Death Knell for Nortel, Jubilee for the Developed World?

Nortel Networks, (NYSE: NT), a corporation that earned $10.95 billion in 2007, has filed for bankruptcy both in Canada and the U.S. Nortel is, or was until recently, known as the world’s largest manufacturer of telephone network equipment. Nortel’s stock, in the year 2000, sold for over $800 per share. It melted down after a bubble around 2000-2001 and never recovered. These days, a share of stock can be gotten for $0.32. Which, based on its debt and bankruptcy, may not even be worth it.

The real problem here is how this is a bellweather for downstream problems which can occur from this. The modern information economy is reliant upon equipment to provide “always on” uptime service to everyone. Yet what will happen now, if Nortel is not there to ensure its pervasive products and technology? Here are some crowing points Nortel published in its recent corporate backgrounder:

• Nortel equips 85 percent of the top revenue-generating wireless operators globally.
• Stock exchanges in New York, Australia, Sao Paulo, Buenos Aires, Bombay and Seoul use Nortel solutions.
• More than 500 state or provincial agencies, 5,000 local city and county agencies and numeros federal and international government agencies throughout the world rely on Nortel solutions. This includes the U.S. Department of Defense in all 50 U.S. states and more than two dozen countries across the globe.
• Nortel enables secure connectivity to more than 100 million enterprise users worldwide.
• Nine out of 10 of the largest U.S. public school districts, serving more than 3.5 million students, run on Nortel solutions.
• More than 93 percent of the top 100 manufacturing companies run on Nortel solutions including aerospace, pharmaceutical, automotive, and IT companies.
• Our products are at the heart of every one of the top 25 service provider networks globally.
• More than 1,000 customer networks in over 65 countries use Nortel optical systems.

Now suddenly take away the company that provides all this equipment. What happens to the stock exchanges? The phone, network, and wireless providers? Schools? The Department of Defense?

Nortel may be too big to leave to utterly collapse and shutter its doors. There is a need to support and service the equipment base already in the world. There may be products, services and vital research that its dedicated customers will continue to sustain throughout its bankruptcy proceedings. It may survive as a smaller organization, or it may shed different divisions that may or may not survive on their own. Competitors may swoop in like vultures during the period of uncertainty.

Yet the customers will be faced with the prospects of keeping their gear from an unstable equipment vendor, or they may need to write it down or off, and repurchase gear from another technology provider over time. There will be, regardless, a “low grade fever” of IT worries over the next few years throughout the industries that Nortel affects.

Or, indeed, Nortel may just be availing itself of bankruptcy proceedings just to, in effect, bilk its creditors and avoid paying back some portion or most of its debts. According to its own press release, it plans to continue operations without interruption. Nortel Government Solutions (NGS), and the Caribbean and Latin American operations will not be affected. So is this simply a means to preserve its last $2.4 billion of cash? That would not be sufficient to cover its debt to even its single largest creditor, New York Mellon Corp., to which it owes $3.8 billion. Its total debt load is $6.3 billion, and total liabilties of almost $12 billion.

In comparison, the U.S. national debt, now estimated at $10.6 trillion, increases an average of $3.39 billion per day. Nortel is just a drop in the bucket of the overall meltdown of the world economy.

So what is occurring here? Are we going to see this as the first of a wave of corporate collapses, or will it be the beginning of corporations saddled with debt simply telling creditors, “you’re not going to get your money back.” How will the responsibility be distributed between Nortel, its creditors, public and private investors, and the Canadian and U.S. governments?

While Nortel, its corporate competitors and the existing Nortel channel will move to cover any customers and prevent a collapse of the global markets and networks in the midst of an economic vacuum, and while many concerned parties will try to heal this situation over the long-term, there will be a price paid for this failure. Something is going to happen. An economic implosion. Money will simply “poof.” Debts will be reduced, either written down or written off entirely, as losses.

One irony in the corporate backgrounder is that “Nortel was named to the Dow Jones Sustainability North America Index for the third consecutive year in 2007. The Dow Jones Sustainability Index is an investment index that benchmarks North America’s corporate leaders in sustainable development.” While Nortel was undertaking carbon impact reviews of its operations—it was estimated to have produced 314,286 metric tons of carbon dioxide in 2007—Nortel itself as a corporation was not sustainable.

Is this a canary in the coalmine of how other corporations will deal with their own debts and obligations? Could even nations conduct such behavior. Will there be a mass “Chapter 11” for governments unable to cover their debts? Equador, declared default on its own $3.9 billion in debts. Milton Ramirez’ recent analysis of the situation in Equador describes a possible slippery slope:

In the end, ordinary Ecuadorians, who may not understand the terminology of this discussion, may correlate the issue of debts to the banks to their own lives. If they follow the same logic, shouldn't they stop paying their own debts with banks?

