The credit worthiness of the two largest North American telecoms equipment makers Lucent Technologies and Nortel Networks has been downgraded to "junk" status by the rating agency Moody's Investors Service.

The rating cuts affect $7bn (£4.5bn) of Lucent's debts and $5bn of Nortel's debts.

The agency said the two giants are running out of cash and that they are being deserted by their customers.

"Telecom carrier equipment spending is declining and we expect it to continue to decline," said Moody's official Robert Ray.

"A turnaround remains elusive."

Gloomy future

Beyond downgrading the firms, Moody's also said its outlook remained "negative", hence further cuts could follow.

Shares in both companies have lost more than 80% of their value this year.

Yet both firms insisted they will bounce back.

Lucent said it has "a specific plan to return to profitability by the end of fiscal 2003" and insisted it has "sufficient liquidity to fund our operations and business plan".

Nortel said its "top priority remains returning to profitability by the second quarter of 2003" and insisted it has "a strong cash position and continues to focus on cash management".