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QUEST MEANS BUSINESS
Volcker's View; The Heat is On; Arts in Nigeria; Nigeria's Oil Business
Aired July 15, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JOHN DEFTERIOS, CNN ANCHOR, QUEST MEANS BUSINESS: Capital punishment, eight banks fail European stress tests.
Speed up reforms, we hear from Ferrari's chairman as Italy's parliament gives final approval to it austerity plan.
And, out of their depth? Former Fed Chairman Paul Volcker on why ratings agencies should stay out of the U.S. debt crisis.
I'm John Defterios in for Richard Quest. This, of course, is QUEST MEANS BUSINESS.
Tonight an emergency debt summit is called in the Eurozone as Europe's weakest banks lie exposed. Heads of state who share the euro will meet next week to talk about financial stability and the Greek bailout program. It follows a stress test of the sector, which eight banks failed this evening. Jim Boulden has been following this story all day long, and joins us now with the latest.
A lot of tension leading up to this.
JIM BOULDEN, CNN FINANCIAL CORRESPONDENT: Yes.
DEFTERIOS: A few surprises tucked in, but overall not a shock to the system?
BOULDEN: Not a shock to the system. And far less capital money needed for the banks that failed. But let's go over some of the numbers here. Passed, of course, would be the most-out of the 90 banks that actually took, were involved in all of this, in the end 82 passed. Now that number is a little bit more than people thought might pass. Now, how many failed? That is the important number, eight failed. You remember last year, 7 banks failed. We'll show you in a moment where those eight banks were.
Here, I think, is just as interesting, is how many barely passed. It was 16 banks, in total, barely passed. That means they had a tier one capital ratio between 5 and 6 percent. So that is 16 banks that barely passed. In fact, it would have been 20 banks that failed, if many had not upped the capital ratios over the last four months.
Now, let's break down where these banks came from. Let's start over here with Portugal. Portuguese banks all passed; two of those, barely passed, however. The country with the most of both, no surprise, Spain. We had five Spanish banks failing, five barely passed. More on that in a bit.
Germany, there was talk, of course, that one bank withheld all of its data; it would have failed. In fact, it would have failed. Two barely passed from Germany. My surprise, really, I think, and I have to say, Austria. We had a failure out of there; that was Volkswagen. And finally, Greece, where everyone is looking: Two failed, two barely passed.
Now, the EBA held a press conference here a few moments ago. And this is what the head of the EBA had to say about the stress tests.
(BEGIN VIDEO CLIP)
ANDREA ENRIA, CHAIRMAN, EUROPEAN BANKING AUTHORITY: We are aware that the treatment of sovereign exposures is very contentious and the stress test, itself, is not designed to deal directly with every presenter (ph) in the sovereign debt issue. We believe our treatment is rigorous and still consistent with the recent development.
(END VIDEO CLIP)
BOULDEN: Of course, these tests were controversial. Last year some banks very upset at the amount of data they had to give to the EBA.
DEFTERIOS: I was just wondering if we could move away from the theoretical?
DEFTERIOS: This is a test, a theoretical test, to the practical. We are living in real time right now with the sovereign debt crisis. And was that tucked into the criteria, or not?
BOULDEN: What wasn't tucked into the criteria was what if Greece failed? What banks would go under? What we did learn is that 67 percent of Greek debt is held internally by Greek banks, 9 percent by German banks, 8 percent by French banks. That is the kind of information that people wanted to hear. But they didn't put it under stress in the sense that, oh, my, God, look, Greece has gone under. Here is the debt crisis, which banks will fail. But we did learn a bit more about Greek sovereign debt, in each of the banks, in the countries. But we have seen some analysts reactions already saying, until you stress these banks in a way that shows the worst case scenario, which is a sovereign debt crisis, where we have one of the countries, like Greece, actually default. Then it isn't as much of a stress test as some analysts would like to see.
DEFTERIOS: It is quite interesting what you are saying here abut Greece. Because Germany has exposure of about 40 billion euros, if I'm correct, to the Greek market itself. The Greek banks, when you saw some of the failures today, have exposure of $100 billion euros.
DEFTERIOS: So the ability for them to deal with a partial default is actually much more difficult.
BOULDEN: And it is the actual only thing that people were worried about, because the stress test came two years ago, when we were talking about economic crisis, we were talking about-we were talking about, you know, some people thinking depression. So they were worried about the banks then being able to get loans, and make loans. We have moved on from that a little bit to where we now talked about the worries of sovereign debt. Yet this stress test was not about the failure of any sovereign debt.
DEFTERIOS: OK, we can breathe a little bit easier tonight.
DEFTERIOS: With the exception of some of those countries like Spain. Jim had a sound bite from Andrea Enria, we are going to actually talk to him in just a moment, to get a deeper interpretation of the test.
Well, to pass this round of tests banks needed to show they had enough cash to survive a number of shocks, as Jim was talking about. The EBA says this capital cushion stay above 5 percent, even in certain adverse scenarios. And these included a set of shocks in the EU. A sharp drop in global demand, for example and a slump in the value of the dollar. If worse came to worse and this scenario came true, GDP in the EU would drop by 4 percent, under that scenario. The European shocks thrown at the banks were a 0.5 percent decline in the Eurozone for 2011, about a 15 percent drop in the stock market, and a four notch sovereign downgrade of Europe's weakest governments. There was no test, as I talked about with Jim, for a sovereign default.
