With the Brazilian meltdown still looming large, Latin American markets are grappling with what could become another crisis in the region: the millennium bug. Detailed information on Y2K preparedness is scarce, and some investors are consequently re-evaluating their involvement in Latin deals.

"In deals that we do, this is an issue that comes up in due diligence," said Winona Whong, cross-border investor at Citicorp.

According to a report on international preparedness, the largest economies in Latin America are behind schedule, with Argentina 21% behind, Brazil 22% and Mexico 24% behind the curve. In addition, the Gartner Group predicts a 33% failure rate for Brazil, Chile, Mexico and Peru, a 50% failure rate for Argentina, Colombia, Guatemala and Venezuela, and a 66% failure rate for Costa Rica and El Salvador.

Rodrigo Moraga, the South American co-ordinator for the United Nations-linked international Y2K Cooperation Group, estimates that South America will have to spend a total of $12 billion to $15 billion on Y2K debugging. "Most of Argentina's private companies are up to speed with the testing, repairing and replacing of computer systems," said Lorna Martin, an analyst with Fitch IBCA in Buenos Aires. " But I don't think that the same can be said about government agencies."

Financial institutions are probably best prepared for the problem. According to a recently released report by Morgan Stanley Dean Witter, banks in Argentina, Brazil and Mexico will spend a total of $321 million on compliance. The authorities in these countries hope that as banks get prepared they will compel providers in the telecommunications, petroleum and power sectors to become compliant. Still, there is no way to evaluate how smaller companies and service providers are dealing with the bug.

"Banks and big private companies are solving the Y2K problem, but they can be affected by smaller providers that have not worked out the glitch," said Martin. "It is a complex chain, and one weak link could have sizeable consequences."

Not surprisingly, rating agencies are placing added emphasis on how companies are handling the issue. "Most of the companies we evaluate will assure us that they will have the problem solved by the end of the summer," said Marco Sotomayor, an analyst for Duff & Phelps in Mexico.

Pemex, the Mexican oil producer, has websites that include large sections on Y2K preparedness. "We recently visited Pemex, and they said they've practically uprooted the bug from their systems," said Sotomayor. According to Venezuela's presidential chief of staff Alfredo Pena, state-run oil company PDVSA is on track to complete preparations by the end of this month, having spent $40 million so far.

The fact that Latin American companies started using computerized systems much later than their U.S. and European counterparts provides them with a relative advantage in the race against Y2K. "Most Latin companies acquired computers fairly recently, so they have relatively new technology which doesn't carry the Y2K bug," said Sotamayor. "In contrast, more developed economies have been using computer systems since the 1960s, a time in which programmers were not aware of the millennium problem."

Clearly, issuers and investors are aware of the dangers of Y2K on future and present securitization deals. However, some are approaching the milestone in a relaxed manner, hoping for the best. "I'm not going to lose any sleep because of Y2K," said one investor. "Hopefully I will not be surprised on the down side." - TH

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