http://washingtonpost.com/wp-dyn/articles/A19557-2001Apr14.html Beware the Telecom Quake
By David Ignatius Sunday, April 15, 2001; Page B07
The colorful flameout of the dot-com companies is obscuring a deeper and more dangerous problem for the global economy: the financial squeeze affecting the world's telecommunications companies.
In the United States, Europe and Asia, the telecommunications industry is suffering from the hangover of a five-year investment binge. The telecoms' sudden contraction has devastated the order books of their suppliers, such as Cisco Systems, Nortel Networks and Lucent. And it's now beginning to hit the banks and investors that have pumped an estimated $650 billion into the industry since 1996.
The telecom meltdown is the real worry for the global economy this spring. This one doesn't involve the funny money of inflated Internet stock, but real money that was invested in laying fiber-optic cable and buying expensive "3G" wireless licenses. Those investments have been turning sour over the past year, and some companies and their lenders are now facing severe pressure.
Like all bad investments, the telecom spending binge seemed like a great idea at the time: The world's demand for "broadband" communications would keep growing exponentially, the telecoms figured. So they borrowed and borrowed, and built and built -- creating more capacity than the world needed or than the telecoms could sell profitably. Then last year, the terrible shakeout began.
What worries me is that the telecom sector involves big, saavy players. In that sense, it recalls past financial crises like the Third World debt squeeze of the early 1980s, or the savings and loan shakeout of the early 1990s. Institutions that had lent money in boom times were rocked when the borrowers got in trouble. It took several years for the rippling waves of indebtedness and default to work their way through the global economy.
The clearest warning I've seen about the telecom meltdown comes in a special report in the current edition of Business Week. The article cites the estimate by Thomson Financial Securities Data that the telecom giants have raised $650 billion in debt and equity since 1996 and cautions: "The health of some U.S. financial institutions could be threatened as telecom companies continue to default on their loans."
Among the worriers, reports Business Week, are the Federal Deposit Insurance Corp., which said in a March 21 report that "cash-hungry telecom firms may have difficulty obtaining financing," and the Bank of England, which the magazine says has issued two warnings that telecom debt could create financial instability in some global markets.
I heard similar concern last week from a big New York investor. He has raised nearly a billion dollars over the past year to invest in telecommunications and media businesses -- and he feels very lucky that he has committed little of it so far. Other firms that plunged into what seemed like good investments a year ago are now reeling.
An example of how the telecom quicksand has caught even the cleverest investors is a privately held telecom company called FirstMark Communications International. Founded in 1998 by a dynamic New York businesswoman named Lynn Forester, FirstMark planned to develop broadband services across Europe. Initially, the idea was to focus on a new technology for "fixed wireless" services that would deliver high-speed Internet connections via a network of base stations and rooftop antennas. But the company's ambitions grew in last year's telecom fever, and it embraced other broadband delivery systems, including fiber-optic cable and DSL phone lines.
FirstMark seemed like a sure thing. Its board included such luminaries as Henry Kissinger, Vernon Jordan and Microsoft guru Nathan Myhrvold. And Forester was something of a celebrity herself, especially after her marriage to international banker Sir Evelyn deRothschild last year. Time magazine dubbed her one of the 25 hottest players in a special "Digital Europe" issue last December.
Investors queued up for a chance to fund the company, and FirstMark raised more than $1 billion in debt and private equity last June -- probably a record for a European start-up. It was a "Who's Who" of investors, reportedly including Kohlberg Kravis Roberts, Goldman Sachs, Morgan Stanley and Credit Suisse First Boston.
But that was then. FirstMark's hopes for a quick IPO were dashed by the Nasdaq slump. And its ambitious broadband strategy foundered in a European market that was already facing overcapacity and cut-throat competition. According to recent news reports, FirstMark has had to close most of its London office and sharply curtail its operations, to slow the rate at which it's burning cash. FirstMark's investors and lenders must be worrying that they will have to take a big hit.
One of life's cardinal rules is: Keep your cool. Things are never as bad as they seem in the down times. And that still strikes me as the right way to think about the global economic slowdown: The fundamentals of the world economy are still sound; the productivity gains of the New Economy are for real and there's no reason to think that this decade as a whole won't be one of growth and prosperity.
But beware the telecom crisis. Like an earthquake, it has already caused enormous damage at the epicenter. And the financial shock waves are only beginning to radiate outward to the rest of the global economy.