Telcos have forged a decent reputation in recent years for being able to ride out an economic storm. In the aftermath of the financial crisis of 2008, for example, most operator groups were able to maintain stable margins and cash flows by reigning in structural and operational costs. This strategy had its downsides – notably a slowdown in network upgrades – but it saw the sector sail though the crisis with no hint of a Lehman Brothers-style meltdown or government bailout. Telco stocks rarely offer stellar returns but they are a safe haven when markets go bad.

The crisis currently engulfing the eurozone is likely to see operators in the region once again baton down the hatches to protect against rising debt prices, government-mandated austerity programmes and – if the Greek exit from the euro goes ahead – a major shake-up in the EU’s fiscal union.

A study last week by Wireless Intelligence highlights how the crisis is already impacting Europe’s largest operator groups. In its annual ranking of the top 20 global operator groups by revenue, the firm calculated that the five largest European operators – the so-called ‘G5’ – all reported lower year-on-year mobile revenue in Q4 2011, noting declines at Vodafone (down 3.1 percent), Telefonica (-0.1 percent), Deutsche Telekom (-5.1 percent), France Telecom (-1.9 percent) and Telecom Italia (-5 percent).

The eurozone crisis and any related slowdown in consumer spending are not the only factors behind the declines; fierce competition, market saturation and regulatory pressures are also weighing on sales, and each of the G5 face different challenges. But it’s hard to deny the impact of the European economic situation when operators in similar mature markets such as the US, Japan and South Korea are still registering growth.

The most directly exposed of the G5 is Deutsche Telekom due to its 40 percent shareholding in OTE, the former state-owned Greek incumbent fixed-line operator and parent of the country’s largest mobile network, Cosmote. OTE also owns networks in Bulgaria, Romania and Albania and claims to be the largest operator in Southeast Europe, as well as one of the largest firms on the Athens Stock Exchange (ASE).

Deutsche Telekom acquired an initial 30 percent stake in OTE for EUR3.8 billion in 2008 and bought another 10 percent last year (for EUR400 million) as the Greek government continued to offload state assets to pay-down its huge sovereign debt. As the crisis has escalated, the German giant has been forced to write-down the value of the asset a number of times and was required to extend an emergency credit line to OTE in case the Greek operator finds itself struggling to raise funds via increasingly spooked markets.

It’s tempting to present this situation – a German stalwart forced to prop up an ailing Greek – as analogous to the problems at the heart of the eurozone crisis – but that would be hugely unfair on OTE. Unlike its domestic government, OTE has made significant progress in recent years in reducing debt and controlling costs, notably striking a landmark deal with labour unions last year that will allow it to reduce its huge payroll bill on the fixed-line side. It has also sold non-core assets, including offloading its 20 percent stake in Telekom Srbija late last year.

These measures contributed to a better-than-expected performance in OTE’s last quarter (Q1 2012) as profits reached EUR307 million (up from just EUR30 million a year earlier) and revenue was down by just 3.7 percent, the smallest contraction for two years; group mobile revenue increased, even at Cosmote. 

But OTE’s improving balance sheet may count for little if the Greek exit from the single currency goes ahead. In a worst case scenario, a return to the drachma could decimate the value of OTE’s domestic assets overnight (on paper at least) and see it struggle to service its euro-denominated commitments. Little wonder that the value of its bonds is falling as rating agencies question the long-term ability of the firm to refinance maturing debt.

OTE’s domestic competitors have not been faring much better. Vodafone wrote down the value of its Greek assets to the tune of £450 million last year, while Wind Hellas is now owned by its bondholders after avoiding bankruptcy in 2010. These two players recently discussed a merger that would have made the combined firm roughly equal in size to Cosmote – but the deal was abandoned as the Greek crisis worsened.

Those operators not directly exposed in Greece fear the "contagion" that could spread across Europe if the expected Greek exit is badly handled, but – as discussed previously – the large telcos are sufficiently capitalised and fiscally well managed to absorb any short term shockwaves.

A more pertinent question to consider is the role the operators and their next-generation networks can play in rebuilding the European economies once the dust settles on the latest crisis. Cash-strapped governments across Europe are enjoying a much-needed windfall from the latest round of 4G spectrum auctions, but they must reciprocate with providing operators with a framework that will encourage ongoing investment in networks that can become an engine for future economic growth.

Matt Ablott

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members