneven understanding about global and national infrastructures, and the reactions of decisionmakers and the general public in a Y2K-stressed environment are also uncertain.

Furthermore, the impact of Y2K failures will depend, to some extent, on the context in which failures occur. While manageable under normal circumstances, some outages and breakdowns would assume much greater significance in the event of heightened political tensions, severe weather conditions, or an ongoing humanitarian emergency. "

-- Brian (imager@home.com), October 15, 1999.

In their summary statement Int'll Monitoring says that "We believe that Y2K will be the 2nd most costly accident in history". Anybody have any ideas on what could be the first most costly accident?

-- Scottsworth (speculator@Iwonder.com), October 15, 1999.

Planting an apple tree in the Garden.

-- Lobo (atthelair@yahoo.com), October 15, 1999.

Scottsworth ... That's an easy one. I can almost hear the crunch, as she bit into that big, red apple ; and the snake saying, " It'll only be a minor , three day sanction . Nothing to worry about. Trust me ! " Eagle

-- Hal Walker (e999eagle@freewwweb.com), October 15, 1999.

Print this one out, & give it to the next person who says y2k is a hoax. Dog Gone, That was my favorite line as well. 2nd runner up:We believe that our predictions tend to err on the conservative side, in terms of Y2K impact and cost.

3rd place:At this point, we do not feel it is prudent to publicly discuss the detailed risks faced by international banking in a broad media forum such as the one before us today.

Flint,

Yes, I agree. I think we would all like to know what information they have based this report upon. Fat chance of getting it though! ;-)

-- Deborah (infowars@yahoo.com), October 15, 1999.

Brian, thanx for the CIA testimony link. A very sobering assessment indeed.

It is amazing to me that people want to argue about Ed Yourdan's "purity" instead of talking about hard substantive reports such as the CIA's.

-- Mitchell Barnes (spanda@inreach.com), October 16, 1999.