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Britain's Government Pushes Spending Cuts; New Danger in the Gulf of Mexico

Aired August 17, 2010 - 14:00:00   ET


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Better to bash the budget then to deny the deficit. Britain's government pushes spending cuts.

There is a new danger in the Gulf of Mexico. Scientists say not all the oil has been recovered and it is still a threat.

And the glass is half full. Carlsberg's chief tells me tonight, times are tough, the future, frothy.

I'm Richard Quest. We have an hour together. And, yes, I mean business.

Good evening.

Tonight, Britain faces a choppy ride back to economic health. And the finance minister says we must stay the course. George Osborne, the chancellor of the exchequer, was defending a swinging program of budget cuts already introduced. And a spending review still to come later this year. All designed to narrow a yawning gap in U.K. finances. The U.K. deficit the highest, just about, in the European Union.

Just before he spoke he received a letter from the governor of the Bank of England, as required by law, warning of further unpredictable headwinds. Now, what did Mr. Osborne say in what was billed as a major speech in the U.K. economy?

Join me over in the library and you'll see what he said. He said there was room for "cautious optimism". Good signs of GDP growth, employment, manufacturing. And as he went through the litany of reasons why the U.K. was at least coming out of recession and returning to growth. He made it clear that the cuts announced, the more than $50 billion apparent cuts announced in the June budget had to stick.


GEORGE OSBORNE, U.K., CHANCELLOR OF THE EXCHEQUER: I'm optimistic that if we stick to the course we have set ourselves on, hold firm to our plans, deal with our debts. Start to rebalance our economy and provide the stability that Britain has been lacking in recent years, then we can navigate our way through to calmer waters. The alternative, to change course, put off dealing with our problems, be in denial about the scale of the deficit, is the surest way to disaster. It would wreck the British economy.


QUEST: Unfortunately for the chancellor, there is one sticking point, and it is consumer prices, 3.1 percent. Now it is lower than June's 3.2 percent but it is still above the U.K. government's target of 2 percent, and it looks like it is remaining that way. There are a variety of reason, return of VAT to 17.5 percent, fuel, seasonal factors. But it is entrenched at over 3 percent and is likely to be that way until the middle of 2012, at least particularly with more VAT rises; which is why the governor of the Bank of England, who has monetary responsibility and the responsibility for inflation targeting, has written a letter to the chancellor, in which he says, that he will-he's expecting inflation to remain over 3 percent, but what is interesting is he says he's ready to change policy both in terms of quantitative easing or indeed tightening policy as necessary.

Interesting stuff. Elissa Bayer is the director of private clients, at the stock brokering firm Charles Stanley. She joins me now.

So, let's start with the chancellor's speech, today. He sticking to his guns on the spending review and the deep cuts.

ELISSA BAYER, DIR. OF PRIVATE CLIENTS, CHARLES STANLEY: Well, he was flagged to come in, David Cameron is gone on his holiday, George Osborne they brought in to make this speech, to say they are going to do exactly what they were going to say. To be fair, I mean, that why there was a change of government. They needed to bring in those spending cuts. So he is sticking to what it is.

I think the problem is that the public have reacted to what he has said and everybody is highly nervous. So, I think to some extent, he may want to reinforce what he is saying, but he is trying to make sure that, you know, not everybody hides in their rabbit hutches (ph).

QUEST: You see, that is the thing, he's created the self fulfilling prophecy that will-that could eventually become a downward spiral of economic activity.

BAYER: Well, I think, you know, the retail are naturally nervous, the consumer is very nervous.

QUEST: I'm nervous.

BAYER: Everybody is nervous. And I think rightfully so. And also one must not forget the levels of debt that were built up in this country. So, Mr. Consumer may not get him out of the problem.

QUEST: But let's just pause for one second there, because George Osborne also referred to the gambling with economy, in terms of he was prepared to take risks. We'll talk about this in a second, after we have heard from the chancellor.


OSBOURNE: The gamble will have been not to act. To put Britain's reputation at risk and to leave the stability of the economy to the vagaries of the bond market, assuming investors around the world would continue to tolerate the largest budget deficit in the G20. The actions we took it the budget have removed the biggest downside risks to the recovery. A loss of confidence and a sharp rise in market interest rates. Britain now has a credible plan to deal with our record deficit and we must stick by it. To budge from that plan, now, would risk reigniting the market's suspicions that Britain does not have the will to pay her way in the world. I will not take that risk.


QUEST: He says he's not prepared to take risks there. But there is a difference of opinion. People like David Blanchflower, and of that school, believe that too much debt reduction now is dangerous.