Italian lawmakers have just approved the latest round of austerity measures, a new budget is designed to stave off speculation that Italy will get swept into the debt storm. Just a little bit earlier, about an hour ago, I spoke with Nina Dos Santos in Rome. Five banks underwent the stress test there. I asked Nina how they faired.
NINA DOS SANTOS, CNN INTERNATIONAL CORRESPONDENT (on camera): You can imagine that the managers of some of Italy's largest institutions here, High Street names in this country, like, for instance, some San Paulo Entresa (ph), UniCredit, which is important, not just in Italy but also in other countries like Austria and also to large sways of Eastern Europe. The managers of these kind of companies must be breathing a hug sigh of relief this evening because it seems as though the five Italian banks that were put to the test did manage to pass this stress test with ample margin.
I won't go into the details of what was exactly tested here, but one of the key measures that is particularly important for Italian banks is core tier one ratio. This is a measure of how much money these banks actually have, forgive the pun, in the bank, in their vaults. It measures how much capital they have and how they would survive under a whole series of scenarios which also includes the sovereign rating as well. In fact it is one of the reasons why Italy has been so much in focus of late, John. Because just a month ago Moody's actually put this country on credit watch, negative for a potential downgrade. That is why the bond market has jitters when it come to selling and buying Italian debt. And that is one of the reasons why the banks are in focus. Because according to JP Morgan analysts, the Italian banks hold about 6.5 percent of their total holdings in Italian debt, John.
DEFTERIOS: A little shock therapy, beyond the stress test. They did get the austerity plan passed; $56 billion worth of cuts. A fairly big week, and a wake up call for Italy overall I would say.
DOS SANTOS: These austerity measures will be hugely important here in Italy. Rome, the city I am standing in at the moment, will be bearing the brunt of those kinds of cuts because a number of people here among Rome's 4.5 million people, in the population here, do work for the government. Many of them are civil servants. Some of them are pensioners. Some of them are students. There will be cuts right across the board, John. We should also mention that the speed at which this reform went through, just two days in parliament. One day in the senate, and one day in the lower house, is actually, basically a record for a country that is used to debating legislation endlessly. It is not used to these kind of measures passing so quickly. And also with such a consensus, would you believe it?
DEFTERIOS: Nina Dos Santos, with a perspective from Rome. Well, the Spanish cajas came off with the worst report cards, with all of their exposure to the property market there. Let's get a read from Madrid, from Al Goodman.
And, Al, the Salgado, the finance minister, before the test came out kind of gave and indication what was coming later today, by questioning the validity of the test and the structure of the test.
AL GOODMAN, CNN MADRID BUREAU CHIEF: Hi, John. Well, we heard more of that from the central bank, governor of the Bank of Spain, Miguel Angel Fernandez Ordonez, at a press conference at the bank just a short distance from the bureau here; also questioning the validity of the test. He said, no, he wasn't criticizing the European banking authorities and the way they conducted the test, but he said he had discrepancies. And he said, putting a bright spin on it, he did-that this is not a failure. That five Spanish banks failed, and five just barely passed. He says that really, when analysts look at these banks, after these headlines of five failed, that they will see that due to general provisioning, which is required under Spanish regulations wasn't taken into account by the European authorities he says. That the analysts will find that the Spanish banks are really not in that bad of shape, John.
DEFTERIOS: OK, we'll leave it there. Al Goodman joining us from Madrid tonight. Apologies for the crackly line that we had Al on, but he just got up on the last two minutes for us to test it.
Andrea Enria is the chairman of the European Banking Authority. He joins me now on the phone from London, because he just broke from his press conference in the last 30 minutes or so.
Andrea, what do you think about the results that we saw today. Do you think, number one, that with all the complaints coming into this, into this day, that the criteria were correct. Or are you going to have to massage those in the future?
ANDREA ENRIA, CHAIRMAN, EUROPEAN BANKING AUTHORITY: No, I think the criteria were correct. I mean, of course, if you are going to apply a common European benchmark to everybody, it is unavoidable that some national regulators or some banks will feel that, let's say, will feel not particularly happy about that. Because some instruments that they use at the national level were not allowed at the European level, but this is about having a European-wide stress test.
DEFTERIOS: Too much disclosure of data, which would actually exacerbate the sovereign debt crisis we see today? That seems to be the number one criticism of this process.
ENRIA: Well, I don't think-I mean, I think this is the major achievement we have with this process. I mean, putting a lot of information on the table, having an unprecedented degree of disclosure, or transparency. I mean, everybody has been criticizing European banks and European supervisors for-they say not cleaning the house. And now we are giving to everybody the possibility to look for themselves, make their own calculations and see whether the European banks stand.
DEFTERIOS: OK. Thanks for joining us, Andrea Enria, of course, of the European Banking Authority, after the announcements late this afternoon, in Europe.
Well, the euro is trading fairly steady against the dollar right now. There has been no shock reaction, as I noted to the stress test. At the moment it is down slightly, at $1.4154 against the U.S. dollar.
