In both cases it is clear--to us economists at least--what has to happen, and happen as quickly as possible. The equity shareholders need to be dispossessed, the bondholders need to be turned into shareholders, and the companies need new managers who can then concentrate on running a communications business rather than on delaying bankruptcy. Such a reorganization would be of great benefit to the rest of the economy: telecommunications prices would then no longer be kept up out of a desire to try to service unserviceable debt, and low telecom prices would open up large opportunities in other industries. Such a reorganization would be just a recognition of reality for telecom stockholders and bondholders.

If European governments understood their situation, they would be trying to hasten--not delay--this process of bankruptcy and reorganization.

Economist.com: The crash in the value of telecoms companies has produced corporate scandals in America, raised doubts about the probity of banks and government policies everywhere, and resulted in a collection of top executives abruptly losing their jobs. Now the telecoms fallout in Europe has also entangled the French and German governments into a growing political and financial mess

IN A terrible year for European telecoms, the past few weeks have been particularly bad. First came the news earlier this month that France Telecom, in dire straits itself, was backing away from previous plans to support MobilCom, the German mobile and Internet operator in which it has a 28.5% stake. This then threw the German government into disarray, threatening as it did 5,500 German jobs just days before voters went to the polls in a general election, which took place on Sunday September 22nd. Gerhard Schröder, in a tough fight for re-election as Germany’s chancellor, stepped in with a euro400m rescue package of dubious legality that calls into question the whole movement towards privatisation in Europe. Then the French government, still France Telecom’s majority shareholder, forced out its chairman, Michel Bon, without having a successor lined up to replace him, and started making plans to raise billions of euros to prop the company up. Now the European Commission is investigating whether the German rescue package is legal, or whether it breaches EU-wide rules against government subsidies.

France’s plans to rescue France Telecom could also come under scrutiny in Brussels. The French government is apparently insistent that the former state monopoly issue new shares worth around euro15 billion to fund its cash needs over the coming year, which include the payment of interest on its near euro70 billion of debt. But, with the company’s market value languishing at a sixth of the value of its debt, it is unclear if it has the credibility to pull off such a fundraising...

AP

IN A terrible year for European telecoms, the past few weeks have been particularly bad. First came the news earlier this month that France Telecom, in dire straits itself, was backing away from previous plans to support MobilCom, the German mobile and Internet operator in which it has a 28.5% stake. This then threw the German government into disarray, threatening as it did 5,500 German jobs just days before voters went to the polls in a general election, which took place on Sunday September 22nd. Gerhard Schröder, in a tough fight for re-election as Germany’s chancellor, stepped in with a euro400m rescue package of dubious legality that calls into question the whole movement towards privatisation in Europe. Then the French government, still France Telecom’s majority shareholder, forced out its chairman, Michel Bon, without having a successor lined up to replace him, and started making plans to raise billions of euros to prop the company up. Now the European Commission is investigating whether the German rescue package is legal, or whether it breaches EU-wide rules against government subsidies.

France’s plans to rescue France Telecom could also come under scrutiny in Brussels. The French government is apparently insistent that the former state monopoly issue new shares worth around euro15 billion to fund its cash needs over the coming year, which include the payment of interest on its near euro70 billion of debt. But, with the company’s market value languishing at a sixth of the value of its debt, it is unclear if it has the credibility to pull off such a fundraising.

France Telecom’s withdrawal of support for MobilCom should not have come as a surprise. The company had splashed out euro3.74 billion on its 28.5% stake in MobilCom at the height of the telecoms bubble in March 2000, and Mr Bon had later agreed, in a letter, to spend euro10 billion on its expansion plans. After the bubble burst, it became obvious that the ambitious targets of the mobile-phone industry were unlikely to be achieved, and Mr Bon tried to go slow on the investment plans. This year, the two companies have been bickering publicly for months over how much France Telecom would invest. It emerged that France Telecom had unwisely agreed to issue to Gerhard Schmid, MobilCom’s founder, an option to sell his 40% stake under certain conditions, and Mr Schmid was threatening to invoke the terms of the agreement. It hardly helped matters when Mr Schmid admitted that he had transferred euro70m to a company controlled by his wife for the use of shares owned by her to underpin an employee share-option scheme. Outraged, France Telecom secured his ouster. Mr Schmid denied any wrongdoing. Then France Telecom decided this month to write off its investment in MobilCom. It also had to take on supplier debt that it had guaranteed as part of the price of its exit.

It is somewhat surprising that the German government apparently failed to take any interest in MobilCom until just a few days before France Telecom decided to pull out, when Mr Schröder made a last-ditch attempt to come up with a political fudge. Some Germans suspect that no politician wished to be associated with Mr Schmid, a once-feted entrepreneur whose star has now faded.

But, a skilled politician like Mr Schröder was not to be bested, and on September 16th, he appeared to have saved MobilCom and some 5,500 jobs when he persuaded two state-owned regional banks to put up the euro400m that it needed to keep going. The European Commission is investigating the terms of these loans to see if they breach European Union rules on state aid. There is a strong chance that they will, as MobilCom may not be a going concern without such loans. A report commissioned by France Telecom to help its managers decide whether to continue investing concluded that its customer base is eroding and its customer-satisfaction ratings are low. Furthermore, the other mobile operators in Germany may also object that an ailing rival has been kept in business with government money. However, the European Commission investigation will take some time. The key point for Mr Schröder is that he was seen to do something last week to save jobs just before voters had to decide whether he was going to keep his.

MobilCom may be the most embarrassing of France Telecom’s poor investments, but it is not the only one. Of more significance was the acquisition of Orange, a mobile-phone company, from Vodafone after it acquired its German rival Mannesmann. Despite the fact that Vodafone had to sell Orange to meet the concerns of competition authorities in Brussels, France Telecom still paid handsomely: around $40 billion, mainly in cash. It invested—if that is the right word—a further euro8 billion in NTL, a British cable-television and telephone operator which was forced into bankruptcy proceedings earlier this year.

This all leaves the French government with a problem just as acute as that of its German neighbour. France Telecom is labouring under almost euro70 billion of debt. It needs at least euro15 billion just to keep going. But its credit rating was slashed in June and is currently hovering just above sub-investment grade: if it falls to so-called “junk” status it will either have to pay more to borrow and its bonds will be out of bounds to several classes of pension-fund investors. Its shares have done little better, and fell 40% in a particularly bad run of five trading days this summer. There was open talk about what the company could do to get out of the crisis. Mr Bon refused to countenance a rights issue, insisting that sales of other assets would be sufficient.

But the problems continued. At the end of last month, Moody’s, a credit-rating agency, said that France Telecom’s cash and cashflow would not be enough to meet its requirements. The government is now trying to arrange a rights issue that would raise euro15 billion, compared to France Telecom’s current value of euro10.2 billion. But to persuade shareholders to hand over billions more to the company, the shares will have to be deeply discounted. Moreover the French government would have to subscribe more than euro8 billion to take up its share of the offering. This would threaten its compliance with the euro-zone’s stability pact, which requires governments to keep their budget deficits under control. And there is still a question over whether MobilCom will try to pursue the company for the promised euro10 billion in future investment. When France Telecom was privatised five years ago, it wasn’t meant to be like this.