Monday, September 23, 2002
Brad DeLong suggests that the standard economic doctrine would be that Europe should be encouraging the debt-ridden telecom companies to go bankrupt, extinguish the existing shareholders, and let the bondholders take over, so the companies can be run as ongoing enterprises rather than as accidents waiting to happen.
While probably the only remedy, this hasn't exactly happened with blinding speed in the US either. Naturally there are numerous problems. Under ordinary circumstances we would see healthier telecoms buying weaker ones to get their customers, even though they don't need the additional capacity. Then they would
combine operations, improve efficiency, and reduce overall capacity, and gradually the telecom market would come back into some kind of equilibrium.
Unfortunately, all the players in this game (except IDT, which has been buying up some of the smaller distressed companies) are already so indebted that they can't handle any more debt, so they can't buy each other until after they are restructured. But it is likely that once a firm has restructured, it will be super-competitive (because of the lack of debt) and will start rapidly bankrupting the other players. People (banks are people too) are nervous about bankrupting an entire industry, and who can blame them--the assets that will need to be written down may be their own. And in Europe you have the additonal complication of companies being partially owned by the government --how do you liquidate a golden share?