It is the end of a wild week for European traders, though. And it looks like they are all traded out, if I can put it that way. The main markets didn't move much this session. They all closed before the results of the stress tests were known. So, as you can see, a lot of caution before that. Nearly flat across the board, with the exception of the Zurich SMI at-trading at 5938.
Apologies all around at News Corp., but the scandal isn't over yet. Next we'll look at the resignations and repercussions of the phone hacking crisis.
DEFTERIOS: Rupert Murdoch will tell the United Kingdom he is sorry over the phone hacking scandal. News International, News Corp.'s U.K. newspaper company tells CNN that full-page apologies will appear in all of the major U.K. newspapers tomorrow. Today Murdoch personally apologized to the family of Milly Dowler. The taping of the murdered schoolgirl's phone by "News Of The World" journalists is at the center of the current scandal. The 168-year-old newspaper was closed down, of course, last weekend. Its staff are also accused of illegally eavesdropping on the phone calls and messages of terrorist victims, politicians, and even celebrities.
Murdoch acknowledges that the apologies won't be the end of the scandal. He, his son, James, and former "News Of The World" editor Rebekah Brooks will have to explain their actions to British lawmakers next week.
Well, News Corp. has a lot at stake here since the scandal broke. First the "News Of The World", then its plan to buy out the cash cow BSkyB and now Rebekah Brooks is in the news. Let's walk over to, as Richard likes to call it, the library. Here, this is a picture of her. She, of course was the CEO of News International. She resigned today. Remember she was a "News Of The World" editor at the time of the most serious allegations.
Here is what she had to say today" "I feel a deep sense of responsibility for the people we have hurt. And I want to reiterate how sorry I am for what we now know has taken place."
There is a new face in the U.K. market for News Corp. overall, but it is not new to the company. His name is Tom Mockridge, a 20-year veteran of the group. He replaces Ms. Brook, founding chief executive of Sky Italia, he was based in Rome for the last seven or eight years. He set up the 24- hour news service, TGI 24. He has been Rupert Murdoch since 1991. So, bringing in a hand that is done work for News Corp. globally, moved him to Italy to start a platform just like BSkyB here in the U.K. And he is going to have that experience to bring. We see if they are going to come back to launch another bid in the future. That is not on the table right now.
Attention is now shifting to James Murdoch, News Corp.'s second in command. Calls by institutional investors for him to step down as chairman of BSkyB because of the controversy. Today he took time to praise Brooks as one of the outstanding editors of her generation.
Let's take a look at what happened in the markets today. Shares of News Corp. are currently trading a little bit higher in New York. Let's see if we can get those numbers. As we know the market cap of the group has been destroyed over the last 10 days of trading, losing some $7 billion before a slight recovery. Today it is up 1.3 percent. Now, on the Nasdaq, with shares trading at $15.63. In London shares of BSkyB ended the session with gains of nearly 2 percent, but they are down around 18 percent for the week, as a whole.
Well, Geoffrey Robertson joins us now. He is a lawyer with special experience in media law and somebody who knows this market extremely well.
Thank you for joining us. I wanted to start with the concept of how do you close the chapter on something so you can move forward? They really tried to preserve Rebekah Brooks, for a long, long time. And I'm wondering if you see that as a mistake now that she has had to resign.
GEOFFREY ROBERTSON, MEDIA LAW EXPERT: Well, it is obviously a mistake. There has been no strategy until today. There has been no coherent strategy. I mean, only yesterday Rupert was telling his own paper, "The Wall Street Journal", I regret nothing. Today he is regretting everything. Is this a different strategy from Britain to New York? Or is it a change. Is it a realization that the British public, in this fit of moral fury, which is really-it is starting to wash over America, with the FBI investigations, that his people have just gone too far.
That he can't defend what has happened on any basis. It is obscene and he is now going, finally, and I think correctly, to humiliate himself, humiliate News Limited (sic), but actually seek and apology and apologize to the public in the hope that he will bounce back. And I think he is quite capable of bouncing back.
DEFTERIOS: You do? Even at this age? And what's happened?
ROBERTSON: Well, I think he-
DEFTERIOS: What's happened over the last 20 days?
ROBERTSON: Well, I think you have got to remember that Rupert is an Australian at heart. American though he may be, he is a great Australian, in the sense that Attila was a great Hun.
DEFTERIOS: Great source of national pride.
ROBERTSON: Yes, exactly. And he is aware that something like this happened in Australia to one of his other, his mogul mates, Gary Packer (ph) 20 years ago.
DEFTERIOS: I do remember that.
ROBERTSON: The attacks, there was a lot of hysteria about Gary Packer's tax dodging. And he was summoned to a parliamentary committee, just like, Rupert. And he-
DEFTERIOS: You will admit, though, Geoffrey, that this on a global scale because he was dealing with the Australian market. This is quite different.
ROBERTSON: Yes, yes. Packer made a great impact and he was able, it was a bear bating session. It will look like a bear pit on next Tuesday and it may be that Rupert, who is after all, has done a lot of great things and is still at 80-I mean, he eaten the British for breakfast, basically, over the last 40 years. And I don't put it past him to actually succeed on Tuesday, because remember he'll have a row of silks, of QCs, of top lawyers.