BAYER: Well, he's already got 60 billion he's banked, he's done his June budget. He's asked for very big cuts from the government departments and it will be interesting to see how they do that. But the fact is Blanchflower has always been more hawkish, and there is a real concern that if you do all this now, which is what Labour said, that you are going create more problems going forward. On the other hand, we have to have these cuts.

QUEST: But that is the difficult part, isn't it? That is the conundrum at the moment. And frankly, no one really knows how this is fully going to play out.

BAYER: No, but the important (ph) thing is, I think the corporate sector, private sector have done very well over the past two or three years. The public sector haven't taken the hit. But you have a huge employment problem, nearly 1.2 million in the NHS. When you start cutting back that is were your problems are going to be. Because what are all these people going to do?

QUEST: Inflation is over 3 percent. We know the reasons why. But Mervyn King, in his letter, in the governor's letter, he says that underneath the headline number, clearly reading between the lines, the capacity and there is more slack in the economy than perhaps it seems at first glance.

BAYER: He was very measured. He's always very measured, very measured last week when he talked about double dip. You know that is not in the Bank of England's philosophy to talk about things like that. But he is looking at what is going on, but inflation is going to remain at this level. You've got high fuel, as you said, high consumer prices. I mean, the wheat may not affect us, but it is going to have a knock on affect all the way around.

QUEST: So, I'm asking just about anybody in economics this question.


QUEST: Double-dip, yes or no?

BAYER: I am going for the no.

QUEST: You are a no?

BAYER: No. It is going to be difficult, but I think, no.

QUEST: Going to difficult?



BAYER: And the corporates, I think, will come through well. The figures coming through, some of them are very good.

QUEST: And we are going to hear more about that later in the program. Many thanks, indeed, for joining us. You are always welcome. Lovely to have you with us.

Talking of, as Elissa was just talking about, you have only have to look at the markets and investors did shrug off concerns about the U.K. economy. All the main indices put in a strong finish. There was a bit of help from those healthy earnings reports that we were just alluding to. There was some upbeat figures from some European companies, too, including Carlsberg and chief executive will be on this program in a moment or two.

Financial stocks, insurers were the best of the lot. Mines and steel makers also made solid gains. But if you really want to have a bit of a-a bit of a-a bit of a rally, on the beginning of the week, or a Tuesday.


Look at that! Dow is up 169 points, 10, 471. All sorts of interesting reasons. We'll talk about those in just a moment, mainly earnings related.

It has been almost two years since the U.S. pumped $135 billion dollars into two very large but somewhat obscure companies. They are Fannie Mae, Freddie Mac, but are they ready for reform? In a moment.


QUEST: The U.S. Treasury secretary says he's looking for ways to keep Fannie Mae and Freddie Mac from getting into trouble in the future. These are the two mortgage organizations, government sponsored entities, they are known as, in the United States. They are the backbone of the U.S., and some would say that, perhaps, the global mortgage industry. So now the U.S. is reaching out to the financial sector, academics and others. Tim Geithner, the Treasury sec says, reforming the mortgage companies is essential. And it convened a summit to jump start the discussions. Maggie is in New York.

Maggie, look, I mean, Fannie Mae, Freddie Mac, they are-they are incredibly important, and unbelievable boring at the same time.

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: And complicated, and everything else. Listen, they call them the two-headed monsters. I mean, they are monsters that we can't live without, but boy are they a mess. Take a look at some of these numbers, Richard. You mentioned before the original bailout, the tally right now is about $150 billion, and counting in taxpayer aid-some call it bailout money-since the crisis hit.

Last quarter alone, they had $9 billion in combined losses, just in the quarter. They are so broken that the politicians in Washington didn't even try to address them in the recent financial reform bill. But even Treasury Secretary Geithner says they have got to be fixed.


TIMOTHY GEITHNER, U.S. TREASURY SECRETARY: There is no clear consensus yet on how best to design a new system. But this administration will side with those who want fundamental change. It is not tenable to leave in place the system we have today. We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support.


LAKE: Fundamental changes, of course, the reason we care about that, they are responsible for about 90 percent of the mortgages in the U.S. in this market. They are absolutely huge. Some of the big headliners at that conference, and there were a lot of really important people there within the financial community, have all sorts of solutions. No one can agree what to do.

Some, like Bill Gross say, listen, you should completely nationalize them. However, that would really balloon out the deficit. So a lot of people stacked up against that. On the other side of the spectrum, you have people say, hey, fully privatize them, pull the plug. Let's these things go, privatize that market. But it doesn't seem like in the private sector there is any appetite to take on the risk in the housing market. It is likely that you would only see mortgages two to five years, and they would get a lot more expensive for homeowners. That is also untenable.

