Return to Transcripts main page


Economic Impact of Unrest in Libya

Aired February 22, 2011 - 14:00:00   ET


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: It's a case of hold onto your hats. Investors take flight from market risk.

Colonel Gadhafi refuses to budge. Foreign companies suspend operations.

And tonight, inside Interpol, what they do to combat one of the most lucrative areas of crime, human trafficking.

I'm Richard Quest. For the next hour, I mean business.

Good evening.

It's a case of return of risk. Markets around the world have been retreating after months of gains. Unrest in Libya, Bahrain, and elsewhere in the Middle East is now starting to seriously unsettle investors. And tonight we ask is the rally finally over? And is a tough new reality of risk about to begin?

If you want to see what I'm talking about come and join me over in the library. Let us begin with the Dow at the open, which was a sharp fall. The Dow has been up around about, oh, I don't know, 7 percent in 2011. Look at it now. That was the open, down 1.39, is where the market happened. And the reason, of course, was because of pressures taking place in Libya. That market now still falling, 173.3. Further pressure and further updates, of course, from Libya have been continuing that downward pressure.

And it was the same in Europe, where as you can see, the worst losses of the day, they really came in Paris, the CAC currant. And if you look behind those numbers you can see it was airline stocks that were down. The banking sector in Paris was thoroughly hammered. Obviously, historically, France and Libya have connections. Interestingly, the MIB was also off quite sharply in Italy, too. Same reason, those countries with traditionally strong, perhaps historical links. Flight to quality, the Swiss franc was the big gainer, on the course, of the day. The franc, if you look at this Swiss economy, with its low inflation, low budget deficit. All the matrixes of the Swiss economy show, but the Swiss franc is up three-quarters of 1 percent against the dollar. The franc is also up more than 1 percent against the pound sterling, and the euro.

Oil, Libya may not be one of the largest oil producers, but in North Africa it is a considerable producer and it is the systemic risk that could follow from what's happening there, outside. So we saw a surge. Oil at now two and a half year highs, a very strong rally. Brent fell back slightly, but it is still, Brent is still $108 a barrel. And NYMEX, tonight, is up some 6 percent.

Wherever you look, the call is avoid risk. At least rebalance risk. PIMCO is one of the world's largest investment firms. Chief Executive Mohamed El-Erian, joins me from their headquarters in Southern California.

Hammond, thank you very much for joining me.

This-you've written an article, today, in which you talk very much about the regional aspects and how that will spill out further. We are in a new and very dangerous moment here, you believe?

MOHAMED EL-ERIAN, CHIEF EXECUTIVE OFFICER, PIMCO: I do, Richard. I think that the impact on the global economy of what is happening in the Middle East and North Africa has morphed in the last few days. What is happening now is equivalent to a shock of stagflation for the global economy. Stag, in the terms of lower growth; inflation, in terms of the higher prices lead by oil prices. So, it is understandable that markets are pausing. It is understandable that people are running away from risk, because we have new stagflationary winds now blowing in the global economy.

QUEST: If there is that stagflation, which those of us who are old enough to remember, the `70s, and there were other periods of stagflation. It is very hard to get out of it when governments have got vast budget deficits and all the normal parameters can't be used.

EL-ERIAN: That's correct. One of the concerns is that most governments in Western countries have used up all their ammunition. They used up all their ammunition to overcome the impact of the financial crisis in 2008 and '09. And therefore, as you point out, they have high deficits, high debt, and on the monetary policy side, the narratives have changed. People are starting to worry about inflation. So the room for maneuver is limited given what is happening now.

QUEST: Right. Now, our viewers need to know, because obviously, I know PIMCO's philosophy is not to look at a basket of assets, or buckets of assets, but rather look at buckets of risks. So, if risk is back on the agenda where do you move from, and move to, in asset allocation?

EL-ERIAN: Well, you have got to make sure that first you can ride out what is going to be a very volatile time for equity risk and credit risk. So, whether you are in global equities, or whether you are in corporate bonds, make sure that your allocations are such that you can stay in the trade. Secondly, what we are seeing today speaks even more to the importance of commodities in an asset allocation. You want commodity risk. Thirdly, never forget safety, never forget the role of government bonds, but high quality government bonds. So you have got to be careful, especially in Europe, that you don't end up investing in some of the peripherals.

QUEST: Well, there, I mean-I heard, funnily enough, Mervyn King talking at the G20, before that, saying, you know sovereign debt of course was always thought of as being the great barrier, or the great harbinger of safety, but not today.

OK, within those parameters, do you stay in equities?

EL-ERIAN: You stay in equities, but in the right type of equities. So you want to make sure that you are exposed to the fastest growing parts of the world. That start with clean balance sheets, so certain emerging economies, yes, they will suffer, in this risk off trade, but they have the ability to bounce back very rapidly as they did in '08, '09. You do not want to invest in countries, simply for historical reasons. So make sure that the composition of your equities is as correct as your allocation to equities.