ROBERTSON: Who will be telling him, no, you can't answer that question, because there is a police investigation going on. So it will be very interesting to see what questions these politicians do, in fact, get away with asking him.
DEFTERIOS: Well, there is the political storm, of course, and then the questioning is going to take place on Tuesday. But the long arm of the law, as we have been discussing, could carry on and actually damage the company for 18 to 24 months. FBI investigations, the Australian prime minister said she is going to start investigations there. Is that the timeline-if I'm an investor in News Corp., that I should be anticipating?
ROBERTSON: I don't think that they'll find anything particularly wrong in Australia. You have got to remember that Rupert keeps saying he has a 100-year-old mother and he wouldn't like her to read papers like "The Sun" and the "News Of The World". The British have a particularly prurience about sex and grief, to which he caters. And he doesn't do that in Australia. So, I think that the crooks, the journalists on "News Of The World", who were working with this guy, Glenn Mulcaire, who did most of the dodgy bugging, were perhaps England only, catering to that amorally to that market. And they were-
DEFTERIOS: It sold newspapers.
ROBERTSON: It sold newspapers. But I think the big question that the committee has to probe on Tuesday, is who is taking care of Mr. Mulcaire? Because he is the guy who knows where all the bodies were buried and the big question that they have got to get at, the police have got to get at, that will determine whether senior executive at "News Of The World", right up to Rupert, may be in danger of arrest; is, who authorized, who signed off on the $130,000 payment to Mr. Mulcaire. So that is the $64,000 question.
ROBERTSON: And I think the fact that he'll be asked about the ethics. How come you were running an organization.
DEFTERIOS: And this carried on?
ROBERTSON: And those people didn't know it was against the law to bribe the police.
DEFTERIOS: We appreciate your time tonight. Thanks for joining us. (UNINTELLIGIBLE) for the analysis. Geoffrey Robertson once again.
Well, CNN will have live coverage of the testimony before the British parliament by Rupert Murdoch and his son, James; plus expert analysis. That is Tuesday starting at 1430 in London, 1530 in Berlin, right here on CNN.
It has been a rough week for Italy. Next the chairman of Ferrari tells us what the country needs to do to turbo charge its stalled economy. Stay with us.
DEFTERIOS: It has been a week of shock therapy for Italy. Starting with fears of debt contagion, ending with banking stress tests, and the passing of a $68 billion austerity package in between.
Luca Di Montezemolo is one of the country's leading industrialists, chairman of Ferrari and former president of Confindustria, Italy's largest industrial association.
I asked him if the tough austerity package is going to hamper the country's ability to recover.
LUCA DI MONTEZEMOLO, CEO, FERRARI: I think that is very positive that we-that the parliament has approved in such a short time, unusual for Italy, and this is a good news, and with very good political cohesion. So, I think this is very important for Italy, it is a good signal and it is positive.
Having said that, I think this is a start, but is something extremely important and useful for the economic situation at the moment.
DEFTERIOS: Italy average 2 to 2.5 percent growth in the 1990s, before the introduction of the euro. After the euro, in the last decade, you have grown on average about 0.5. If you cannot devalue your currency, where is the export growth going to come from?
DI MONTEZEMOLO: We have strong export activities from the medium, the small, and big companies. We have a lot of center of excellence, so I don't agree with such a-sometimes negative attitude to look at Italy. I think that we are in the middle of speculation against the euro and we maybe are paying the highest price.
And I think also that now is time to stop the speculation of the agency ratings, in which we have a lot of conflict of interest. And also the international speculation, because at the end of the day, the speculators, they can do everything without taking any responsibilities.
Now due to the cohesion we need to immediately now to approach the fundamental structural reform, because in the last 15 years we did not enough.
And last, but not least, I think we have to cut a lot of costs that are not fundamental.
DEFTERIOS: So, how do we address the issue of the north, the very productive north of Italy, and the south, which has double-digit unemployment, some 20 percent, even higher amongst the youth, right now, of Italy?
DI MONTEZEMOLO: For an Italian leading class, political and industrial, to invest, to develop, to look at the south as the south of Europe, not only south of Italy, is the priority number one for the growth of the company (sic). This is something we have to look at with a strong political effort with industrial effort, and to do something like different taxation, like incentives if you invest in the south, like something to attract international investment. For me, this is a huge, huge opportunity.
DEFTERIOS: I appreciate that. But you have a huge tax evasion problem, and a corruption problem in the south, and that is what has held back foreign direct investment.
DI MONTEZEMOLO: I think that the south has to be the first priority for a new leading class and I think that this is something that we can face, also-also, putting at the main problem of the south, that you have mentioned, to be solved as a priority. This is something crucial for our future.
DEFTERIOS: Would we see an IPO coming in the future for Ferrari? Mr. Marchionne, the head of Fiat, suggested the valuation of around $7 to $7.5 billion. Is that in the pipeline the next two years?
DI MONTEZEMOLO: I want to be very clear. At the moment there is nothing on the table. There is no program to float Ferrari. We don't need to do it. And at the moment there is not programs at all. In the future, we will see.