QUEST: All right.

LAKE: They have got to figure a way out. It is critical to fixing the housing market, but it is politically a very difficult topic. Because at the core, Richard, is whether there should be the homeownership level. Whether there should be government subsidies for homeownership in this country. Boy, heading into a mid-term election that is a tough question to ask.

QUEST: A car in every garage, a chicken in every pot, I think is the American phrase.

Look, I was going to ask you to explain the role that these GSEs, Fannie and Freddie, play in the U.S. housing market.

LAKE: Were you really?


QUEST: Yes, I have-

LAKE: Do you have four hours, Richard? Gail (ph) will have a heart attack.

QUEST: I was about to say, Gail (ph), in charge, who is producing the program tonight, even she is now having to be given oxygen at the thought that we were going to go down that road.

All right, Maggie. As they would say in the old days, are Fannie and Freddie, necessary to discuss, but we'll have to leave that for another day. All right, we'll leave that for another day.

LAKE: Yes.

QUEST: All right. Other stories, big stories tonight; trading with the enemy. That is the charge against Barclays Bank. The British institution is owning up to several years of busting U.S. sanctions. And the penalty it agreed to pay will swallow up a 10th of the property turned in the last quarter. Jim Boulden is here with this.

Hang on (ph), this is frustrating (ph).

JIM BOULDEN, CNN FINANCIAL CORRESPONDENT: Yes, well, this is Barclays joining the other European banks that have already paid fines for deeds done earlier this decade. We are talking about trading between 2000 and 2006, when it comes to Barclays. And you remember, the U.S. has these laws that you can't trade with Cuba, can't trade with Iran, Sudan, Libya-at the time, though not now-and then Myanmar, or Burma.

So, the idea was, you know, willfully the U.S. government says, willfully, these employees at Barclays Bank were hiding some transactions through New York, and-

QUEST: Do you think, or they say they were doing it deliberately?

At first when I heard about these stories, you know, a couple of years ago, you thought maybe the banks weren't up to speed on the law? Well, that is naive isn't it? The U.S. government will say that all these banks did it on purpose and willfully. Now, what's happened here is a settlement has been agreed for $298 million.

QUEST: $300 million.

BOULDEN: A fine, that Barclays will pay.

QUEST: $300 million.

BOULDEN: And then a judge has to agree to the final settlement. But it does mean that Barclays will pay the fine and move on. But it is about past practices, I think it is fair to say that.

BOULDEN: Yes, hang on, recent past. It is not like, you know, Second World War stuff?

BOULDEN: No, no, I don't mean that at all, but I do mean that this isn't about an ongoing investigation into people-

QUEST: Are Barclays shame faced? Is there any embarrassment? Is there any embarrassment? Is there any-huh?

BOULDEN: Well, there was a very long no comment from them basically today, because it still has to go before the judge. But the agreement that they have come to, this fine, we have seen other banks as well, ABN Amiro was fined five years ago, that is now part of the Royal Bank of Scotland. Lloyd's bank fined $350 million, and Credit Suisse fined $500 million. So Barclays becomes number four in that list, anyway, of European banks that have been caught on the wrong side of U.S. sanctions. And now, of course, we have even greater sanctions against Iran. So, banks, companies, oil companies, others who are trying to be very careful that they don't skirt this U.S. law.

QUEST: Irony of ironies. All right. Many thanks, indeed. Many thanks indeed.

Russia is sending its love to Carlsberg, but can that profitable relationship survive Moscow's ban on grain exports. The chief executive of Carlsberg joined me from Copenhagen, after the break.


QUEST: Carlsberg is pouring fewer pints and yet making more money from those that they pour. The Danish bre-brwe-brewery-giant-I do beg your pardon-says net profit jumped by more than a third, to just over $450 million in Q2. Costs savings, now cost savings and changing currency rates help make up for a drop in the amount of beer being drunk in some key markets. And the company is increasing its appeal to customers in its key market, Russia.

Now, bear in mind that Russia had unique problems for Carlsberg, indeed all brewers, after this Draconian rise in excise duties imposed in January by the Russian government. More than 40 percent of Russian drinkers currently choose a beverage made by Carlsberg. And so, they did so despite steep price rises after the government tripled the tax rise 300 percent. The numbers were originally down 5 percent on volume. Now they've eased off a bit.

Carlsberg expects earnings for the year to rise 40 percent. A best guess it was a gain of 20 percent. Rising taxes and a stronger ruble are only part of the story though, for Carlsberg in Russia. A ban on wheat export is forcing up the price of grain, and that of course, is an essential ingredient for beer.

I was joined by Carlsberg's chief, Jorgen Rasmussen. And I asked him is he expecting to see an impact as a result of grain?