Such is not unprecedented. We can look to a nation for a historical precedent: Iraq. Ancient Babylonia had a system for forgiveness of debts. It became known in Judeo-Christian tradition as “Jubilee.” As Wikipedia describes:

“These Babylonian kings… occasionally issued decrees for the cancellation of debts and/or the return of the people to the lands they had sold. Such "clean slate" decrees were intended to redress the tendency of debtors, in ancient societies, to become hopelessly in debt to their creditors, thus accumulating most of the arable land into the control of a wealthy few. The decrees were issued sporadically. Economist Michael Hudson has maintained that the Biblical legislation of the Jubilee and Sabbatical years addressed the same problems encountered by these Babylonian kings, but the Biblical formulation of the laws presented a significant advance in justice and the rights of the people. This was due to the "clean slates" now being codified into law, rather than relying on the whim of the king. Furthermore, the regular rhythm of the Sabbatical and Jubilee years meant that everyone would know when the next release was due, thereby giving fairness and equity to both creditor and debtor.”

Is the world in such a state today that a “jubilee” is needed? Can there be equable solutions to the writedown or writeoff of the debts of individuals, corporations, and governments around the world? The situation reminds me of the play by William Shakespeare, the Merchant of Venice. In that play, a technicality in the repayment of the debt Shylock demands, “a pound of flesh,” demands that Shylock remove the pound of flesh without spilling a drop of blood. Is there any such technicality in debt relief today whereby we can escape our debts by point out the “drops of blood” that would need to be shed for their repayment?

Back before 9/11, Bono began his campaign for third world debt relief:

“Debt-relief advocates say their cause comes down to two moral questions. First, is it right to ask 41 of the world's poorest nations to pay back nearly $200 billion in debt they accumulated over the past 30 to 40 years if much of the money was stolen by long-gone dictators propped up by the West during the Cold War? Second, is it fair to ask for repayment if just the burden of paying the interest costs cripples the nations' ability to improve their standards of living?”

There are the pounds of flesh, and our drops of blood. In the latter part of the 20th Century, there was an increasing call by many, including Bono and others, that led to Jubilee 2000. There was some easing from the IMF over the 1990s. In the article from 2001:

“So far, those lenders have agreed to relieve 22 nations of debts totaling $34 billion. But there are strings attached. International monitors must be allowed to watch whether the savings go toward making people's lives better or into corrupt leaders' bank accounts. (Countries with repressive governments, such as Sudan, aren't eligible for relief.)”

This sort of activism continues, through the ONE campaign and DATA, which recently merged. Debt relief for developing countries continues to shape global economics. In 2005, the G8 Summit agreed write off $40 billion owed by 18 indebted nations of the world.

Circling back from the third world, to the developed world, is this the shape of things to come for the developed world? Will we be seeing debt relief become a more prevalent part of the global economic debate? Do we need a “reset” on the economy, from the banking and finance, housing, healthcare, technology and public sectors? If we do, can we cushion our fall when debts are defaulted upon?

Can we maintain our economic, ecological, social and technological networks of interdependence without it falling apart? We may be kidding ourselves as we talk about economic or ecological “sustainability” and then see everything else we care about personally, as well as the corporations and institutions upon which we depend for our day-to-day existence, declare bankruptcy.

How do we square this sort of situation with the fiscal stimulus package, or the TARP, and other economic programs being promulgated in the wake of the current crisis? $775 billion is being categorized as insufficient. Rather than having bad debts be written off by the banking sector, the United States government is being asked to buy the bad debt. That debt will then need to be paid off by U.S. taxpayers, or, in turn, simply written off or defaulted upon by the U.S. government. Does that make sense to anyone?

The current estimated U.S. debt of $10.615 trillion, divided amongst the 306 million people living in the United States, is approximately $36,000 per person. A $775 billion stimulus, alone, requires a per-capita addition to the debt of $2,500 per person. Certainly we cannot ask for further tax relief without also then increasing the federal deficit and fueling the debt even further. We can compare this situation in the U.S. to the crisis in South Africa, where personal debt-to-household income ratio is rising. People there are seeking to take out loans simply to pay back their pre-existing debts and loans. If debts and obligations, whether personal or governmental, rise towards 100%, in due time, the amount of income any consumer would have for personal use will drop towards zero. We would all be “enslaved” to our debts, unable to achieve anything other than repaying past obligations.

How do we finally face the idea that, in order to really address this situation, we will need to, at some point, simply write off or write down these debts? Someone needs to take the hit. The painful realization may not have set in yet, but at some point it shall need to.

In such light, perhaps Nortel’s decision to enter bankruptcy protection doesn’t seem so tragic after all.