What's New in the Financial World (12/21/2011) DT to Buy Sprint?

Italy’s GDP dropped o.2% from the second quarter to the third. This will undermine hopes that expansion coupled with austerity will quickly bring Italy’s deficit lower. That, in turn, should bring down the nation’s borrowing costs. Now, the opposite is likely to be true, in terms of what Italy will have to pay in interest rates on sovereign paper. The effect of the news is that it is more likely Italy will have to tap aid from either its neighbors or the International Monetary Fund.

No Tax Cut Extension

The single biggest risk to U.S. economic activity in early 2012 looms. Congress has not approved an extension of tax cuts, and the long-term unemployment insurance of 1.7 million American is at risk. The House has rejected a proposal to keep current programs in place for two months, while the debate over the fate of the cuts and unemployment benefits continues. The president insists that the two-month extension is the only course available as the year comes to a close. The two sides remain far apart as Congress prepares to leave for holiday recess.

Brent Crude Rises

The seesaw of oil prices continues, with the latest price move being upward. Brent crude has risen to more than $107 on a belief that economic activity in most of the world, except the eurozone, has improved. Of course, a sharp increase in energy prices is one of the few things that could quickly undermine GDP growth, as consumer spending will drop to accommodate the increased cost of gas and oil.

T-Mobil and Sprint

Speculation over what Deutsche Telekom will do with the $4 billion break-up fee it will receive from AT&T (NYSE: T) has begun. The $39 billion deal for the huge U.S. telecom to buy T-Mobile was killed by FCC and Justice Department resistance. Speculation is that DT will try to merge T-Mobile, the number four U.S. cellular carrier, with number three carrier Sprint-Nextel (NYSE: S). That would give the combined operation 85 million subscribers, which would allow it to be a reasonably strong competitor to AT&T Wireless and Verizon Wireless. Sprint’s market cap is less than $7 billion. One hurdle is that Sprint also has more than $5 billion in debt.

Douglas A. McIntyre