QUEST: Right. Back to the geopolitical scene, if we may? As we just look into the immediate future. Where for you is the biggest risk? What happens next that you get most concerned about?

EL-ERIAN: What happened over the last few days, Richard, was very different from what we saw in Egypt and Tunisia. And for the following reasons: First you have oil exporters. Like we said in the beginning, Libya may not be the largest oil exporter, but it is a significant oil exporter. So, suddenly oil prices are in play. Secondly, in Bahrain you have sectarian issues, which means that the geopolitical nature of developments in the Middle East have gone up. And thirdly, violence, what is happening in Libya now is very different from what happened in Egypt and Tunisia. All that means that geopolitical risk goes up. It means that markets have to price in more risk, it means that equity prices come down.

QUEST: Mohamed El-Erian joining us from California, from PIMCO. Always lovely to have you on the program, Sir. We thank you for giving us the time and joining us tonight.

To put this into the European perspective, in terms of the nuts and bolts, I spoke to Elissa Bayer, the director of private clients at Charles Stanley. She joined me earlier. As we were just talking with Mr. El- Erian, if what we are seeing is a flight to safer assets, is it simply that or a market correction?


ELISSA BAYER, DIR. OF PRIVATE CLIENTS, CHARLES STANLEY: I think it is actually a flight from some equities to other equities. So I think you have seen the market correcting itself, and I think that is fair enough. And you have still got more nervousness. And I think the point is equities will continue correcting, whilst they don't know what is going on. So, the coped with Egypt, Yemen, a bit more uncertain, then Libya is a major, major, and it is whether it develops going on. And that is what will unsettle equities over the next few weeks.

Plus, the fact, of course, you've got rising oil prices and rising gold prices.

QUEST: In that scenario, where do you move from and to?

BAYER: Well, I suppose initially, you don't panic. Because how long is it going to last? Will other countries join in? I mean, you had Bahrain last week, and not much news about Bahrain this week. So you have got to see what goes on. But you don't just sell everything into the market and then re-buy-at least you don't it for private clients, I mean, that is unacceptable.

QUEST: But do you rebalance?

BAYER: No, but you might rethink some of your stocks. That is what I think is important. Because I would say in these markets we have been looking all the time at stocks, and areas where you want to invest. And provided you think those areas are OK, then that is fine. What I think it highlights is that emerging markets carry bigger risks than, you know, your conventional market.

QUEST: Hasn't that always been the quid pro quo, though? That bigger risks gave you better returns. But that was the price you paid for the risk?

BAYER: It was, but also the perception of what is the emerging market? What is high risk? What is low risk? What's happening in the Middle East is changing things, because you've had the same regimes there for very many years.

QUEST: Would you go to bonds at this point?

BAYER: We have come out of bonds because the prices are so high. Prices are very high, yields not so exciting. What people have been doing is moving more money, funnily enough, into equities, but with a high yield. And that is in all parts of the world.

QUEST: So, those equities which either have a strong dividend play, or are cyclicals?

BAYER: Some cyclicals, yes. But also people have been looking for higher returns. There is no doubt about that, which is why emerging markets have done so well. But they may be a bit more nervous. Because when something happens in emerging markets it isn't going to go down 5, 6 percent. I could be, it will be double figures.


QUEST: Elissa Bayer, from Charles Stanley, talking to me earlier. Although U.N. sanctions were lifted in 2004, doing business in Gadhafi's Libya has never been easy. When we return in just a moment, we'll be investigating how the last eight days of protests have impacted on business in the North African country. QUEST MEANS BUSINESS, good evening.


QUEST: Now to the showdown in Libya. After eight days of protests Moammar Gadhafi has delivered a defiant, some say rambling speech, in which he refused calls for him to step down. Instead, blaming the arrests on rats, as he called them, who are agents of foreign intelligence services. Gadhafi says people found to be cooperating with outside forces and those who carry weapons against his country will be executed.


MOAMMAR GADHAFI, LIBYAN LEADER (through translator): This is not the time of shootings, when we will be-to violate, to violate and breach any military commandment, the punishment is execution. Using force against the state the punishment is execution, destruction, ransacking, looting, the punishment is execution.


QUEST: Anti-government demonstrators have been demanding and end to Gadhafi's 42 year rule. There have been many reports of war planes and helicopters firing into the crowds in the capital in Tripoli. Those reports are impossible to independently verify. Human Rights Watch says at least 233 people have died in the uprising. The unrest spurred in part by high unemployment and demands for freedom have now lasted a week and appears to continue. Eastern Libya, the first part of the country to rebel is now believed to be under opposition control.

One of the clear and obvious difficulties for both politicians and business people at the moment is the narrowing of the line, between business and geopolitical affairs. For a clearer perspective on what is going on, I turned to the former foreign secretary of Great Britain, Lord David Owen. He is an expert in the juggling of politics and trade. I spoke to him about the situation and asked him how to strike a balance between doing business and diplomacy.

