Howard’s End: An Accident Waiting To Happen

The Bank for International Settlements says that 30% of this year's international syndicated loans were for telecom debt while in Europe, it's a record-breaking 40% of total loans. This is an accident waiting to happen. John Howard writes.

Telecom debt has become so alarming that European government bank regulators have begun to investigate the degree of bank lending to the giant telecommunications groups, to determine if certain banks have taken undue risk and exposure.

The centre of the debt problem is related to unprecedented cross-border mergers and, lately, the bidding of absurdly high sums in various government auctions for new UMTS licenses, the so-called Third Generation Mobile access.

But UMTS technology (Universal Mobile Telecommunications Standard ) on a mass scale is several years off, and to get it will require an added telecom investment in Europe alone of some 160 billion Euros.

At least 100 billion Euros of that must come from more bank loans or similar sources of credit.

Many large banks across the world are hugely exposed to telecoms while telco companies, as a global group, have borrowed more than $US 400 billion since 1998.

The huge debts incurred by the largest international telecom companies, most of them still majority state-owned even if they are public stock companies, are setting off a vicious cycle of consequences. (Deutsche-Telecom, for example, is a private corporation, whose main shareholder is the German government with a 74% interest)

High debt levels are leading the international credit rating agencies to down-grade many formerly blue-chip credit ratings.

That, in turn, makes it far more difficult and more expensive for the companies to raise needed capital for further investment to make the UMTS gamble even potentially pay.

The telecos will have about 6-12 months to significantly lower their debt if they are to qualify for future loans and stocks.

There is an irony in this. Just imagine, government's might be forced to use the receipts from their recent mobile phone license auctions to bail out the banks that lent to the winning telecommunications companies.

It would be the ultimate irony if the only beneficiaries of third-generation auctions were the advisers in the auction process.

There is a crisis of confidence in the market right now and more huge losses are expected in the high risk corporate bond market - which had been the prime source of capital for information technology and telecom companies.

Suddenly, the major Wall Street and European bond underwriters found themselves sitting on billions of dollars of bonds they cannot sell.

Corrections are likely, but a full-blown crisis in the markets is not too far away.

Couple the global unpayable-debt pyramid and bankruptcies with the US economy being hit by surging inflation in the housing sector, all the energy sectors, the HMO health care sector, and inflation bursting into the realms of industrial commodity prices in many other sectors and it's not hard to see that the world has a big financial problem.

And remember the 30 million barrels of oil which the US released from its strategic petroleum reserves back in September to provide Americans with home heating oil because inventories were low and prices were high?

It has now been revealed that oil is going to designated companies, three of which are unknown entities without any refining capacity, and two are one-man operations.

None of them have constraints placed on the destination of the final product. America is committed to the global "free market" say the government energy gurus.

Meanwhile, the northeastern refineries in the US are shipping home heating oil to Europe where prices are higher. The companies involved are counting on mega profits.

According to the Washington Post only 10 million barrels of the 30 million being released, will be available for US consumers for winter home heating. The rest is expected to be sold on foreign markets where oil speculators on the energy futures exchanges reign supreme.

Speculation, cartelisation, derivatives and government taxes and policies are what's causing high oil prices.

Has the world gone mad?

The so-called "boom" in the global economy is the sound from waves of hyper-inflationary greed now crashing over the heads of the global population.

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