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U.S. AAA Rating in Trouble?; Boehner Bill Being Rewritten

Aired July 27, 2011 - 14:00:00   ET


RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS: AAA, it spells alarm, Americans are bracing for the worst.

There is one thing that is on time and on budget. It is the year to the Olympics. London's mayor is on tonight's program.

And investing in property, a whole town, Scenic, South Dakota is up for sale.

We've an hour together. I'm Richard Quest. I mean business.

Good evening.

It was Winston Churchill who said, "You can always count on Americans to do the right thing after they have tried everything else." Now more than ever, we must hope that he is right. Tonight, deadlock, and perhaps next week, perhaps default. Seemingly, also, eventually, downgrade. Six days before the debt ceiling deadline and U.S. lawmakers are still working on the plan. Republicans making frantic amendments to theirs, after the cost cutting program fell short. It will now be Thursday before John Boehner, the Republican speaker, brings the plan back to the table. A day closer to uncertainty.

As we consider, default, downgrade, and debt, the ratings agency, S&P said tonight, it doesn't believe the U.S. will default. Kate Bolduan is on Capitol Hill now and joins me now.

It is getting very close and very tight. Can they make it?

KATE BOLDUAN, CNN CONGRESSIONAL CORRESPONDENT: It is getting very, very close. And I will tell you, Richard, today we are starting to get a glimmer that there is some recognition amongst the leaders here, in the House and the Senate, that it is getting very close. And some recognition that they know they are going to have to compromise. That doesn't mean that they are ready to compromise quite yet, I'll tell you, as you well noted. There are two plans right now, moving on different tracks. One in the House of Representatives, and one in the Senate, and they are moving along their own tracks right now. And it seems like the next step is going to have to be to see how House Speaker John Boehner's bill fares in the House.

QUEST: Right.

BOLDUAN: We are starting to-while there was some question at some point, Richard, it does seem that that plan will pass in the House. That vote is Thursday, tomorrow. And then we'll have to see where we move next at this point.

QUEST: If there is this threshold of an agreement and they are coming together, is it at all likely they might just raise the debt ceiling, just to get it done before Tuesday. Or are they so entrenched that absent a full range of agreement, they'll do nothing?

BOLDUAN: I just-I have a hard time believing that at this point, after all of this fighting, that they would agree to just raising the debt ceiling. Republicans just will not go for that. How the compromise is going to turn out is anyone's guess. But if I had to guess I would say it is going to include some sort of these cost cutting, deficit reduction measures, and then some way to bridge the divide where they stand right now. This question of two votes or one vote to raise the debt ceiling through the presidential election, Richard.

QUEST: Kate, I asked U.S. viewers for their opinion and my e-mailbox at absolutely exploded with vitriol from both sides. And a lot of people that said a plague on all their houses, are the politicians at all sensitive now, seriously sensitive, to the anger in the country?

BOLDUAN: That is actually an interesting point. Because if you asked me that maybe two days ago I would say that the politicians say we understand what the American people are feeling. They were saying that. But after the president came out in that evening speech, and said, make your opinions known. Contact your representative. E-mailboxes, the phone call centers here, absolutely blew up. Floods of calls, floods of e-mails, web sites were going down here on Capitol Hill yesterday.

And this morning as we were talking to-I was talking to some conservative Republicans, they said when they were more of a no vote, they now they have become more of a yes vote, because they said they are starting to really hear from their constituents. That getting some kind of deal is better than sticking to your position and getting nothing.

QUEST: Kate, good to talk to you. We'll talk to again no doubt over the next 48 hours. Kate Bolduan joining me from Washington.

Alison Kosik is at the New York Stock Exchange.

Alison, just bear with me one second. We have "Beige Book" details coming out from the U.S. Fed. According to the Fed the economy slowed in much of the U.S. in June and early July. Eight of the nation's 12 Fed districts reported moderating growth.

So, it is not particularly good news from the Fed. And it seems as if the markets now, are starting to get concerned about debt default and downgrade.

ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: Yes, we definitely are seeing that today. And you look at the numbers the Dow down 106 points. Yes, investors are taking notice now. We are just four sessions away, including today, before that debt ceiling deadline. And making matters worse, of course, are the growing worries that the debt negotiations just aren't going to net anything. You know, many investors think the debt ceiling is going to be raised, but really the big worry here, Richard, is about the downgrade.

You know many traders are telling me the downgrade would make it feel like another recession for so many Americans because it would trigger just a domino effect of just a series of events. You know, the downgrade, though, is not 100 percent certain. But at least one trader told me they would bet yes, towards a downgrade happening. But there is one thing for sure, there is a lot of uncertainty. Hear what one trader told me today.


ALAN VALDES, DIRECTOR OF FLOOR TRADING, DME SECURITIES: One thing the market really hates is uncertainty. And right now there is a ton of uncertainty out there. Whether it is the debt ceiling, whether it is the possible downgrade-and don't forget, Friday we have a big jobs number, we get GDP this week. So there is just uncertainty all over the place. Low volume, enough to move the market anywhere, and we hit these numbers in the S&P, 1335, and we can't hold, so we come back in. So there is a lot of technical things going on, but it is basically all of this uncertainty out of Washington.

KOSIK: What are you telling your clients?

VALDES: Well, you know, right now we are telling our clients, if you are in the market, stay in right now and keep a close eye on things. But if you are not, stay on the sidelines. Just watch. There is no rush to get in the market at the moment. There is just too much uncertainty.


KOSIK: And, Richard, you are really seeing the worry most visibly played out in the gold markets. Gold prices, as you know, hitting record highs on an almost daily basis now. It is a sign that investors-they are looking for a safe place to park their money while these negotiations play out in Washington, D.C., Richard.

QUEST: Alison Kosik at the New York Stock Exchange, we will be back to you over the next day or two. Many thanks, Alison, for that one.

Now, we need to actually-join me over in the library and you'll see exactly what is happening and how the markets are starting to factor all of this in. As Alison, was saying, we are seeing sluggish trading. We are getting low volumes and investors are waiting to see. There is a serious concern. And of course, what is likely to happen as we get closer to the deadline is those volumes become lower and almost you end up with a disproportionate affect because what then takes place is small movements, at a large price differential.

And this is where you are really going to see it. The U.S. has just auctioned more than $30 billion of five-year notes and bonds. And they went-they had to pay a slightly higher premium for that. Now whether that is just the market being disgruntled, or they are really saying if this is going wrong, we are going to demand a higher premium. And this is where we are going to see the first sign of the cracks in the wallpaper.

But you are also seeing companies starting to put aside cash. Companies are stockpiling it hoping it will protect them from the shocks. GE announced it has $91 billion cash on line, because it knows it might need it. But also lots of mutual funds and money markets are also hoarding cash. Why? Because if there is default, then there could be quite large redemptions. And if there are redemptions they'll need cash on hand. That was one of the problems that we saw with Lehman Brothers. So the market, through all of its various different vagrancies, is now telling us very firmly that things are not going according to plan.

If you are an investor, most of us are in one way or another, what do you do? Fredrik Nerbrand is the global head of asset allocation at HSBC.

Right, you have heard our synopsis, so far. It seems fairly fair, what do you do?

FREDRICK NERBRAND, DIR., GLOBAL ALLOCATION, HSBC: Well, first thing, I mean, it is depending on where you are to begin with. Are you invested in the market, are you really in there? Are you really in there, are you long equities, are long bonds, etc cetera?

If you are us, and said, actually over the last few months, that you don't want to be in this market. You want to have large cash holdings etc cetera. Having said that, though, as you mention you find some companies have very large cash positions, but actually if you look at money market funds holdings, they are relatively small compared to that in the equity markets or leading bond markets.

QUEST: But they are going to have to increase their cash positions.


QUEST: Because the fear is that even if there is a downgrade or whatever, the fear is there will be redemptions and they'll need cash.


QUEST: And the cash won't be easy to get.

NERBRAND: So, at the end of the day, I guess, this is how we view the world. You should either take the view that this is really going to be something quite Draconian, you are going to see large-scale downgrades in terms of growth, this is going to have an impact on everything like that.

Then you say, actually still to this day, you sit in Treasuries.