JORGEN BUHL RASMUSSEN, CEO, CARLSBERG: In our case, if I take this year first, 2010, all of the visibility we have, in terms of increased cost for the second half is it is clearly built in into our upgrading, upgraded earnings out look for this year. So we expect, if you take Russia, our raw materials cost to be slightly off versus first half, in 2010. But still included in our earnings upgrade. If you look into next year, the impact of what has been happening Russia, in terms of barley costs, will not be material for the group. But can vary by market, depending on the region and in some places it could imply price increases. But will not be material for the group at all next year.

QUEST: The performance of the company, as so many major economies, flirt with double dip recession. What's your experience, Jorgen, when there is these bad economic times, and people do have to cut back, either because of austerity measures or because of higher taxes. What is your experience of what they are spending pattern is?

RASMUSSEN: It is still challenging times, but as we have also said this morning, we do see some slight improvement in the overall consumer sentiment, in most of our markets. So it is slightly better than last year. But last year was also a bad year. And we are not back to the good ol' times, before the crisis. So, small improvement versus `09 and I don't believe you are going to see suddenly a consumer sentiment coming back to what we saw in the middle of 2009. So slightly better and that is what we are anticipating in our outlook for this year. And also we must start thinking about next year.

QUEST: And as you look forward to the second half and into next year, are you more interested in launching new or products, within the group? Or are you interested in acquisitions?

RASMUSSEN: We-it is not an either/or. We are very interested in launching new products. And we have a lot of great products we have launched in quarter two, before the peak season and we don't need to build on those in the second half of the year. And we have many more great ideas in the pipeline. But a part from that we will also be looking at if there is an acquisition to make somewhere, primarily out of Asia, if any.

We still have so much opportunity in our current business. So we don't need to acquire but we are still looking at interesting acquisition opportunities.

QUEST: Every country, and I need to just ask you about this, finally.

Every CEO I talked to, particularly those on, if you like, the western side, in Europe and the United states. That Asia, emerging markets is the game in town and it is the biggest game in play. But it is a difficult game in play isn't it? And you've got to know what you are doing.

RASMUSSEN: You do. And that is why you need strong logo management, as we have in all our markets, especially developing markets, and also as a strategy Carlsberg we need at good balance between more developed markets and emerging markets. And I do believe we have that today, in Carlsberg, where 40 or 45 of our earnings coming from developed markets and 55, 60 percent of our earnings from emerging markets. To me that is a great split. Where you have emerging markets with a little more risk and then the balance on more mature markets, more stable markets.

QUEST: Isn't it inevitable that in the next five years that balance is going to flip flop and the emerging markets will be the driving force?

RASMUSSEN: They have become more and more important. But also when they become more and more important some of those markets will be more and more stable, so that will also change, and evolve over time. And I don't mind to be exposed to a lot of growth, I think that is what you have to be if you want to have a successful business, growing business. And also offer all your people a lot of career opportunities in the company.


QUEST: The chief executive of Carlsberg. Jorgen Rasmussen, joining me earlier.

In the Gulf of Mexico the containment cap that BP put on its broken oil well, has held up now for more than a month. So far, so good. So, why are scientists saying that a new threat has emerged? We'll be in Louisiana, after the break.


QUEST: Hello, I'm Richard Quest. QUEST MEANS BUSINESS, this is CNN, and on this network the news always comes first.


QUEST: Now the BP oil disaster in the Gulf of Mexico and the fall out from it, including a U.S. moratorium on deep water drilling. There was a hearing today on how that ban is affecting small businesses in the area.

At the same time, two new studies have been released on the lingering affects of the spill. There is much that we need to talk to Ed Lavandera, who is in St. Petersburg, in Florida.

Ed, let's start with those surveys, or those studies. We had been told, 75 percent, or 50 percent, whatever it was, of the oil had been recovered or was inert. Are we now being led to believe there is more there and it is more dangerous?

ED LAVANDERA, CNN CORRESPONDENT: Well, you know, what scientists have been going over the last few weeks -- at least the federal government scientists -- had released what they're calling kind of like a budget of where all of this oil is. And so you've seen like this back and forth that's starting now, emerging from scientists, who are taking a closer look at that over the last few weeks and saying to themselves, you know, it really kind of depends on -- on how you -- how you look at this.

And -- and, basically, what these scientists are saying is that you can account for about 33 percent of the oil being collected, burned off or -- or siphoned off off of the Gulf waters and that. So they can take that. They say everything after that is -- the idea that -- of -- of oil evaporating and being kind of naturally dissolved in -- in the waters -- is very much a -- a guess at this point, because we don't know the depths at which this oil is, how it's reacting down there and that sort of thing.

