May 8, 2001

An Extra Helping of Debt, Please

Like so many other telecoms, WorldCom is jumping on the bond-issuing bandwagon. Wall Street continuously touts the safety of bonds to investors, and many investors are attracted to the high yields that these bonds offer. But, beware, there's a ticking time bomb in telecoms.

Telecoms in the U.S. and Europe are mired in nearly $700 billion worth of debt. According to Moody's, the telecom sector was the single largest defaulting sector in the first quarter 2001, with $6.2 billion worth of defaults -- $4 billion worth in March alone. And things are only going to get worse as the economy spirals into recession.

Big telecoms are now issuing bonds in the hopes that the economy will stage a recovery in the second half of 2001. But that looks less likely every day as the unemployment rate skyrockets, consumer confidence and spending plummet, and as productivity decreases in the face of higher labor costs. Without a recovery in the second half of this year, corporate credit ratings could plunge -- leaving investors holding worthless paper.

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