International Monitoring's 6 December update on http://www.intl-monitoring.com/gfs.htm says that "The global financial system will face its largest challenge to date from Y2K. The last real threat to global markets was the Russian debt crisis in the fall of 1998. In 1998, Russia only represented roughly 1.5% of Gross World Product (GWP) and yet the U.S. stock market declined over 20%. Y2K risks in emerging markets significantly dwarf the Russian threat...."

The report refers again to the 44 page document on Herstatt risk submitted to the US Senate in October.

-- (indigoseahorse@hotmail.com), December 07, 1999

Answers

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[Fair Use: For Educational/Research Purposes Only]

Global Financial System at Risk

Dec 6, 1999-- The global financial system will face its largest challenge to date from Y2K. The last real threat to global markets was the Russian debt crisis in the fall of 1998. In 1998, Russia only represented roughly 1.5% of Gross World Product (GWP) and yet the U.S. stock market declined over 20%. Y2K risks in emerging markets significantly dwarf the Russian threat.

International Monitoring believes that most institutional large value exchanges and clearing systems are now Y2K compliant. Unfortunately these efforts alone will most likely not be enough.

International Monitoring has published a technical white paper highlighting the risks to the global financial system which has been submitted to the U.S. senate sub-committee on Y2K and is available free online at www.intl-monitoring.com/banking.htm

The Y2K financial threat comes in the form of market liquidity disappearing with extreme volatility filling the void.

A recent article published by Reuters on Dec. 2nd indicates that many sophisticated derivatives funds similar to LTCM (Long Term Capital Management) have, or are currently liquidating their positions.

The article went on to state that these funds are anticipating volatility, which falls outside of their historical models.

Highly leveraged derivatives are highly sensitive to extremes in volatility. This volatility could easily be transmitted to traditional bond and stock markets.

The U.S. Fed has done an excellent job of planning a Y2K strategy for the U.S. economy, between the extremes of excess liquidity leading to inflation and limited liquidity leading to institutional runs and flights to quality. Unfortunately the U.S. Fed isnt big enough to be a lender or liquidity provider of last resort to the world.

Liquidity and Y2K counter measures have been created by the fed and many central banks. The creation of a US$426 billion market in repo options by the fed is one of the more creative ways of offering liquidity on tap over the Y2K period. The fed and other G-8 central banks have expanded their definitions of acceptable collateral in an effort to bolster banks positions and available liquidity. These are significant defences. Whether they will hold up in the face of volatility extremes in the multi-trillion dollar derivatives market is another issue.

Many central banks in important markets are not as sophisticated or as well prepared as the Fed to respond to this crisis. The Asian and Latin American economies, which have just posted improving GDP figures in the last quarter, are at risk.

Lesser economies are at severe risk as they will be some of the first to lose liquidity in flight to quality or liquidation situations. Individuals in these economies are at risk of events far worse than the Asian crisis of 1997.

The de-monetisation of economies or extreme currency swings are possible for many economies globally. One investor option is holding what may be more stable currencies or gold as a store of value.

The debate of putting gold forth as a store of value would seem laughable given its performance over the last 18 years. That being said, yesterdays dog may well be tomorrows dynamo, as gold's traditional role as a store of value is upheld. Prices have tested new lows around $250/oz. in the fall and shown extreme sensitivity to upside interest as seen in the recent price pop to over $330/oz. a few weeks ago after a positive IMF announcement.

Recent prices of $270 could be seen as reasonable in the face of the risks ahead.

We recommend fund managers consult the central banks in the countries in which they do business to ascertain their Y2K countermeasures and response plans.

International Monitoring is a specialist consultancy based in London. They assess countries technology infrastructure, efficiency of Y2K fixes, and estimates of the lateness of certain fixes. These analyses are used to calculate economic damages and probable Y2K scenarios.

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-- snooze button (alarmclock_2000@yahoo.com), December 07, 1999.

I tried to open the 44-page document referred to but was unable to do so.

I noticed that in the 10/13 Senate report the guy from IM was fearful of saying too much about banking in "a public forum like this."

-- Rick (rick7@postmark.net), December 07, 1999.

Rick,

I remember that incident--and could not believe what my ears had heard and were hearing???? To unreal!!

I believe he also intimated Japan was cooked! i.e. trillions in financial wires etc. poof!

-- d----- (dciinc@aol.com), December 07, 1999.

IM did not say "biggest risk is in the financial sector". IM said that financial sector is facing it's biggest risk ever. There is a difference. I, for one, think the BIGGEST RISK is in the utilities.

-- Dot (dromano03@snet.net), December 07, 1999.

Apologies Dot, you are quite correct.

It is the earlier testimony document of 13 October that states "International Monitoring believes threats to international banking could pose the greatest Y2K risk." (Same place that they say "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" as Rick mentioned.)

It's at http://www.senate.gov/~y2k/hearings/991013/gogerty_intl.pdf

-- (indigoseahorse @hotmail.com), December 08, 1999.