That's why you're seeing so many scientists kind of coming out and questioning exactly the accounting of how all of this is taking place.

QUEST: Now, Ed, as we look...

LAVANDERA: This is the WeatherBird II, a research vessel (AUDIO GAP)...

QUEST: Well, we -- we were hoping to hear from -- a report from you there. But we will continue talking amongst ourselves -- Ed, the -- the way in which the ban -- the drilling ban is now affecting local businesses, this is quite interesting, isn't it, because, you know, between -- literally between the devil and the deep blue sea. The local businesses want the drilling to continue but are mindful of the risks.

LAVANDERA: Well, they are. You know, and there's a new report out, also, as well, from the University of South Florida researchers that kind of -- it sets the stage for what could be some serious questions about the future of -- of the fishing industry here all along the Gulf Coast. And those scientists have just returned from a 10 day mission. And they're found -- for the first time these scientists come back and have found that there are some small marine organisms that have come into contact with these toxic oil and they wonder about the future of this marine life.


LAVANDERA: This is the WeatherBird II, a research vessel that has been used by the University of South Florida for the last 10 days investigating the oil spill. Some 13 scientists have been on board and they're just now coming home to St. Petersburg.

(on camera): So what's in these containers right here?

DAVID HOLLANDER, OCEANOGRAPHER, UNIVERSITY OF SOUTH FLORIDA: Water in here has been -- was collected from 50 meters.

LAVANDERA (voice-over): David Hollander was one of the lead researchers on the mission.

(on camera): Did you feel like you were kind of on the verge of really getting a better understanding of what's going on underneath the water?

HOLLANDER: Well, I think we're adding to the puzzle. We're adding to the pieces of the puzzle.

This is where we found the sedimentary oil.

LAVANDERA (voice-over): Hollander and another expert on the journey, John Paul, sat down with CNN for an exclusive review of their findings. The USF scientists say they found toxic levels of oil and dispersants infecting marine organisms just 40 miles south of Panama City, Florida. The organisms, called phytoplankton, and other microscopic bacteria in the ocean, are the foundation of the food chain.

PROF. JOHN PAUL, MARINE MICROBIOLOGIST, UNIVERSITY OF SOUTH FLORIDA: It's what feeds and fuels the ecology of the ocean. And if those guys are in trouble, then the ocean is in trouble.

LAVANDERA: So far, federal government scientists have downplayed the impact of microscopic oil making its way up the food chain. This is what the head of the National Oceanic and Atmospheric Administration said earlier this month.

DR. JANE LUBCHENCO, NOAA ADMINISTRATOR: Fish will degrade that oil and process it naturally. And so it doesn't bioaccumulate. So it's not a situation where we need to be concerned about that. Over time, it will be broken down.

LAVANDERA: USF scientists tell CNN that is a short-sighted view of the danger. NOAA officials haven't responded to these latest scientific findings.

The 10 day mission in the Gulf of Mexico was a rocky voyage. The scientists were battered with 12 foot seas and strong storms, taking them within 25 miles of the Deepwater Horizon spill site. All along the way, they found microscopic droplets of oil on the ocean floor.

HOLLANDER: Here is a sedimentary record from an area that's about 1,500 meters water depth...

LAVANDERA (on camera): OK.

HOLLANDER: -- right adjacent to the Deepwater Horizon.

LAVANDERA (voice-over): Using U.V. light on the sediment, the microscopic oil stands out easily.

HOLLANDER: You can see it all spread out all over. There's no reflection. Some of those weren't before, but this is all speckled. And when you turn off the light completely, it looks like the southern sky.

LAVANDERA (on camera): Yes, it looks like a constellation of stars on that.

UNIDENTIFIED MALE: It looks like a constellation of stars.

LAVANDERA (voice-over): But most troubling to David Hollander is evidence that the submerged oil is making its way through a region of the Gulf of Mexico known as the Desoto Canyon. The canyon stretches from just east of the Deepwater Horizon spill site to an area south of Panama City.

(on camera): So the concern is not only that you found the droplets of oil widespread, is -- but where you found it?

HOLLANDER: Yes, it's becoming now into these areas that are critical marine protective areas, critical habitats for commercial and recreational fish.


LAVANDERA: And, Richard, we reached out to BP officials. They say they haven't seen many of the details in this latest scientific expedition, but they do say that they want to know everything that everyone wants to know about the conditions of the Gulf waters and that they've committed some $500 million to continue studying the long-term impact -- Richard.