DEFTERIOS: How about that valuation I was suggesting? About $7 to $7.5 billion, is that about right in your view?
DI MONTEZEMOLO: No, even the double.
DEFTERIOS: Pretty clear. A valuation of $15 billion. That is the chairman of Ferrari joining us a little bit earlier from the city of Turin.
Well, another day, another deadlock and all the while the rating agencies are hovering. We'll ask one of S&P's top analysts why he is so worried about the U.S. debt talks.
DEFTERIOS: And welcome back.
I'm John Defterios.
You're watching QUEST MEANS BUSINESS. .
And here are the day's headlines.
News Corp's chief executive, Rupert Murdoch, is not extending a series of apologies. A few hours ago, he met with the family of Milly Dowler, the teen whose phone was reportedly hacked by the "News of the World" staff.
Meanwhile, full page apologizes over the phone hacking scandal will run in British national newspapers this weekend.
Enormous nationwide protests in Syria Friday. There's word of violence in several cities, with activists reporting as many as 19 deaths. This video is from YouTube. We can't confirm its authenticity, but you can see the size of the crowd. Some reports say more than a million people have taken to the streets right across the country.
The United States has recognized the main opposition group in Libya as the legitimate governing authority in the country. U.S. Secretary of State Hillary Clinton made the announcement Friday at a meeting of the Libya Contact Group in Turkey. It could give the rebels access to Libyan assets that have been frozen by Washington and others.
Barack Obama says the American people are on his side now, as he tries to get an agreement on the U.S. deficit and debt ceiling. The president said the public wants a deal to go through by the August 2nd deadline and told Republicans who are opposing it to put aside their politics. Mr. Obama said if Congress cannot get its act together, he's now ready to start moving.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We are obviously running out of time. And so what I've said to the members of Congress is that you need, over the next 24 to 36 hours, to give me some sense of what your plan is to get the debt ceiling raised through whatever mechanisms they can think about and show me a plan in terms of what you're doing for deficit and debt reduction.
If -- if they show me a serious plan, I'm ready to move, even if it requires some tough decisions on my part.
(END VIDEO CLIP)
DEFTERIOS: Well, the clock is ticking louder and louder. Now another ratings agency is getting ready for a possible downgrade. Standard & Poor's says there's more than a 50 percent chance that the country's long- term debt rating will be cut in the next 90 days. It says the political situation has become more entangled since it said the outlook was negative just back in April.
Treasury Secretary Tim Geithner says that's another sign that time is running out. The department issued a wake up call to Congress, saying politicians need to put aside their differences and quickly come up with a cost-cutting plan.
The problem now, that it's no longer just about the debt ceiling. Both S&P and Fitch say the U.S. has to come up with a deal to reduce the country's debt, as well, in order to avoid a negative outlook or even a downgrade.
Well, Paul Volcker says he's no fan of how the ratings agencies have been handling the situation so far.
Jim Boulden spoke with the former Fed chairman, who was once one of President Obama's top advisers.
He asked him if the US' AAA rating was really in danger.
(BEGIN VIDEO TAPE)
PAUL VOLCKER, FORMER CHAIRMAN, ECONOMIC ADVISORY BOARD: I don't like the role of the credit rating agencies...
JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT: OK.
VOLCKER: -- frankly. I think they have injected themselves into a situation that's beyond their comprehension.
I mean, the United States is going to pay its debts. And playing around with this rating agency thing, at the moment, is, I don't think, very helpful. It's not as if their record has been so distinguished they deserve special precedents in this area.
BOULDEN: One of the things us non-economists have had to learn about is quantitative easing.
BOULDEN: We've had two QEs, QE2.
Do you expect, eventually, there will be a QE3 in the U.S.?
VOLCKER: Well, hey, it's up to the Federal Reserve at some time. But I think -- I don't like the idea of this QE1, QE2, QE3. It dramatizes something I don't think is really that dramatic.
What this consists of, basically, is the Federal Reserve has decided to enter the long-term bond market, which, for decades, they've eschewed doing. And they're doing it for what seems obvious reasons -- they'd like to keep long-term rates as long as possible given the condition of the economy.
BOULDEN: I mean, you are known as an inflation hawk.
Do you have any concerns that the U.S. interest rates are so low for so long?
VOLCKER: Well, I don't like that they're so low and so long. But the explanation, of course, is the economy is not behaving appropriately. So I'm not going to say it's inappropriate. But it -- it is an uncomfortable situation that we have essentially zero interest rates for a long period of time. This has gone on now...
BOULDEN: Several years, yes.
VOLCKER: -- for quite a while without much investment return to the ordinary investor.
BOULDEN: But are you one of these people worried more about the deflation or inflation?
VOLCKER: I worry -- I'm a constitutional worrier about inflation. And I think there's been too much worrying about deflation...
VOLCKER: -- frankly. You know, I think the chronic worry is the worry about inflation. But that doesn't say I think inflation -- the inflation animal, bull or whatever it is, is lurking right over the picture at the moment.
So you don't think the Fed should be raising rates any time soon then?
VOLCKER: Not right now.
VOLCKER: I think that's unlikely.
VOLCKER: But, you know, you would love to see rates more normalized...