QUEST: Right.

NERBRAND: Despite the fact that these are no longer the risk free returns that we once thought that they were.


NERBRAND: But you also sit in gold, you also sit hedge out of that-

QUEST: We'll come to the allocation in a second. If I have got Treasuries in my portfolio, do I sit on them, or do I sell them?

NERBRAND: I think you sit on them. Ultimately, this will mean that growth is going to be falling off. And already, despite that, we have already seen leading indicators, indicators are meant to lead the economic cycle, they are already coming down to virtually all-time lows again. Near where we saw them in 2008, or the summer of 2008, which essentially means that people will be looking for some type of certainty, and liquidity, and Treasuries offer that.

QUEST: The last time I saw HSBC's asset allocation I was surprised. Because you were very firm about moving into cash.


QUEST: You were absolutely rigorous. Cash was the way to go, where that is real cash, and you mean real cash, as money on deposit. You don't mean bonds or other liquid instruments?

NERBRAND: Well, you know, it is like it is money market instruments.

QUEST: Right.

NERBRAND: Commercial paper, as well.

QUEST: Right.

NERBRAND: But it is essentially sitting in cash. And cash is king as far as we are still concerned. And even though we have an (UNINTELLIGIBLE) return type of target in our asset allocation, we still sit with 13 percent of cash.

QUEST: What would you do on bonds? Would you start to lower the total weight of your bonds?

Yes, well, what we have done is that in order to-the bond weighting is that we have taken off from Treasuries, we have added TIPS and emerging markets type of instruments, in terms of getting out of the dollar, more than anything else. But also, of course, there are more things.

QUEST: Quick question. Default, yes, or no?


QUEST: Downgrade, yes or no?



QUEST: All right. That's a ((UNINTELLIGIBLE). All right, many thanks.


QUEST: Now when we come back, how one letter could change the lives of millions of Americans. The credit rating agencies are answering questions in Washington. What if America looses-




QUEST: Moody's and Standard & Poor's, both rating agencies have the U.S. debt under review for a possible downgrade, negatively. Both agencies say if they take that step a new rating in the AA range would be likely. That, of course, assumes that there is not structural or temporary default. In which case, S&P would be forced, Standard & Poor's, but at the moment it still looks as if U.S. Treasuries would have AA. John Defterios is with us.

AA, AAA, what's in an A?

JOHN DEFTERIOS, CNN FINANCIAL CORRESPONDENT: Yes, it is amazing. If you told me a week ago that we'd talking about AA for America, I'd be quite surprised. Let's call it right now, Richard, the AAA club; a fairly exclusive club of 20 countries that have a top rating given by Standard & Poor's at least. Not surprisingly, as the world's largest economy and the largest debtor, the U.S. has the largest sovereign debt market; $11.1 trillion. The rest of the government AAA rated paper adds up to just $7 trillion. It ranges all the way from the United States, Australia, New Zealand, Guernsey, the tax haven Liechtenstein, the Isle of Mann.

All told, outside the United States, just $7 trillion. According to Nomura International, here is the top five, after the United States, Germany at one point, $7.2 trillion, France at one point, $7 trillion, the U.K. with a gilt market, at one point $3 trillion. Canada at $1 trillion, in terms of debt it has been issuing. And rounded off here, the top five, $300 billion by Australia.

So, you can see, with the U.S. at $11 trillion. Why it takes in so much capital. It is not that much availability in the other markets around the world. There is also some concern that the U.S. has downgrade, it may force a reexamination of some of the other key countries that are borrowing right now, particularly those that have exposure to Southern Europe. So, why-

QUEST: Before you move on.


QUEST: I just want to quickly interrupt you on this one.

DEFTERIOS: It is fairly interesting, the big gap, isn't it?

QUEST: It is fascinating. But is it a fair connection, bearing in mind as we see here. The U.S. economy is such a considerably larger economy.

DEFTERIOS: But that is why the AAA rating is so important, though, because it is sucks in so much capital, because they are issuing so much debt. It is an interesting point, though. The U.S. was averaging, its debt to GDP, 60 to 70 percent, between 1995 and say 2006. It has been ballooning ever since.