QUEST: Ed, finally and briefly, the thing I found most fascinating is from a consumer's point of view, from an investor's point of view, from anybody's point of view, you have two -- in your report, you beautifully brought up two diametrically opposed views -- the experts who say it's going to get into the food chain, the government officials who said not a worry.

LAVANDERA: Well, you know, and that is the -- the -- really, the question is can the -- what we don't know at this point is, really, the severity and the long-term impact of all of this. You know, scientists here, like the ones we speak -- spoke with at the University of South Florida, say, look, we -- we approach it from a very different standpoint than perhaps the consumer public and the people who depend on this. They want to know what's the long time impact of this.

And what worries them the most is that even though this is all microscopic droplets of oil down there in the bottom of the Gulf of Mexico, that over time -- that because they believe that this won't break down as quickly as once believed, that exposure over time and the question marks that that leaves on -- on how that will leave marine life over the years to come, that's the big unknown at this point.

QUEST: Right.

Ed Lavandera in Florida.

Thank you.


QUEST: To return to a major story in the news tonight, the news of the incident that took place at the Turkish embassy in Tel Aviv.

Paula Hancocks is in Jerusalem for CNN tonight.

And Paula joins me now -- Paula, it sounds like the incident is over and I'm just trying to gauge how serious it was.

PAULA HANCOCKS, CNN CORRESPONDENT: Well, Richard, that's certainly what we're hearing from the Turkish side, that they believe everything is under control. And what we did hear from the Turkish diplomat is that there was a man -- he's believed to be a Palestinian man -- who actually jumped the wall and tried to get inside the Turkish embassy.

Now, he is inside the Turkish embassy at this point, the Turkish diplomat saying he was incapacitated, but not really explaining what that means.

Now according to the Israeli Emergency Services, they say shots were hear -- heard, or at least one shot was fired. And they understand from sources within the embassy itself that the man is very likely wounded but nothing more.

Now, the assumption is he was claiming political asylum. Now, there have been reports that that this is a man who tried exactly the same thing four years ago at the British embassy.

Now, this has not been confirmed by either side at this point, but they are credible reports. We know that Israeli Channel 2 has actually spoken to this man that they believe is inside. And four years ago, he said within the British embassy that he was going to blow up the embassy -- and blow him -- and kill himself unless he was granted political asylum.

A pretty similar thing this time, saying that he had two hostages. Now, no one knows if this is actually the case because the Israeli forces outside are hearing nothing from the Turks inside -- Richard.

QUEST: And -- and, of course, being sovereign territory, I understand that the Turkish authorities have not allowed the Israelis inside.

HANCOCKS: Absolutely. And that's fully within their rights to do that. But, of course, remember, the relationship between Israel and Turkey is not good at this point. The Turkish ambassador is not there. He was recalled from Tel Aviv a few months ago after that flotilla incident where nine Turkish citizens were killed on board a ship trying to get to Gaza.

So, really, relations between the two countries have been dreadful from the Gaza war, the end of 2008, the beginning of 2009. Though I did talk to the Israeli foreign ministry and there was almost a little bit of frustration that they were getting nothing from the Turkish authorities.

So the information at this point is coming from Turkey.

Outside the Turkish embassy, there are countless police cars, ambulances. There's been a SWAT team, apparently, up there. But, of course they can't step over the threshold -- Richard.

QUEST: Paula Hancocks in Jerusalem on the story for us this evening.

Many thanks for that.

After this very short break, inside the jobless recovery -- we're going to be in Portugal, where a record number of people are out of work and yet there's an acceptable of austerity, in a moment.


QUEST: Workers in Portugal are searching in vain for what they believe will be light at the end of the economic tunnel tonight. The latest jobless numbers failed to budge from record levels, a glaring sign that the economic recovery in Portugal may be there, but only just.

You need to come with me to the library, where we'll put some full details into this.

You'll see the unemployment rate in Q2 is 10.6 percent. It's unchanged from the previous quarter -- one of the highest rates of unemployment within the European Union, certainly within the Eurozone, not to be confused, of course, with Spain, which has its own unique problems and an unemployment rate higher -- twice as high as that.

But Portugal had been doing quite well.

Now, at the moment, GDP has slowed sharply in Q2, to .02 of 1 percent. The government is projecting growth of .7 of a percent this year.

The issue, of course, for Portugal is how far it has to reform itself and its government budget deficit and deficit to GDP, if it's not to follow the same fate, for example, as Greece. And merely putting those two countries in the same sentence will enrage people in Lisbon.

The austerity plan that's currently before -- from the government is $2.4 billion in 2010. Now that's quite a massive savings for the economy. It includes cuts in public service salaries. It includes job losses and a restructuring of the economy.

A short time ago, Paula Ferreira, a reporter from our affiliate, RTP, joined me on the line.