DAVID OWEN, FORMER BRITISH FOREIGN SECRETARY: Any country is faced with a dilemma if they have an arms sales industry. If they don't sell them, will somebody else? So the best way to do it is to have agreements. The purist way is you only supply to people who you are in a military alliance with, your NATO partners. In Britain's case we obviously extend it to commonwealth. You have to be realistic about this. There is a competition out there between countries. You can't afford to be too pure. But you do have to have some basic moral basis. And you have got to try and weave your way through it, not easy.

QUEST: And when you end up with oil companies, whether it is a U.S. giant, a French giant, or BP, from the U.K., then they are trading with countries like Libya, or like some of the stallions (ph), then it is really messy.

OWEN: It is very messy. I am in business myself. When you go into business in countries, like say in Russia, I decide I'm not going to get involved in politics. I don't comment on the political scene. Your attacked for doing this. Yet, I think, business contacts between us and Russia, ever since the Berlin Wall fell, has been of vital importance in pulling the Russian Federation, slowly, and sometimes fast, sometimes less slowly, towards the West.

QUEST: Whose responsibility do you think it is, ultimately, to pull back? Is it chief executives to say, it is wrong to be there. It is wrong to be doing business there. Or is it governments to say, we are going to regulate, and you won't be there.

OWEN: Well, we are all citizens and chief executives like everybody else. They have to make some decisions which are based on moral principles. Not always on bottom line and making profits for shareholders. But above all it is government, governments should regulate the climate. And it is much easier for them to take some of those decisions. So there are certain countries you shouldn't supply arms to, full stock. Other countries you break off diplomatic relations. But on balance, in diplomacy, you talk. Churchill said it and he was right. George Orr is better than more war. And you talk to a lot of unpleasant people and a lot of unpleasant regimes, and I'm in favor of that. Broadly speaking, keep talking.


QUEST: The former foreign secretary of Britain, Lord David Owen.

Earlier today, Italy's ENI, the E-N-I, the biggest foreign oil producer in Libya, temporarily suspended some of its oil and gas operations. Shell relocated the dependents of its ex-patriot staff, outside Libya. CNN's Jim Boulden now takes closer look at operating in the country.


JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT: As Western businesses working in Libya scramble to get staff and dependents out, or book their flights and tours, many will be wondering whether they can remain doing business in Libya.

It's a far cry from 2004, when diplomatic relations between the U.K. and Libya started to warm. And in 2007, when the then-U.K. prime minister, Tony Blair, shook the hand of Moammar Gadhafi. The so-called, "Deal in the Desert", giving British companies carte blanche, to do business with Libya once again. BP followed Shell, and struck energy deals, as did other major European oil and gas firms. Plus, there was a deal that today is worth $130 million, for defense communications, with the U.K. arm of general dynamics.

Libya was also seen as a unique opportunity for construction and infrastructure firms, since so much needed to be built.

UNIDENTIFIED MALE: It has been in a time warp, it has been subject to sanctions for a long time. So it has been about the potential for all sorts of things to become developed, whether that is basic infrastructure, or it is services, financial services, telecoms and so on.

BOULDEN: But Libya is also know for its tiny stock market and a heavily centralized bureaucracy even by North African standards. Companies that have worked there often say there are vast opportunities, but it has never been an easy place to work.

Libya's sovereign wealth fund is also invested in a number of Italian firms. From a big stake in the bank UniCredit (ph) to a 7.5 percent stake in football club Unventis (ph), there is also a 2 percent stake in helicopter maker and defense firm, Finmeccanica, which has a factory now in Libya. Finmeccanica also signed a $400 million border security deal with Libya in 2009.

UNIDENTIFIED MALE: You can't really do business in Libya unless you are connected in some way with the authorities, or the secret services, or whatever. And so in that respect, if there is a reassessment of how wealth was distributed, I think that certainly politically sensitive holdings will come under question.

BOULDEN: Now will there be pressure for any of these companies to divest? Jim Boulden, CNN, London.


QUEST: When running a successful business knowing your customer, apparently, is key. On this week's episode of "The Boss", two of our chief execs look beyond the numbers as they try new strategies to keep the customers coming back.


QUEST: Two different sides of the world, two different businesses, and one challenge, how to bring in new customers and to keep them coming back. This week on "The Boss" Richard Braddock in New York faces his biggest deal yet, making meals for kids, and at the same time, keeping them healthy. And then on the other side of the Pacific, Michael Wu takes a long-term view. He wants to keep his customers with a loyalty card.


UNIDENTIFIED MALE: Previously on "The Boss", as he celebrated the Chinese New Year, Michael Wu tells us why family and business go hand in hand.

MICHAEL WU, CHAIRMAN, MD, HONG KONG MAXIM'S GROUP: I think it is important to respect culture and tradition.

UNIDENTIFIED MALE: And in New York the extreme winter weather put Richard Braddock under pressure.

RICHARD BRADDOCK, CEO, FRESHDIRECT: We really stunned some people with how much of our product we did get delivered.