Let's take a look at what I'm talking about. It really is all in the numbers. Why is the U.S. in this mess right now? This is the whole story, Richard. 2011 budget deficit projected to be 10.7 percent of GDP. The U.S. was running a surplus at the end of the 1990s, worth remembering. The average debt to GDP was 3 percent until the year 2007.

Then the Lehman crisis came in, funding the Iraq/Afghanistan war, and the Lehman crisis, and the huge financial bailout, what it has done to the debt to GDP in America now? 102 percent, it is likely to stay there for the next few years. And there is all this discussion about $14 trillion- dollar debt ceiling and raising that debt ceiling as time goes on. No matter what they do over the next week, whether they raise the ceiling, or come up with a long term plan, that number is likely to cross $20 billion by 2016.

And, Richard, it is quite interesting. We were having this conversation earlier to day. They talk about the lost decade in Japan. Actually, nearly lost two decades, where you have extremely slow growth. Your debt continues to surge, 225 percent debt to GDP in Japan. This discussion now of the U.S. slipping away, because it doesn't have the growth that it had over the last 10 years.

QUEST: I-I-Laura Tyson argument, of course, is that what is happening. And, frankly, three years into it already.

DEFTERIOS: And there is a path, by the way, to get out of this. It is just that the gap is so wide, and this is what the credit rating agencies are looking at. They don't see eye-to-eye, right now.

QUEST: John, many thanks.


QUEST: Officials from the major credit rating agencies are on Capitol Hill, and faced stony questions over the debt crisis, and what their next step might be. Maggie Lake is in New York.

Maggie, the-I mean, the rating agencies have a job to do. And the politicians don't like it.

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: That's right. You know, it is interesting Richard, this hearing came, though. The hearing was about the rating agencies, their credibility, and whether their role should be reduced. But because of the timing of it, it was sort of tricky. Because they are, you know, they still have a lot of clout, and they are in this position with this rating issue hanging over it.

It took a while, but they did get around to asking some very pointed questions about the U.S. debt rating, what they plan to do with it. Lawmakers there were trying to pin them down on numbers--would $4 trillion, is that the sort of number that is bandied about, it has to be the minimum cut in order to maintain that AAA rating. Have a listen to the exchange.


DEVEN SHARMA, PRESIDENT, STANDARD & POOR'S: We do not comment on any specific plan, or the political choices or policy choices being made.


SHARMA: We are just commenting on what is the level of debt burden? What is the level of deficit that must meet the threshold to redeem its AAA.


SHARMA: And since there was a $4 trillion number put forward by a number of Congressmen, as well, as the administration. Our analyst was just commenting on those proposals, that that would bring the threshold within the range of what a AAA sovereign debt would require.

UNIDENTIFIED MALE: So, watching my time, firstly, is something under that thin potential, still be able to maintain a AAA rating?

SHARMA: Senator, I would leave that to our analysts to determine that.


LAKE: He dodged the question. That is important, Richard.

All of the plans right now are under $4 trillion. They didn't close the door on something like that, being able to maintain AAA, but that is where the real question is. Interestingly, no sooner did S&P finish answering that question, and one of the other panelists, gave a very scathing review about whether we ought to be paying attention to the rating at all. Listen to this.


JULES KROLL, KROLL BOND RATING AGENCY: I question whether this is the job of a private sector entity to be looking at the United States government, or frankly, any other government and reaching decisions on their levels of credit worthiness. And what we have seen throughout history is a constant activity of being a day late and a dollar short. And running around in front of the parade, so is this new news? What makes these organizations-we are not qualified to do this; we are too small. But I question, conceptually, whether private enterprise should be in this business, for pay?


LAKE: A lot of investors asking that question as well, Richard.

QUEST: Paul Volcker was head of the Federal Reserve, '79 to '87, now he also questions whether rating agencies should be involved. We'll talk more about this in a second. Let' listen to Mr. Volcker.


PAUL VOLCKER, FMR. CHAIRMAN, FEDERAL RESERVE: I think they have injected themselves into a situation that is beyond their comprehension.


The United States is going to pay its debts.