This number of unemployment, the 10.6 percent, was this the worrying factor that have gotten people so worried in Lisbon?

PAULO FERREIRA, RTP: It's the highest level in unemployment in Portugal since we have these figures. So the unemployment remains the same as the first quarter of the year, but it's above the level of the last year.

So people are concerned, of course, because the jobs that were destroyed in the past financial crisis and in the debt crisis last year and this year, it's -- it's very difficult to -- to recover from that losses of jobs.

QUEST: Is there a feeling that Portugal is in real danger of slipping down the same road as Greece?

FERREIRA: No, I don't think so. We don't have that idea here in Portugal. We never had that idea, even in the -- in the middle of the financial crisis, the debt crisis in February and March. The situation in Portugal is quite different from the Greek situation, because we don't have the imbalances the Greeks have in the -- the fiscal budget and we -- we didn't lie in our figures, in our statistics. And it's very important for the markets to trust in Portuguese figures in a different way that they look and they looked in the past for the Greek figures.

So it's a very different situation between the two countries.

QUEST: And -- and yet, at the same time, unfairly -- unfairly to be fair -- to be true, but Portugal, Spain, Greece and Ireland -- all these countries are having to pay more for refinancing their debt. And that, of course, is putting an even bigger strain on government budgets and deficits.

FERREIRA: Yes, that's true. Portugal is paying now for the treasury bonds of 10 years at over 5 percent a year, which is very, very high. It's almost double that Portugal paid last year. So it will put lots of pressure in the -- the -- in the financial situation of the government.

QUEST: Right.

FERREIRA: Portugal has a debt concerning to GDP of 80 percent of GDP. So it's -- it's very unfair, but that's the way the markets function. And we must pay that -- to that -- that price.

QUEST: Finally, when people are out and about, is there a general feeling that things are getting better or...


QUEST: -- at least -- or at least they're not getting worse?

FERREIRA: No, people -- people think that the next coming years in Portugal will be very tough, because the -- the -- the political message that the -- the government and the opposition parties are passing to the people is that the next month, the next -- the coming years will be very tough. The wage increases will be not very high and unemployment will stay at high levels as in this past quarter. And people know that they must make an adjustment in their own budgets, not only the government budget...

QUEST: Right.

FERREIRA: -- but only the private sector budget.


QUEST: The plight of Portugal. QUEST MEANS BUSINESS will be back in a moment.


QUEST: Authorities in Northern Europe are going beyond borders in their own borders in a bid to head off serious financial turbulence in the future. Eight countries in the Nordic and Baltic regions have shaken hands and are promising to share new information, from Iceland, of course, in the north, all the way to Lithuania down in the south. The aim is to spot and snap out problems in banks with cross border operations.

Nordic banks have a lot of exposure to Baltic countries. For example, Swedbank, the largest Baltic lender, watched its stock plummet 18 months ago as the region sank into the E.U.'s deepest recession. And, of course, you don't need me to remind you about the problems of Icebank and -- and the various problems in Iceland which transmitted themselves across the continent.

Anyway, that's what they have been deciding and discussing. The Swedish minister for financial markets, Mats O'Dell, joins me now on the line from Malmo in Sweden.

Minister, what do you hope to gain from this regional collection that you weren't getting before?

MATS O'DELL, SWEDISH MINISTER: Well -- well, recently, I think you described it yourself very well when you said that we are trying to strengthen our supervision across border to supervise our cross border banks and also that we will share more important new information. And what we hope is to make more coordinated actions possible in our region.

And you are well aware that our region is very closely integrated in our financial markets.

QUEST: Right. But, for instance, if we just had the E.U. stress tests and all the banks we know have -- have passed and those that -- that have failed -- I'm slightly at a loss to see what -- what additional safety and security you gain. For example, if there was a Landesbank or if there was another Icebank crisis, how would that help you?

O'DELL: I think this agreement will help us to detect and also to handle the risks earlier. The stress tests are, of course, very important and I think our banks came out very well on these stress tests. But now it's -- it's the aim to strengthen cooperation, to avoid future crisis, hopefully. But if they will occur, how to handle them and how to have a joint -- a joint crisis response system.

QUEST: Right.

O'DELL: But I think two key words here are transparency that we always try for in Sweden and also sharing information.

QUEST: How...

O'DELL: These are two very important elements.

QUEST: And, of course, you'll need to be careful on that regard, the sharing of information, because, of course, there's a lot of big cross border banks further south of your Nordic and your region.

O'DELL: Yes, but I -- this is -- this is not sharing information between banks and their customers, this is sharing information because...

QUEST: Right. But what I'm...