UNIDENTIFIED FEMALE: Sweet turkey, organic turkey, sweet and sour meatballs, brown rice, we know parents prefer that.

UNIDENTIFIED MALE: First he conquered the four-minute meal, then he took on the frozen meal. Now Richard Braddock faces his biggest challenge yet.

BRADDOCK: I want us to come off as responsible and we build a responsible offering. And then we made it fun for kids.

UNIDENTIFIED MALE: For the first time ever FreshDirect is delving into children's' meals, with a new line of products called "Kid Power".

BRADDOCK: Our core market is families. And therefore, the kids' meal alternative was a very natural evolution.

UNIDENTIFIED MALE: For FreshDirect CEO this product is more than just a game changer. It is his philosophy, giving back.

BRADDOCK: It is all about healthy eating today, every way you slice it. And I think any one who supplies or sells food has to take an added responsibility for delivering quality product.

UNIDENTIFIED MALE: Richard likes the product so much he wants to promote I among advocates of healthy eating.

BRADDOCK: This one is good.

UNIDENTIFIED MALE: Including the first lady.

BRADDOCK: Number one, I think we should send a package of these to Michelle Obama, with a note, which would show off the healthy eating.

I like the packaging.

UNIDENTIFIED MALE: The parents may want to buy it, but the children still have to eat it.

UNIDENTIFIED FEMALE: Butternut squash, edema me, and green beans?

UNIDENTIFIED MALE: A fresh product with a healthy conscience. Richard knows "Kid Power" has the potential to grow. As the chief executive that is the bottom line.

BRADDOCK: The more important thing is we look at brands like this, that are very powerful alternatives as not only ways to generate business, half our business is about generating business, but also to cement the loyalty of our customers.

UNIDENTIFIED MALE: While Richard Braddock is attracting new customers Michael Wu is looking for ways to keep his coming back.

WU: We serve over 0.5 million customers every day. We see these mainly as a transaction, a number, but we'd like to do much more than that. We'd like to put a face to these numbers.

UNIDENTIFIED MALE: Today, he believes he's found the way to do just that.

UNIDENTIFIED FEMALE (translation onscreen): When the customer shows us his or her loyalty card, we just swipe here, details will pop up on the computer, with the customer's name.

UNIDENTIFIED MALE: Loyalty card schemes aren't new. They offer huge benefits for customers and businesses alike. As a chairman Michael knows the scheme can be a winning addition to his business.

WU (translation onscreen): Will they be rewarded every time they visit?

UNIDENTIFIED MALE: With these sweeteners Michael hopes his customers will keep coming back. And with that increase the money they spend in store.

WU: What it really aims to achieve is to connect more closely with the customer, get their loyalty, and return to increase our sales.

UNIDENTIFIED MALE: For Michael this is more than just a smart business strategy. This is his opportunity to get to know his customers. And in return, be able to serve them better.

WU (translation on screen): What else do we have in the system? Do we have customer's birthdays? Their spending mode? Last time they visited us?

We can interact more closely with our customers, we know much more about them. We know their spending patterns, we know their birthdays so we can send them gift coupons for their birthdays. And if we are doing any special promotions, we can offer them this first hand.

UNIDENTIFIED MALE: Michael plans to expand this system across his empire, with over six hundred Maxim stores across Hong Kong, from restaurants to bakeries, to fast food, he knows he'll be able to capture almost every customer in the city.

WU: It is really important for us, when we get all this information, so we can see who is coming more. Who is coming less. Why hasn't the customer gone to a certain restaurant recently? Or if he's having a birthday in one of our restaurants, why isn't he having his wedding anniversary in our restaurant? So this is a very powerful system.

UNIDENTIFIED MALE: Next week on "The Boss", with only days to go before the re-launch, Sarah Curran lets her team take the lead, but can she let go?


QUEST: And indeed, Sarah Curran's launch party, for, is taking place at the moment, on the other side of London. And she has already Tweeted about how things are going.

If you would like to trace the steps of our bosses since the series started, then you can log on and you can follow the whole progress, at Episodes 1 to 13 are all there for you to watch. And in the weeks ahead we will be inviting more bosses to joins us on "The Boss".

When we come back, after this short break, I'll have the news headlines, also undercover operations. Vast banks of data and real human suffering. We continue our rare look inside Interpol with the fight against human trafficking. (INAUDIBLE)


QUEST: Hello. I'm Richard Quest, QUEST MEANS BUSINESS.

This is CNN. And on this network, the news always comes first.

Defying the opposition movement that's taken control of Eastern Libya, Moammar Gadhafi is refusing to step down, saying he'd sooner die a martyr. That's as witnesses report a second night of gunfire in the Libyan capital.

To the east, people say they'll cut off oil exports unless Gadhafi stops what they're calling a massacre.

Anti-government protesters in Bahrain have put on their biggest demonstration yet, despite government concessions. The kingdom says it's releasing prisoners and halting the prosecution of some Shiite leaders. The U.S. State Department is commending Bahrain's king and crown prince for taking steps to restore calm.

