Europe caught in draft

July 5, 2001 Posted: 1458 GMT

CNN's Abid Ali

LONDON (CNN) -- Marconi's unusual move to ask the London Stock Exchange to halt trading in its stock was the cue for European investors to shudder.

Some two hours after the market closed on Wednesday, the UK's biggest telecom equipment maker issued a profit warning. On Thursday morning, investors headed for the exit, dumping stock and halving Marconi's value.

What had started as a trickle of profit warnings from chipmakers such as ST Microelectronic (PSTM), Infineon Technologies (FIFX) and Philips Electronics over the last two months threatened to turn into a flood on Thursday.

ASML, the world's biggest maker of chip making equipment, joined the line, saying customers are delaying or canceling orders and no longer expect an upturn in fortunes in the fourth quarter of this year.

The technology industry is not alone, German chemical manufactures BASF and Bayer plan to axe thousands of jobs as demand wanes.

Airlines such as Germany's Lufthansa and KLM of The Netherlands are struggling to stay profitable as the price of fuel soars and pilots, air crew and engineers demand higher pay.

There is no doubt Europe has caught a cold from the U.S., the world's biggest economy. U.S. companies in all sectors have been warning for some time that they will miss profit targets.

"A lot of the profit warnings that have come out over the course of this week really reflect a very sudden fall off in orders towards the end of the quarter," UBS Warburg analyst Gavin White told CNN.

"I think the most encouraging thing that companies can do rather than talk about second half recovery is more to get on with managing their business for this tougher environment," he said.

Other analysts were more scathing, saying European managers had learnt nothing from their U.S. counterparts, who themselves thought they could weather an economic slowdown.

Many like Larry Ellison of Oracle and John Chamber, the chief executive of Cisco Systems, are now eating their words.

The roll call from the other side of the Atlantic includes the world's biggest telecom network maker Nortel Networks (NT: Research, Estimates), which shocked investors when it said it would post a massive second-quarter loss, and announced another round of job cuts.

Chemicals company DuPont (DD: Research, Estimates) and American Airlines have also warned sluggish U.S. economic growth will crimp profit.

"I think they had every warning from the U.S. and I think its systematic of what's been going on in Europe in 2001, stemming from the central bank right through the various companies," Philip Manduca at Dexalt said.

"They've been quite arrogant in terms of thinking they can resist the slowdown in the biggest economy in the world and they've been wrong and that's a very worrying aspect," said Manduca.

The U.S. Federal Reserve has slashed interest rates six time to 3.75 percent in the last six months in a effort to help ailing growth and companies with debts and loans.

The Bank of England has cut rates three times to 5.25 percent, but the European Central Bank, which controls borrowing rates in the 12 nations that form the euro zone, has only cut interest rates once on May 10 to 4.5 percent.

Demand in Europe's corporate sector has fallen shapely in the last few months, in particular in among telecoms as European operators splashed out more than $100 billion on acquiring high-speed mobile phone permits.

That has burdened the companies with more debt than they can manage. Investors have punished the like of British Telecommunications, Deutsche Telekom and France Telecom, for letting their borrowing get out of hand.

Straddled with huge debts, about $29 billion at BT and 60 billion at Deutsche Telekom and France Telecom, the companies have reigned in spending on new infrastructure projects.

The winners in the European auctions for high-speed mobile phone licenses, that give the operators the rights to offer Internet, video and data services over cellphones, are now clubbing together to roll out services as a way of further curtailing spending.

"If you have people out there saying we haven't got the money to invest in companies that's going to filter through to people who provide the infrastructure and there's no real sign of any pick-up of that certainly by the end of this year," Henk Potts at Barclays Stockbrokers said.

The quandary for European central bankers is consumer confidence remains buoyant despite job losses, as manufacturing and technology companies scrimp and save to bolster earnings.

Inflationary pressures in Europe remain high, and there seems no way out for now.

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