Y2K Fears Hit East Europe Markets

WARSAW, Poland -- Millennium computer bug fears have frightened foreign capital out of Eastern Europe's stock and debt markets, allowing steely nerved buyers to benefit from bargain prices.

Eastern Europe's biggest economies - Poland, Hungary and the Czech Republic - have spent a fraction of what richer Western neighbors have splashed out on preventing chaos in computer systems when the century ends in less than three months.

Other former Soviet states have spent even less and the entire region has experienced marked Western nervousness over business paralysis, power cuts and production shutdowns likely should older computers mistaking 2000 for 1900 cease to function.

This has persuaded many investment funds to exit less liquid emerging markets for the security of more established financial centers with better awareness of the Y2K problem.

Since the start of September the Warsaw exchange has fallen 12 percent, Budapest 9.7 percent and Prague 2.7 percent amid dropping volumes. Prices for sovereign debt across Eastern Europe have also receded.

"We have definitely seen capital withdrawal, especially from U.S. investors worried about Y2K ... but we are either at the end or near the end of selling due to Y2K concerns," said Michael Gomulka, equity analyst at Nomura in London.

Analysts said that portfolio investors have slowly cut positions in Eastern Europe in the last months, knowing that a rapid sell-off might cause a market crash.

Telecoms and power sector stocks, hardest hit by Y2K capital withdrawal because they are thought to be most exposed to computer problems, would benefit most from bargain hunting.

Analysts say havoc in water or power supplies or in local administrative systems is possible, but banking systems and stock exchanges are probably safe.

A recent CS First Boston report ranked Hungary as the most "millennium-compliant" country in the region scoring 20 out of a possible 35 points.

Poland was third lowest among the 18 global emerging markets tested with 15 points and the Czech Republic was last with 12. The risk of a cash crunch in emerging Europe at the turn of the year is minimal but does exist, say analysts, despite the steps taken by central banks to prevent a liquidity crisis.

The region's central banks are regarded as amongst the best prepared of the financial sectors for the Y2K problem.

To guard against a liquidity crisis the National Bank of Hungary promised to offer commercial banks unlimited access to repos, or cash injections, during December.

The Polish central bank says it does not have to offer repos because the local banking system is naturally cash-rich.

The Czech monetary authorities have said their country's banks are as well prepared for Y2K as New York institutions.

"It's hard to judge whether there will be panic on the market or, on the contrary, if we will face over-liquidity ... but banks are bracing for the negative scenario," said Monika Kubik-Kwiatkowska, Standard & Poor's MMS analyst in Frankfurt.