Officials are warning that the death toll from the earthquake in New Zealand could rise significantly because at least 100 people are still trapped in the rubble and collapsed buildings in Christchurch. Rescuers are coming from all over the country to help and try in the rescue effort.

Four American hostages on a hijacked yacht have been killed by Somali pirates. The pirates captured the yacht off the coast of Oman. U.S. forces boarded the yacht after the pirates launched a rocket propelled grenade at them. They found the hostages had been shot. Fifteen pirates are now in custody.

The world's largest international policing agency, of course, is Interpol. It is fighting a battle that it will probably never totally win. It is the battle against human trafficking.

As we continue our look inside Interpol tonight, each year, between 600,000 and 800,000 people are trafficked across borders, according to numbers provided by the U.S. State Department. Last year, Interpol in Gabon and Burkina Faso rescued 300 children workers and arrested 50 people for trafficking.

tonight, as we continue our series inside the crime organization, we look at how it combats this highly profitable trade in human trafficking.


QUEST (voice-over): Think of Interpol and one thinks secrets, spies, high security. But deep inside Interpol's Lyon headquarters and the staff are dealing with real human suffering. We've been allowed to spend some time inside the world's largest international police organization. And one topic we can't avoid, human trafficking.

Knut Brattvik is a criminal intelligence officer at Interpol.

KNUT BRATTVIK, CRIMINAL INTELLIGENCE OFFICER, INTERPOL: To be working on this, we need passion. We have people working in the same unit. They have a -- they need to look at images for child exploitation every day. And we need the same passion to -- to really be able to -- to get to the trafficker and arrest criminals.

QUEST: The U.N. estimates at any one time, two-and-a-half million people are living victims of trafficking.

BRATTVIK: Human trafficking is -- could be illegal immigration. It could be trafficking for women in sexual exploitation, forced labor and organ smuggling.

QUEST: Alongside drugs and arms smuggling, this is one of the most lucrative areas of organized crime. It's a $30 billion a year business.

RONALD K. NOBLE, SECRETARY GENERAL, INTERPOL: It's a basic truism in law enforcement, follow the money. And ultimately, if you follow the money, you're going to follow the person who's leading the organized crime groups involved. And so what we're about at Interpol is trying to figure out the best way to help law enforcement to follow the money.

QUEST (on camera): It is the nature of human trafficking and sex crime offenses to cross national borders. With its 188 member countries, solving these crimes is particularly well suited to Interpol's expertise.

(voice-over): Interpol's best weapon is information -- vast swathes of data collected from member countries and processed right here in Lyon.

NOBLE: And we have evidence, case after case, to prove it, that human trafficking is run by transnational organized crime groups of people who do it more than once, by using false identity documents or fraudulent identity documents. So what we can do is we can -- we have put in place a system that allows passports to be screened and identity documents to be screened and human traffickers that use these modern means of transportations to be taken down in countries, either in transit or at the point of destination.

QUEST: It's the Interpol way. The headquarters coordinates the data and makes it readily available to the member countries. The real legwork is done in the national central bureaus, Interpol's local offices, staffed by policemen and women of that country.

For example, when a country issues an arrest warrant, Interpol's local office may back that up with its own red alert. It means all of Interpol's 188 member countries are now on the lookout in case the fugitive crosses a border.

NOBLE: Recently, there were a group of human traffickers that were stopped at the border of a country. There was a passport checked on and it was determined that of the 11 people, 11 were trying to enter a country to have a better way of life and one was trying to organize it. By identifying those people and freeing those people, we saved them from a potential life of misery. At the same time, we allowed a country to protect its borders from human traffickers getting in illegally.

QUEST: Human trafficking has become an epidemic. And it may still get worse. As rising prices make the world's poor even poorer, more may go looking for a better life and fall into the wrong hands.

NOBLE: The problem with human trafficking is it's such a huge problem.

QUEST: The governments will not grasp it?

NOBLE: No. Governments are doing quite a bit to fight human trafficking. But it's a never-ending problem. It's a problem -- it's like fighting corruption. You can never stop fighting corruption. There's always going to be corruption. You can never stop fighting corruption. Human trafficking, to the extent there are -- there's a legal movement of people, a legal movement of goods, human traffickers are going to try to mix in the illegal movement of goods and people.

And I personally believe that governments are doing quite a bit to fight human trafficking. They can always do more and they should always do more. But I personally believe governments are doing quite a bit to fight human trafficking.

QUEST (voice-over): Quite a bit is a start. But until governments and Interpol can make inroads into this multi-billion dollar trade in human beings, they must continue to aim higher.

Richard Quest, CNN, Interpol, Lyon, France.


QUEST: Human trafficking is just one of the major challenges for Interpol. On tomorrow's program, we'll be looking at some of the other crime areas the organization is fighting and how they do it.


QUEST: On average, how many of these red notices actually are successful?

DIMITRIOS SOUXES, INTERPOL: When it comes to our own unit, I would say between 5 and 10 percent.

QUEST: Really?