VOLCKER: And playing around with this rating agency thing at the moment is I don't think very helpful. It is not as if their record has been so distinguished they deserve special precedence in this area.


QUEST: Between a rock and a hard place, on the sub-prime, Maggie, they were too lenient and ignored much of what was going on. And they got a rocket. Now they are being razor sharp, and they are getting a rocket.

LAKE: Yes, you could say that. I mean this is going to be a debate that goes on, Richard. One thing I do want to point out, and even the rating agencies themselves will say that. Remember, I talked to an independent one yesterday. And this goes to what you and John were talking about as well. This is a political problem, not a solvency problem, which makes it a very different situation from Europe. And because of that when I talk to analysts they say if there is a downgrade, they are not expecting an immediate sort of fallout dislocation in the market. It is more of a longer term picture it will cost money. Borrowing costs will increase. But it is a situation that can be rectified if they get the right solution. So there is a path forward. It is a political problem right now, very important distinction.

QUEST: Well, it could be summed up in a sentence. Won't pay, not can't pay.


Thank you, Maggie.

LAKE: You're right.

QUEST: Maggie Lake in New York.

When we come back in a moment, it is the town that costs less than a New York townhouse. An entire zip code is up for sale. The realtor who would want to buy it. Who would want to buy it, after the break.


QUEST: It has night life, transport links, and its very own zip code, and it is all yours for less than $800,000. And entire town in the American Midwest is up for sale. The town of Scenic, in South Dakota, measures 18.5 hectors, in total. Even though its population is less than- is less than-well, 10. The town still has its own saloon, a dance hall, and a jail. The current owner can no longer afford to maintain the buildings. So you can get the lot for just around about $800,000.

Now, if buying your own town sounds decadent, the reality is a little less glamorous. For example, Braselton, Georgia, in the United States, now this was bought by Kim Basinger, for $20 million in 1989. Basinger declared bankruptcy a few years later. Clearly not a good deal there.

In California, it was Bridgeville, population of about 30. It has been sold twice through eBay. Tragic history, tragic, tragic, listed originally but the auction owner backed out. New buyer took it. The owners decided repairs would cost too much, relisted it on eBay. The new owners got it for a quarter of a million, and then-well, Bridgeville, California, the owner committed suicide and once again, it is up for sale.

And over in New Zealand, well, Otira, the population is just 40. It is a remote mountain village. And it cost $870,000. The railway station and the town hall included. A couple put it up for sale last year. Originally bought it because they felt sorry for it.

That is the situation of those cities and that are or have been up for sale.

When we come back after the break we will talk to the realtor in South Dakota, Joe Bennington will join us on the line after the break.


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


QUEST: The exchange beat expectations with its latest earnings. Q2 net profit fell four percent. Nasdaq says that includes nearly $30 million, a cost associated with its failed bid for the New York Stock Exchange. The shares are currently down more than three percent. After a whirlwind first half of being takeover target, the London Stock Exchange launching its own bid, its share price is pretty much where it started.

I spoke to the chief executive earlier and I asked if he regrets making a move for the New York Stock Exchange.


BOB GREIFELD, CEO, NASDAQ OMX: Well, we obviously regret it didn't work out, but, with respect to whether we regret we did it or not, we certainly do not. And what was fortunate for us, it really was a short period of time. I call it a brief interlude. About six weeks we were involved with it. So, it didn't take up management's time for that long a period of time. And, as you can see from the quarterly results where we set record earnings again, we did perform during that time.

QUEST: Well, your earnings did, certainly, show that, but what the NYSE bid showed also was that you're a management that is still with an eye for acquisition in the right place.

GREIFELD: Yes. In the right place. The NYSE acquisition presented tremendous synergy opportunities and we saw that as an opportunity we could not pass. But, with respect to acquisitions, we do have a very rigid discipline and we have three hurdles that we have to pass before we'll do a deal.

The first is the deal has to accrue (ph) to our shareholders within 12 months. That's a hard enough hurdle.

Second, the deal has to be strategically significant, has to be leveraging the mother ship in some fundamental way.

The third, which now is the toughest hurdle, is it has to provide a higher return than other capital allocation methods we might choose. For example, most importantly, it has to provide a better return than a share buyback might do. So, we have to hit each and every one of those disciplines before we would decide to do a transaction.