VOLCKER: -- but when you can get there is the question.
BOULDEN: Let me ask you about the euro. We are, of course, here in - - in Europe, in London. And all the talk is about default.
BOULDEN: What do you expect a European country to possibly have to default, even if it's a technical default?
VOLCKER: Well, I -- I wouldn't necessarily rule that out, depending upon how this situation is taken care of. I think this is a real crisis for the euro and I would extend that in saying it's a real crisis for Europe as to how this is handled. And I do not think that, you know, what's called a technical default should upset Europe, but you have to be prepared to deal with this with very, I think, consistent and forceful actions by the leadership.
And the real...
BOULDEN: People say there's not a lot of leadership in Europe.
VOLCKER: Well, that's the real question, is will the leadership rise to -- to this challenge, because I think it is a very real challenge. And it's not to -- if they don't, then even a minor default, a fear of default, becomes very disturbing.
(END VIDEO TAPE)
DEFTERIOS: Once again, the former U.S. Federal Reserve Board chairman, Paul Volcker, the man who broke the back of inflation in the 1980s.
Well, these agencies' warnings have really turned up the heat on what's already a tense situation.
Nikola Swann is S&P's top sovereign analyst on the United States.
I asked him what it saw as Washington's biggest challenge right now in dealing with this overall crisis.
NIKOLA SWANN, DIRECTOR OF SOVEREIGN RATINGS, S&P: There are many aspects to a sovereign credit rating, but the primary motivator for moving from the negative outlook that we already had to the credit watch negative is the -- the politics and specifically the difficulty in reaching agreement.
DEFTERIOS: There's three stages, as you know, to this potential proposal by Senator McConnell on raising the debt ceiling. It's created a lot of drama, if you will, in the financial markets, and as a proposal on the table. But I would imagine from your standpoint, this is not creating a very clear outlook for the debt ceiling over the next 12 to 18 months.
SWANN: There are a number of proposals and none of them are really giving much clarity on where that debate on the debt ceiling is going. And as we said in our research update of yesterday, the -- we do think that the risk of a default, because of the debt ceiling disagreement, is small, although it seems to us to be increasing.
But our main concern remains the long-term fiscal consolidation package.
DEFTERIOS: As you know, there's just over a mile between the White House and Capitol Hill. But they seem to be operating, almost, politicians right now, within this island mentality, where they don't see the influence this could have on the rest of the world.
Would you agree with that?
SWANN: Well, what we would say is that there does seem to be a large amount of space between the various proposals that are being put out there. When you have one side arguing that revenue increases have to be part of the measure and the other side arguing that no revenue increases of any kind can be considered, that's quite a large gap.
And one reason we moved to the credit watch negative from the negative outlook that we assigned in April is there doesn't seem to be much moving to the middle since then.
DEFTERIOS: There's a whole slew of people over here that say when it comes to the European crisis, the rating agencies are actually doing a disservice, creating more of a crisis. do you think you'll actually get swept up into reforms as a result of what we've seen here in Europe?
SWANN: I won't comment on regulatory matters. But I would say that we are simply analyzing decisions that are taken. And our criteria are quite transparent. They're there for anyone who wants to read them.
(END VIDEO TAPE)
DEFTERIOS: Nikola Swann, once again, of S&P, joining me from New York, where the criticism has been intense on both sides of the Atlantic today, indeed.
Still, all eyes on Washington over Wall Street, though. The Dow has been trading pretty flat throughout the day. It's currently trading just below the line, down just under 10 points, 9.75 points, at 12427.
There are some signs of inflation eaving -- easing off, though. Today's figures showed the Consumer Price Index fell .2 of 1 percent in the month of June. And one piece of earnings news which is kind of supporting the market, Citigroup has some positive second quarter results. They beat market expectations, with income of $3.3 billion US.
You're watching QUEST MEANS BUSINESS on CNN.
We'll return after a short break with the weekend weather in Europe.
Stay with us.
DEFTERIOS: It's time for the weekend.
Let's get a forecast of what's going on in the U.K. and on Continental Europe with Guillermo Arduino at the CNN International Weather Center -- Guillermo.
GUILLERMO ARDUINO, CNN METEOROLOGIST: John, there are two areas that we're looking at. One is in Britain, so you're getting rain. I'll give you the details in a second. But we see the clouds coming in now.
And the other one is moving closer to the Serbia region and parts of Romania and Hungary. That's the two areas when we see the unstable weather in Europe.
So we start with the windy conditions and also the bad weather in France and the Low Countries. I mean France has been pounded with bad weather.
Did you have the chance to see the Tour de France and sometimes you'd see the rain coming down very heavily.
The other area is this, with severe storms. So pay attention to this if you're going to Northern Serbia or the southern parts of Hungary, even parts of Croatia, especially the east and Western Romania, we may see some strong storms that extend all the way into the north, too.
With all that cloudiness and the rain and the wind, we're going to see temperatures going down in Northern France and in Britain. So we know a lot is going on these days, the Open championship. And we have to tell you that we may see the rain showers moving in.