QUEST: Not really successful.

SOUXES: On the contrary, I would say it's extremely successful, because you have to bear in mind that we have thousands -- literally thousands of red notices.


QUEST: From catching fugitives to stopping the potentially lethal counterfeiting of medicines to good old-fashioned police work, Interpol's daily work. And you can find out more about this series by visiting our Facebook page, And I've posted a short video explaining why and how we got inside this secretive organization.

Pensions that can't be paid. Here's the state of Illinois' answer -- borrow $4 billion. We'll take a closer look at that strategy when we come back in a moment.


QUEST: The U.S. state of Illinois is taking its budget crisis to the bond markets in a major test of investors' appetite for municipal debt. Now, the bond auction this week is of some nearly $4 billion -- $3.7 billion in bonds. It is needed to finance and fund the annual pension bill. The very weak pension system, $80 billion in unfunded liabilities.

This auction, along with other borrowings that are planned, would cover payments not only for pensions, but for other state expenses for the year ahead.

Now, Illinois's crisis is one of the most cash-stripped of the United States at the moment. Last week, we told you about Wisconsin.

Well, Illinois has the second largest budget gap after California, at some $15 billion.

The governor's plan is set out in the 2012 budget last week to save $220 over the next generation. Spending cuts also relying heavily on borrowing to pay overdue bills.

It's faced, I think it's fair to say, heavy criticism from both sides from the strategies.

Illinois is not alone in this sea of red. The Center for Budget Policy says 44 states and, as if that wasn't enough, the District of Columbia, are projecting deficits. That shows you what it looks like. The states in the red literally in the red.

Only the states in white are not facing a debt crisis. But all the major ones from California out to the Northeast, New York, Massachusetts, down in Florida, even Texas.

Let's stay on the subject, though, of Illinois.

I'm joined live by Dan Rutherford, the Illinois state treasurer, who joins me this evening.

And I thank you, sir, for joining me.

If -- if we look at the crisis facing Illinois at the moment...


QUEST: -- tax rises, budget cuts, it's a fairly desperate situation.

RUTHERFORD: Oh, there's no doubt about it. And as a reminder, the general assembly and the governor, just about a moment ago, raised the income tax in the state of Illinois, which is not something that I personally supported, but it did have an effect on the bond market. It -- it gave a slight uptick on the ratings for the Illinois bonds.

And -- but what we've got to do now is, of course, focus in on the pressure, the unfunded liabilities in our pension systems. We've got to look at the expanded spending that's taking place.

And it's time, really, I think, for the politicians to sit down and the statesmen to stand up and face this truly economic problem we have here in my home state of Illinois.

QUEST: You see, that's the classic part about this crisis, people from both sides say it's time for the politicians to sit down and the state men to stand up -- the statesmen to stand up. The problem is one person's politician is another man's statesman and vice versa.


RUTHERFORD: No, but, you know, you're absolutely right, except for the fact that I'm the Republican. I'm one of the first Republicans elected in the Illinois state -- statewide constitutional officers. Our incumbent governor now is a Democrat.

I sat down with him two hours after his budget address and I told him right to his face that I do not agree with his $8.7 billion borrowing plan. I do not agree with the expansion in the size of the growth of government. But I'm in this office privately to talk to you. I will be willing to work with you to resolve that.

Just about an hour ago, I sat down in my office in the state capital with his director of the budget to go through what may be plans that we can work with on the general assembly to try to cause some changes to be out there, whether short-term borrowing or restructuring...

QUEST: Right...

RUTHERFORD: -- the current debt we have.

See, I -- I understand what you just said. But you have got to realize that the politicians themselves have got to be able to check their ego at the door and work together in a bipartisan effect. And that's what we're trying to do here in Illinois.

QUEST: I had your Wisconsin counterpart on this program only last week, because it's a story we're taking great serious, careful coverage about.


QUEST: And, really, I ask you the same as I asked him, do you think Americans are ready and willing to accept that -- that it can't be business as usual?

Or are they still living in a fantasy world of spending?

RUTHERFORD: No, I think, they are -- I think the electorate has shown that. You look at what happened in my country back during the November elections. There was a considerable both states that shifted political parties because they are tired of where things are going on right now. My state didn't quite get over that hump. We're still a strong Democrat state.

But that said, I was the Republican that was elected as the finance officer...

QUEST: Right.

RUTHERFORD: So I think that the public of Illinois and Americans are addressing this and that's why they put people like me in office.

QUEST: It may be unpalatable. It may be unpleasant, but perhaps bankruptcy -- and I know you don't support bankruptcy for states -- but perhaps something...


QUEST: -- some states going bankrupt might actually be the shock the system needs.

RUTHERFORD: Absolutely not. I totally disagree with that concept. The states in America are sovereign governments. They were established to be sovereign governments. And let's define what bankruptcy means. It is a federal bankruptcy judge negotiating with someone that delivered goods or services in good faith to their sovereign government. I do not believe it's appropriate for a federal bankruptcy judge to negotiate with a social service agency to say we'll give you 80 cents to the dollar...

