Western Europe Is Enron

This sentence from an article on Polish demographics helps explain why the West is headed for serious trouble and why advocating for mass migration today could be a career killer in the not-too-distant future.

ZH: Poland's Repopulation Problem

Poland is not popular with Africans or Asians. Social security in Western Europe is three times as high as the minimum wage in Poland. Due to high unemployment among migrants, social security schemes are an important part of the re-population policies in countries like the Netherlands, Germany, France and Sweden.

Read that sentence again and again if it doesn't make sense.

What is Western Europe's strategy? It is copying the vendor financing model used by Lucent Technology:

Like eating Jell-O with chopsticks, finding funding for startup service providers is difficult. After a few years of being viewed as hot property by the financial community, these carriers are now seen as risky businesses. That unsavory label has left the fledglings at a loss for ways to continue funding the rollout of their networks.

Enter vendor financing. The big manufacturers of telecom equipment don't want to see part of their potential market shrivel up and die, so they're leaping into the vacuum left by the capital markets and committing billions in equipment financing to these carriers.

But what’s being done to shore up cash-strapped service providers has many wondering whether today’s big equipment vendors are walking through a forest fire on wooden stilts. Indeed, the practice of vendor financing — where vendors loan service providers money to buy their own equipment — is coming under increasing scrutiny (see SEC Cracks Down on Book Cooking).

The reasons for this are many and, remarkably, the vendors doing the most lending are the least willing to talk on record about the specifics of their practice. Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/Toronto: NT), Lucent Technologies Inc. (NYSE: LU), and Alcatel SA (NYSE: ALA: Paris: CGEP:PA) were all approached for this article, and only Alcatel provided a qualified representative. (Not that he could reveal much, but he was a good sport.)

To be fair, the aforementioned vendors have begun addressing vendor financing issues in their quarterly earnings calls, and each assures investors that they’re conservative lenders and that the practice is no cause for alarm. (Of course, we wouldn’t be doing our jobs if we didn’t doublecheck their claims.)

And while it’s true that each vendor’s financed contracts are but a tiny percentage of their overall revenues, it’s also true that the amount of money committed to customer loans is growing quickly.

According to SEC filings and other published research, Alcatel, Cisco, Nortel, and Lucent have committed about $1.5 billion, $2.5 billion, $2.1 billion, and $7 billion, respectively, to vendor financing. It’s important to note that a commitment is only a promise; the amount of money actually drawn down, or in use, by each service provider varies. In some cases, service providers don’t use any of the funds a vendor’s committed to them.

Chart 1 However, the amount of financing each vendor has committed has grown considerably in the past year or so. Lucent, for instance, only had $2.3 billion in financing commitments in 1998. Last quarter that number hit $7.7 billion and now it’s down to $7 billion. Nortel’s balance sheet, too, will continue to be a weapon in its arsenal. Analysts predict its financing commitments will grow to between $3 billion and $3.5 billion in 2001.

Imagine Western Europe is a corporation. It is deeply indebted with massive unfunded pension liabilities. It's workforce is shrinking, but its retiree pool is growing. It's sales (GDP) are stagnant. It hits upon an idea to boost its workforce and sales: pay people to work there and pay people to purchase its products. Borrow the money to pay for it. Sales go up, the workforce goes up, and lazy analysts who focus only on numbers (it's sustainable on paper) think everything is great. The end will come as it did for Lucent, when the assumptions are shown to be absurd and the public turns on the people who put the fraud together.