Now, I'll give you the specific forecast for Saturday. So you see rain showers and the winds going up in speed. And this is the -- these are the temps that you can expect. Look at the radar and use how it's coming. So it hasn't happened yet. This is the last 12 hours. And it gets close to Saint-Georges. So it's a matter of hours, now, we will see it over there, where we are going to see the rain coming down, unfortunately. You know, we can't do anything about that.
At the same, we're looking at what's going on in India and Pakistan, with the monsoon. Pakistan is getting, finally, some relief of those temps. But when we look at the other side, we know it is a lot of rain in the Philippine Sea. That's a typhoon, probably becoming a super typhoon for a little bit for some time and then it's going to turn northward into Japan. So we have time, like four days from now. But we need to know, with all the sensitivity around Japan, with everything that is going on, we are likely to see landfill. It's a little bit too early to confirm it, but likely to see landfill into the southern parts of Japan. So stay tuned on CNN for that -- John.
Have a nice weekend yourself.
ARDUINO: Thank you.
DEFTERIOS: Thanks very much.
Guillermo Arduino at the CNN International Weather Center.
And that's QUEST MEANS BUSINESS for this week.
I'm John Defterios sitting in for Richard in London.
"MARKETPLACE AFRICA" is straight ahead.
ROBYN CURNOW, HOST: I'm Robyn Curnow.
You're watching MARKETPLACE AFRICA here in the center of Johannesburg.
This week, we begin the show in Nigeria, best known for its booming economy, fueled by oil. But Nigeria also has a thriving music and film industry, these days, also, the contemporary arts scene is gaining ground. Auctions and galleries are flourishing.
And, as Christian Purefoy now reports, that's good news for local artists. (BEGIN VIDEOTAPE)
CHRISTIAN PUREFOY, CNN CORRESPONDENT (voice-over): Gerald Chukwuma is gluing worthless mobile phone recharge cards into the patchwork piece of art that he hopes will be worth thousands of dollars. Nigeria's art industry is booming and Chukwuma is one of its rising stars.
(on camera): Now, you've got some art work here made out of tin cans.
GERALD CHUKWUMA, ARTIST: Yes.
PUREFOY: You've got art work here made out of recharge cards.
Some people would say, well, that's very easy to do, very cheap, why should we pay so much money for something like this?
CHUKWUMA: I think I didn't start making it because of how much someone is going to pay. So I'm really not bothered how much anybody is going to pay. I want to document something. I want to document it the best way I can document it and the best way I am comfortable to. And that's from art.
PUREFOY (voice-over): Chukwuma's art is exhibited across the U.S., Europe and in Nigeria. Although he may not worry about the money, some of his art work is sold for over $20,000.
And African Art Foundation director Azu Nwagbogu wants to make sure such local artists like Chukwuma get the support and money they deserve.
AZU NWAGBOGU, DIRECTOR, AFRICAN ARTISTS' FOUNDATION: The African art scene is really one of the few authentic, you know, pure art forms left on the planet. And...
PUREFOY (on camera): What do you mean by that?
NWAGBOGU: Well, I think they're still not really diluted or corrupted by the -- a lot of Western influence. The -- the art that we have here is still people just expressing themselves, being creative, you know, communicating things that are personal to them in their own way. And I think people can connect to that. People can relate to it.
PUREFOY (voice-over): Mask, sculpture, cloth and paintings, Nwagbogu estimates there are over 5,000 artists in Lagos alone.
NWAGBOGU: This work actually typifies where contemporary Nigerian painting is today, where a lot of people are having more, you know, class experience.
PUREFOY: The most expensive painting his foundation has sold was for $200,000.
(on camera): What would make you sell this painting there?
NWAGBOGU: Maybe anything close to our previous record, maybe $150,000, of course, for the intent (INAUDIBLE), you know, I'd like to keep it, you know...
PUREFOY: So this is -- this is really...
PUREFOY: It's priceless.
NWAGBOGU: Yes, it is priceless.
PUREFOY (voice-over): Overcrowded streets, little development and the high cost of living means working in Lagos is not easy, says Chukwuma. But it is an inspiration.
CHUKWUMA: We are cornered up. You come out at your best. Sometimes you do that, (INAUDIBLE) don't exist. You cannot struggle (INAUDIBLE) it's like can a peanut turn into a butterfly. That experience.
PUREFOY: In this case, turning discarded recharge cards into dollars.
Christian Purefoy, CNN, Lagos, Nigeria.
(END VIDEO TAPE)
CURNOW (voice-over): Let's take a closer look. The African Artists Foundation says more than 5,000 artists live and work in Nigeria. One third live in Lagos, which holds about four art auctions each year. The Foundation says those auctions regularly gross over a million dollars.
(on camera): Up next, high risks and high returns -- how one Nigerian oil company is breaking into the global drilling business.
CURNOW: Nigeria's oil industry has fueled massive growth in the country, but it's mostly been dominated by foreign players. Now, a young Nigerian company is edging in. Seewolf Oilfield Services is the first and only indigenous company to get involved in Nigeria's offshore drilling business.
For this week's FaceTime interview, I sat down with the CEO, Adolor Uwamu, and we chatted about the challenges of getting involved in Nigeria's waters.
ADOLOR UWAMU, CEO, SEEWOLF OILFIELD SERVICES: Seewolf is an offshore drilling contractor. We drill oil wells on behalf of clients in the offshore oil and gas industry.