QUEST: Right.

RUTHERFORD: -- for the services you provided with those with developmental disabilities or for those that delivered bread to the prisons, to negotiate 70 cents on the dollar.

No. There's a -- you -- you -- we have to get our -- our ship righted. We have to do it the right way. And bankruptcy is totally unacceptable.

QUEST: Mr. Rutherford, may I invite you again onto our program as things -- as your -- your discussions go on, so we can follow closely?

It's a fascinating debate.

RUTHERFORD: I would be honored to.

And thank you very much for this opportunity tonight.

QUEST: Dan -- Dan Rutherford joining me from Illinois and -- on the budget debate.

Now, some news coming into CNN just at the moment.

We return to the Libya story.

The Arab League has suspended Libya's membership. It comes amid growing unrest that has divided the North African country. You'll be aware that the Libyan leader, Moammar Gadhafi, a few hours ago, delivered a defiant and rambling speech. He refused, of course, to step down, and vowing instead to die a martyr in his country. Colonel Gadhafi blames the unrest on what he calls rats who are agents of foreign intelligence services and he's threatening execution for anyone who cooperates with them.

Again, reminding you of the news at CNN at this hour. The Arab League has suspended Libya from its group and condemned the crimes against the protesters and peaceful strikers.

Now, and we need to start and turn our attention to the weather forecast.

When I spoke to Jenny -- it just shows you, Jenny Harrison at the Center -- what the difference 24 hours makes in your world.

Christchurch was a peaceful place this time last night. But now we need to know the weather conditions there, as those rescuers go searching for earthquake victims.

JENNY HARRISON, CNN METEOROLOGIST: Yes. In a heart now, Richard. There's been some showers in the overnight hours. And it's also been a little bit cool, too.

I can start out by showing you the satellite over the last few hours. You can see this band of cloud that literally came through. So as we continue to go through Wednesday, very minor -- of course, Wednesday in New Zealand. The conditions should actually improve. Right now, 100 percent humidity, so there's still a bit of dampness in the air, but it is, remember, that time of the day. So as the day goes on, the conditions should actually gradually improve.

This is the forecast for the next 48 hours. And you can just see there, we will be seeing some more rain showers. Now, these are likely to come in as we head toward the end of the week, Friday into Saturday.

Temperature-wise, by day, Thursday not a bad day. By today, Wednesday -- I should say, today, Wednesday, in New Zealand the high temperature about 17 degrees Celsius.

Also, I have to tell you that the airport plans to reopen, hopefully fully, this Wednesday, and that Air New Zealand, they are operating some extra services to get people to and from Christchurch, in particular, from there to Auckland. And they're also offering compassionate domestic and international fares if you have immediate family in the vicinity. That is what they're saying. But, obviously, only if it is family.

Now, when you look at the broader view to the north of New Zealand, we are also, of course, monitoring that tropical cyclone, Atu, is continuing to push well away from New Caledonia and Vanuatu.

Now, as it gets closer to New Zealand, it's going to continue to weaken. So that's some good news, because it's still a very, very powerful storm system. And it should head well to the north and the east of the North Island and certainly away from Auckland.

We will be seeing some higher seas, some very high waves, of course. And there will be some rain with this forecast. But the system right now, the forecast has it moving well away from the North Island. So at least this isn't going to be impacting operations that far toward the north. And, of course, the accumulation, as well, stays well within the center of that storm.

Now, pushing to the northwest of Australia and the northern regions, really, sort of the northwest of the Northern Territory. You can see that we're still following this cyclone. This is Carlos. You remember, this re-emerged over those warm waters. Again, this one pushing away from land.

But before it does, that's still some very, very strong winds now, particularly impacting Exmouth. Again, the rains pushing away from the shoreline for the most part. But we could see some accumulations there, maybe up to about 15 centimeters.

A very unsettled picture in Europe, but nothing delay-wise, really, at all. The major airports have got some rain pushing through the Med. Snow in that cold air. Still pretty cold across Eastern Europe. They're getting milder out through much of the west -- Richard.

QUEST: Jenny Harrison at the World Weather Center.

When we come back in a moment, the latest sales figures show it was an unhappy Christmas at Walmart and that's not all they're dealing with. We'll find out how what world's largest retailer is now worried about.


QUEST: Walmart is the world's largest retailer and says sales in the fourth quarter were disappointing. Even as the company's international sales grew, turnover in the U.S. dropped 1.1 percent.

It has another big fish to fry in the Big Apple.

Maggie Lake is in New York.

Maggie joins me now.

Look, we looked at Walmart as a close barometer as we went into the Christmas season.

MAGGIE LAKE, CNN BUSINESS CORRESPONDENT: Yes, that's right, Richard. But, you know, Walmart struggles we shouldn't necessarily read it as a barometer. A lot of a retailers coming out today and some of those numbers looked pretty good. In fact, some struggling actually turning around. This is really a Walmart strategy problem. They're losing customers on the low end to the dollar stores and on the higher end to department stores and the likes of Target.