O'DELL: -- the industry is...


QUEST: Sorry.

O'DELL: -- and also the authorities.

QUEST: Right. And, of course, you'll be sharing the information that you get from the authorities with other regionals.

On a final point, are you -- are you more comfortable now with the way in which the E.U. and E.C. is moving toward regulatory reform?

The U.S. has done its bit. The E.C. is still somewhat meshed into a mishmash.

O'DELL: Yes, I think we are -- we are better off now, since we have taken very strong decisions within the European Union, also during our presidency last year, to introduce a new architecture for supervision and to regulation. And I think this is the first -- the first regional agreement and I hope, also, I'm pretty sure that other regions will follow our Nordic Baltic region.

QUEST: Minister O'Dell, many thanks.

When you are in London, please, come and join me on the set and we can -- we can have a good chat about these matters in more detail.

Many thanks, indeed.

The Swedish financial markets minister. And that's O'Dell on the line from Malmo.

Now, the weather forecast. Changes are now coming to Russia and they're coming faster, perhaps. The rain and the cool weather is moving in. I'm sounding like an expert. Guillermo is the real...


QUEST: No, believe me, you're the real expert on this one.

So, is the drought over and is the cold weather over?

ARDUINO: No. The drought is not over. But what we are going to see is a big change starting tomorrow. And it's going to fluctuate a little bit. But at least we're breaking the pattern that we had before with this very prominent high pressure that was not allowing any storm that would eventually bring some relief, some rain and some change of air.

But now, it's happening. And. You're going to see the significant changes that I'm now talking about. So, for over 30 days, we were way above average and under a heat wave. But look how much is going to drop comparing Wednesday with Friday. We go from 33 to 14 degrees. So winter, in a way, it's coming back, even though those are figures that we see early in the day at this time of the year.

So the rain is moving on finally. We see here 34 consecutive days until yesterday, because today we did not reach 30 degrees, finally. So it is over. And we think that this is going to help out with the fires, on the other hand, and eventually it will change the situation -- the pattern that we have seen here so far.

Now, until that happens, we'll be dealing with some severe storms, especially into Hungary, into the Czech Republic and farther south to parts of Poland and Germany, the eastern sections of the country. Still some more bad weather, as you see. Excessive rainfall that will eventually make it into Russia. But we will have to wait a little bit.

As for the west, we see a little bit of clearing here in Britain. But that is also pretty irregular. You see the rain coming back and then going away. I was checking out -- since you had a guest in Malmo, Sweden, the rain from Britain is moving there, as well. So we will see some change into Malmo, too, because we have seen or we are seeing now clearing -- clear conditions.

Thirty-three in Madrid. The heat continues over there. Thirty-five in Athens. The -- the Middle East -- and this is funny, because yesterday I told you that Fahrenheit wise, we would see like 105. I was totally wrong. We're seeing 122 degrees. So I'm going to check out what's going to happen tomorrow. The same forecast -- Baghdad at 49. Damascus also very hot, indeed, with 42 degrees and Riyadh 44.

So, Richard, this is pretty much the summary of what we're expecting now. And I'm happy to report that finally a change is coming to Russia. Not to Pakistan. We will have to deal with this until September -- back to you.

QUEST: Many thanks, indeed.

Guillermo at the World Weather Center.

I need to tell you about QUEST MEANS BUSINESS, Ali Velshi and myself battling it out in our new segment, Q&A, Quest and Ali. In Q&A, you choose the topic, we give the answers. Last week it was the what market.

What subject do you want us to take on this week?

You can go to and send us your talking points. Q&A on Thursday, your choices.


QUEST: Tonight's Profitable Moment.

Britain's finance minister today made it clear he's sticking to his policy of brutal deficit reduction. He called those who believe otherwise deficit deniers. George Osborne agreed that the economic outlook was choppy. And yet, in the autumn months ahead, Mr. Osborne and the Conservative/Liberal Democrat alliance coalition will preside over the toughest autumn spending review that the U.K. has faced in decades.

In the winter months, the U.K. economy will be buffeted by the winds of cutbacks. And that will be following on from the storms of slowdown.

Now, of course, the U.K. isn't alone. You heard tonight me talking about Portugal. Japan's recent numbers are giving cause for concern. And state and local governments in the U.S. are only now grappling with their budget fiascos.

The Eurozone overall is unsteady and relying heavily on Germany's export growth. George Osborne believes there's no other option if the U.K. is not to be at the mercy of the market. He may well be right. But for the next few months, the sailing will be anything but smooth.


I'm Richard Quest.

Whatever you're up to in the hours ahead, I hope it's profitable.

"WORLD ONE" is next.