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Thursday, 27 June, 2002, 22:26 GMT 23:26 UK
Investors count WorldCom costs
Traders in a Paris bank
The markets have some serious thinking to do
The world's big banks are starting to count the potential cost of the accounting fraud engulfing US telecoms giant WorldCom, just as US Congress says it will conduct hearings into the company's behaviour.

WorldCom is thought to owe its banks approximately $4.5bn (2.9bn), out of a total debt burden of $30bn.

Markets update
New York: Dow Jones +1.6%
New York: Nasdaq
+2.1%
Frankfurt: Dax
+3.9%
London: FTSE
+0.2%
Paris: Cac
+1.1%
Tokyo: Nikkei
+1.9%
WorldCom is running out of cash fast, and hoped to raise $5bn to meet its running costs and interest payments.

But the potential lenders have reportedly indicated that this credit deal is "dead", following Worldcom's admission that the firm overstated its profits by $3.8bn - a revelation condemned as "outrageous" by US President George W Bush.

WorldCom is expected to announce shortly details of the 17,000 job cuts announced earlier this week. Sources have told BBC News Online that only 650 jobs will be lost in Europe.

The vast majority of posts will be axed in South and North America, among them 3,000 contractors. Job losses in the UK are said to be fewer than 200.

Bosses called to testify

The company now faces a fraud inquiry by the US stockmarket watchdog, the Securities and Exchange Commission.

Congress's financial service committee also said on Thursday it was issuing a series of subpoenas requesting testimony from WorldCom executives.

The probes come amid speculation that a number of staff may have been involved in the fraud.

"It's not possible for [the fraud] to be done by one individual," US Treasury Secretary Paul O'Neill said.

Investors remained nervous on Thursday about the prospect of further accounting scandals, with London's FTSE 100 index recovering only nine of 100 points lost on Thursday.

WorldCom shares remained suspended from trading on the Nasdaq exchange on Thursday.

Big three

If WorldCom does go bust, the top three lenders to US companies all stand to lose money. They are JP Morgan, Citigroup and Bank of America.

But early estimates suggest that as many as 60 banks around the world might have given loans to WorldCom, or bought a slice of its debts in the form of corporate bonds.

The list includes banks in Britain, Canada, Italy and the Netherlands.

In part, this is because the banks have spread the firm's debts out thinly among themselves to reduce the risk to any one financial institution.

But if WorldCom files for bankruptcy protection, the impact of any bad loans could also ripple through insurers and pension funds.

Final blow?

Some analysts think WorldCom is unlikely to survive long and could even be forced to seek so-called Chapter 11 bankruptcy protection before the end of the week.

"It is possible that the restatement [of WorldCom's earnings] will be treated as a breach of representations and warranties by the lenders, who could move to require repayment," said Morgan Stanley analyst Simon Flannery.

The decision on whether to pull the plug on WorldCom comes at a tough time for the big US investment banks.

They are already reeling from a series of spectacular corporate bankruptcies at Enron, at one-time telecoms high-flyer Global Crossing and at Kmart, the second biggest US discount retailer.

The banks are also counting the cost of bad loans to Argentina, which defaulted on $141bn of international debt at the start of this year.

Spreading the risk

Citigroup has put its exposure to WorldCom at about $375m; JP Morgan said there would be no material impact on its earnings; Bank of America has declined to give details of its exposure.

However, analysts have forecast earnings per share could be hurt at both JP Morgan and Bank of America.

US bank Mellon has admitted to $100m of unsecured loans to WorldCom.

British bank Barclays is thought to have lent WorldCom about $100m, according to Reuters news agency.

Dutch insurer Aegon said it has $200m of exposure to WorldCom's debts, as it holds some of the firm's corporate bonds.

Another Dutch institution, ABN Amro, said it would have to write off 100m euros if WorldCom collapses.

German insurer Allianz put its exposure at below $200m, while Italian bank Generali has said it holds 40m euros in WorldCom bonds.

European banking and insurance shares rallied on Thursday as investors seemed reassured that the risks were manageable.

Uncertain market conditions for telecoms firms over the last couple of years have led to banks "managing their exposures down to some extent", said Jim Mitchell, an analyst with Putnam Lovell Securities.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Jenny Scott
"Regulators have promised to tighten the rules"
Retired WorldCom board member Colin Williams
"It was the MCI deal that probably was a step too far"
US SEC's Charles Neimeier
"I would expect that we will see more [events like this]"
The BBC's Stephen Evans
"Those found guilty of fraud will go to jail"
WorldCom

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