QUEST: And London? Does London still potentially seem on your radar?

GREIFELD: Well, I would say right now with our stock price, it's hard for us to do any particular transaction because, if you look at the return we can get from a share buyback, that's quite high when you're trading at nine times earnings. So, I say with respect to any transaction, the bar is quite high right now.

QUEST: We're seeing U.S. companies in the earnings season with remarkably strong, some, in many cases, 19 percent is the average S&P, over earnings estimates. And yet, at the same time, we're seeing an economy that's sluggish and we're seeing a political situation that looks like it's in gridlock. Square that circle for me.

GREIFELD: Well, I'll relate it to our particular situation. So, we've achieved, obviously, record results, as I said, and we did it where equity trading volume was down 30 percent, year on year. And we had recognized going back several years ago, coming into and out of the credit crisis, that this could be a state of being.

So, we have been carefully diversifying our businesses in the last several years that gave us the protection and allow us to continue to perform in difficult times. So, I think our reference point is probably valid for many other businesses. We've been forewarned that we're going into difficult times. Certainly, we have to manage our expenses and make sure that we have revenue streams that are resilient.


QUEST: That is the Nasdaq's point of view.

The software company, SAP, was today's top performer on the Xetra Dax at more than one percent, reporting a strong second quarter. Profits, after tax, up 20 percent. Joining me now from Philadelphia, the co-chief executive, Bill McDermott. Good to see you, Bill, as always. Since we are on the U.S. and you are in the U.S., let's just begin with a thought or two about concerns that you might have as a chief executive of a big company on the debt crisis and what's happening at the moment.

BILL MCDERMOTT, CO-CEO, SAG AG: First of all, Richard, it's good to see you again and thanks for having me. Confidence is a free stimulus and, when the government doesn't come together and get things done for its constituents, confidence suffers. So, we need to raise the debt limit. It's not a choice. It needs to happen. And compromise has to take place in Washington, D.C., and I'm confident that cooler heads will prevail and a deal will be cut.

QUEST: As you look at the way your last quarter traded, some very good results, but so much of your company's performance does rely on a sound economic footing and economic growth, doesn't it?

MCDERMOTT: It always helps. There's no doubt about that, but, what we see now if you look at every theater of the world in software sales, which is the greatest predictor of demand for us, we average 35 percent year over year growth in constant currency, which for a company our size and scale is very good.

What I see, Richard, is a structural change in the I.T. industry where CEOs are now making their I.T. departments align with them around innovation and growth. The companies like SAP, like Apple, like Google, that are innovating are growing and delivering very, very good results. And the companies that are consolidating the past and going after hardware and tired services stories are tending to grow either slowly or not at all. This is an innovation-based economy.

QUEST: Right, but, when that innovation, when you actually have to deal with your clients and your customers, what are they telling you that they want and how is that different post-Great Recession than say that it would have been in the middle of the '90s?

MCDERMOTT: A great question. The big idea is growth. Growth is back on the agenda in the corporate boardroom. And, in the corporate boardroom, there is capital dollars to be invested.

And the areas of interest to CEOs is, first of all, their customers. How do I create a sense-and-respond relationship with my customers? How do I mobilize my work force so they can use the power of mobile technology to remove friction from the customer interaction and get more business? How do I put my business in real time and solve the big data issue?

Data is doubling in the world every 18 months so there's this craving for information and real insight out of the transactional as well as the unstructured data from enterprises so CEOs know what to do. These are big areas. This is what we're focused on.

QUEST: All right, but, in all of those big areas, could you become derailed? Let's just take SAP. Germany with Greece and the Eurozone are in it up to their necks. The United States in it up to its necks. Asia is a phenomenal area of potential growth. How can you be optimistic, Bill?

MCDERMOTT: What's unique about our business model and about the innovation strategy of mobile, of real time analytics, and this consistent core platform that runs multiple industries and multiple market segments, is we spread our risk out in a broad global portfolio, number one.