So you can imagine against that backdrop, where they're trying to get people back in the door, they'd love nothing more than to plant a flag here in the Big Apple, you know and any people who have come here know, if you want to go shopping at Walmart, you don't do it in Manhattan. They're trying hard to change that, but it's not going to be easy.


LAKE (voice-over): So near and yet so far -- you can actually see the New York City skyline from the parking lot of this Walmart in Secaucus, New Jersey. But to date, New York remains one of the few major markets where Walmart does not have a retail presence.

(voice-over): Walmart, which operates over 4,000 stores across the U.S., pushed hard to expand into the largest U.S. market more than five years ago, but backed down amid howls of protest. This year, Walmart is launching a new offensive and is said to have a number of locations across the city in mind.

New Yorkers who travel to this New Jersey Walmart about five miles from Manhattan say the company deserves to be in the Big Apple, in part, because most of its competitors are already in the city.

UNIDENTIFIED FEMALE: Since we have all the Targets and everything else, we have the Costcos and -- I mean I don't see a problem with it. I know a lot of people say because it's not union, but it's still giving jobs.

UNIDENTIFIED MALE: We need jobs, more jobs, you know, the economy grows.

LAKE: As millions of Americans struggle to find work and make ends meet, Walmart's message may be resonating more with New Yorkers now than it did during its last attempt to crack this market. According to a new Walmart Web site, more than 70 percent of New Yorkers want Walmart in the city and the company is trying to build on its support by running new ads on local radio.


UNIDENTIFIED MALE: Some special interests are pushing the city council to block Walmart from opening here, even though it could create good new jobs.


LAKE: But New York City Council speaker, Christine Quinn, who is overseeing hearings on Walmart, remains a staunch critic. She says the company operates on a different ethical plane than competitors and says it's job creating prowess is overstated.

CHRISTINE QUINN, NEW YORK CITY COUNCIL SPEAKER: Everywhere Walmart has gone has shown the same thing -- they don't create new jobs. If you're lucky, it's a net wash, because for every job they create in a store, a small business loses a job.

LAKE: Walmart supporters in the business community say that doesn't have to be so.

KATHRYN WYLDE, PARTNERSHIP FOR NEW YORK: The location is what matters. There are areas of the city that are under retailed, where Walmart would not be competing with local shopping -- local stores, local shopping districts. And we think that's where they should think about going it for -- to be welcome in New York.

LAKE: Walmart has already been accused of denying workers affordable health care, competitive wages and discriminating against female workers, charges that Walmart denies. But a massive class action lawsuit filed by women against the company will be heard by the Supreme Court this year.

Council Speaker Quinn says she would love to confront Walmart on these issues. But so far, Walmart has been a no show at Council hearings, claiming it's being singled out.

Quinn says that says a lot about the company.

QUINN: If you're proud of who you are, if you're proud of your product, if you think you are the best thing since sliced bread, why wouldn't you come and tout it?

Why wouldn't you come into the opposition's camp, if you will, and how me how wrong I am?

It speaks volumes that they are not willing to stand up and take the heat.

LAKE: Its rock bottom prices have convinced many shoppers, but New York has remained an elusive prize for Walmart and opponents want to keep it that way.


LAKE: Again, Richard, this is a specific issue to Walmart. We do have other big boxes that have made their way into Manhattan. And listen, the Council can't completely block them with one swipe.

But is Walmart going to want to wade through the red tape and the resistance that's being put up, especially when they've got this bigger problem nationally with their sales down here in the US?

That remains a question -- Richard.

QUEST: But there are millions of consumers available in Manhattan.

Maggie Lake, who is in New York for us tonight.

I need to point out to you where the Dow Jones Industrials is trading at the moment.

We're off -- back from some of the lows, but 161 points down, 1.3 percent. Two -- 12200 -- nearly a -- nearly all the twos -- 12, 2, 2, 2. That's the way things stand at the moment.

The return of risk for investors is the big issue. We'll talk about that in a Profitable Moment.


QUEST: Tonight's Profitable Moment.

Every one of us who invests for a long-term future hopes that we are ahead of the market. Well, the latest market movements make it extremely difficult. Having seen such really good gains in equities, over the past six months, now we have to consider a correction or perhaps even worse.

The Dow is down over 160 points today. The European bourses were down 1 percent yesterday and a bit more today.

Wherever we look, the flight from risk is underway.

But that raises a question -- where do you go?

bond prices are high and the yields are puny. Commodities are more than frothy and while gold is gold, you pays your money and you takes your choice when you think about that stuff.

The truth is, we're entering a tricky period, where global concerns will weigh heavily on investors' nerves. But then, this is what sorts out those of us who will make a fortune and those of us who don't. I'm not sure which side we'll all be on when the game is over.

And that brings us to the end of QUEST MEANS BUSINESS for tonight.

I'm Richard Quest in London.

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

A special edition of "WORLD REPORT" next.