CURNOW: And you're one of the few African players in this business in Nigeria, aren't you?
UWAMU: We are one of two African -- Nigerian players in the growing business, but the only Nigerian player in the offshore drilling business.
CURNOW: Why is that?
UWAMU: It's a capital intensive business, a business of high complexity. And drilling rigs cost quite a bit of money. And it's a business that has been controlled and operated by, I would say, about five to seven global players worldwide who operate in different regions of the world but are mostly American and European, so.
CURNOW: So how much does an oil rig cost and how many do you have?
UWAMU: An oil rig costs anywhere from $50 million to $160 million, but depending on the age of the rig. We have two new rigs and one older rig. So we have three jack up rigs.
CURNOW: And when it comes down to a young African businessman with a bit of extra cash who wants to go global or wants to play with the big boys, how difficult is it?
What holds -- what holds people like you back from actually doing that, because you say it has been difficult.
UWAMU: There is very little room for mistakes. You're in a high capital business and a high risk business. And drilling for oil is a dangerous thing. And a lot of care has to be taken.
So the biggest factor and the most important factor in the entire industry is safety, because when things go wrong, a lot of catastrophe can occur. And the oil companies are mindful of that.
CURNOW: So they put...
UWAMU: And are very...
CURNOW: -- a lot of pressure on you?
UWAMU: They put a lot of pressure on -- on their client -- on their service companies in general. And because of the risk aversion that pervades the industry, it's very difficult to break in.
CURNOW: Why did you even start then?
Surely there are easier ways to make money?
UWAMU: There are easier ways to make money.
UWAMU: Unfortunately, because there was an opportunity for Nigerians to get into the business. Nigeria is the seventh or eighth largest producer of oil in the world, depending on what -- what time, what period. And it's an -- it's -- it's the major industry in Nigeria and Nigerians are not actively in the business. And there were not -- we're not involved at the bid -- in the business at the sufficient level we should be.
CURNOW: What, for you, is the biggest challenge?
UWAMU: The biggest challenges for us have been developing the -- the talent that is required on that global level.
CURNOW: So there are just not enough skilled Nigerians to work on your oil rigs?
UWAMU: There are not enough skilled Nigerians in -- in general in the oil and gas industry, which is the issue that the government is trying to correct by encouraging -- putting in place the level environment to increase the Nigerian participation.
CURNOW: Many people look at Nigeria and feel that perhaps your country is -- has missed the boat, has really badly managed its oil wealth.
Would you agree?
UWAMU: I wouldn't agree with that.
UWAMU: I would say that we have been less than optimal in our management of our -- our oil resources, but we haven't missed the boat. There is still -- there are still opportunities. I would say in the last couple of years, we -- we've done well in terms of monetizing our gas resources. And now I believe the government should focus on revamping the downstream industry and showing that the refineries work, increasing refining capacity in the country.
CURNOW: That's the key, isn't it?
UWAMU: It is key, because what it does is it prevents us from importing the fine petroleum products, which is less than an optimal situation when you're the seventh largest producer of crude oil in the world.
CURNOW: How does Nigeria fix these mistakes of the past?
And do you think it -- it's possible that that oil wealth is going to be able to trickle down to most of the people?
UWAMU: I believe so. I believe Nigeria has great potential to fix the problems of the past. And the key factor in doing that is having good leadership. We've had a very smooth transition, which is one of the smoothest in -- in recent times. And we believe that the president and -- and the government in power right now has four years ahead of them to put the building blocks in place, which can be carried on from there.
CURNOW: So you're optimistic?
You think it can be done?
UWAMU: I believe it can be...
CURNOW: Not two days? (ph)
UWAMU: I believe it can be done. Sustainable development can be put in place, when those building blocks such as constant electricity, fixing the electricity problem, fixing the -- the -- the refineries and providing the enabling environment for private sector business to thrive.
CURNOW: But that's a lot of work.
UWAMU: Yes, it is a lot of work, but the challenge is there. The commitment has to be shown by the leadership. And they've expressed the desire to -- to put the com -- to put the -- the work in place. And hopefully they will.
(END VIDEO TAPE)
CURNOW: I was talking there to Adolor Uwamu of Seewolf Oilfield Services.
Now, here's what's trending this week
CURNOW (voice-over): As Sudan and the newly independent South Sudan work to separate their economies after splitting, both countries are now preparing to introduce new currencies. South Sudan says it will start circulating the new currency, the South Sudan pound, next week. Officials say it will be equal in value to the current Sudanese pound.
And South African retailer, Massmart, is looking to boost its fresh food offerings. The company is in talks to buy The Fruit Spot, a local fresh produce supplier. This comes just weeks after Walmart acquired a majority stake in Massmart. As part of its expansion in the food retail business, Massmart aims to open up 100 stores within the next three years.
(END VIDEO TAPE)
CURNOW: That's all for this week's show.
I'm Robyn Curnow here in Johannesburg.
Please do go to our Web site. It's CNN.com/marketplaceafrica. All of our stories and interviews are online. There are also links to our Twitter and Facebook pages.
But until next week, good-bye.