Number two, the discretionary dollars towards investment are more and more going to software, the brains of the innovation cycle, versus hardware. We're in the software business. We built an eco-system around the SAP franchise and an openness with customers and they're telling us we have innovated in the areas they care most about. These are the biggest addressable markets.

I look at my pipeline in real time because I run my business on SAP software and, as I look at the pipeline and the visibility in the second half, we actually had to up our forecast to the higher end of the range based upon the robust nature of our business. And keep in mind, you mentioned Germany. Germany grew 30 percent for SAP, year over year. It's the most mature market we have in the world. So, rock on, SAP.

QUEST: Bill, always good to have you on the program and we enjoyed talking about these issues. Bill McDermott, Co-CEO from SAP, rocking for Germany and for the U.S.

Now, European stocks ended sharply lower on Wednesday. There was a further downgrade, if that were possible. Well, it most certainly is possible. (SMP) cut from triple C to double C for Greece. Banking shares were most of the worst performers. The (Dax) here off nearly four percent. Lloyd's off nearly five percent. Italian bond yields were higher. Italian bonds were (hit). Union Bank of Italy was down 5.6 percent. And, as you can see, the Mib, the Mibtel, was off the best part of three percent.

There's one year to go until the greatest show on earth. Not the circus, the London Olympics. Now, will the Olympics prove to be of benefit? In a moment, the mayor of London.


QUEST: Parts of Korea have experienced their wettest day in years as floods wash into the major cities. The destruction, of course, is quite serious. Pedram is at the World Weather Center with the details.

PEDRAM JAVAHERI, AMS METEOROLOGIST: Yes, Richard, you know, we've picked up so much rainfall and just look at the hourly observations and we know that over 100 millimeters of rainfall were falling at one point in the past 24 hours just per hour. And you take a look at some of the photographs that's coming in out of Seoul, South Korea.

Again, not only one of the most populace cities in Asia, but one of the most populace cities in the world. And you take a look at the roadways out there and some of photographs that we received from even the iReporters saying, hey, we saw the roads begin flooding up within, say, 7:30, 8:00, local time, and then, eventually, by 11:00, all the water had subsided.

But significant damage to vehicles, to life, to property across that area and this photograph here just puts in perspective because what you're looking at is an apartment complex. The lower two floors of this apartment complex have been inundated by the debris of this landslide that actually entered from the backside of the complex and washed through the community and came out of the front windshield and perhaps the balcony of the apartment there. So, again, it shows you the vast power of mother nature.

And rainfall totals like this. Again, not a small community, we're talking major cities. Seoul comes in with 332 millimeters in a 24 hour period. Chunchon comes in also with rainfall over 200 millimeters. And Pyongyang also tapping into over 130 millimeters of rainfall in a 24 hour period.

So, here's the forecast. The moisture again follows that front that's been sitting in place here, produced heavy rainfall across Beijing in the last couple of days. And the moisture is still concentrated across the Koreas. Seoul, certainly, not out of the question there for over 5 to 6 centimeters, perhaps a little higher in the higher elevations in the next couple of days here with the rainfall across that part of the world.

OK. How about Europe? Take a look. Southern portions of Europe, working your way northern Italy, exiting on into portions of Slovenia, on into the Adriatic Sea there, getting strong thunderstorms that have developed in the past few hours and looking at travel delays out there. Moderate to light, but we do have storms around Amsterdam.

We do have thunderstorms around Brussels. So, a bumpy ride for you there on Thursday and the heaviest concentration in and around Austria, getting some of the heavier rainfall over the next 24 or so hours. And, again, travel delays going to be minimal with the isolated summer thunderstorms in and around Frankfort.

And, also, taking a look at the observations, how about these temperatures? Moscow comes in, temperatures some twelve degrees above the average. Unseasonably warm air across portions of eastern Europe on into areas of Asia there where we have Ukraine and Kiev temperatures at 31. And Helsinki, Richard, how about that? Temperatures up to 27 degrees across portions of Finland.

QUEST: Well, you know, in those Scandinavian northern countries, it may freezing in winter, but, once the summer arrives, it's beautiful. Been there many times.

Pedram, many thanks, indeed.

JAVAHERI: Thank you.

QUEST: London is marking one year until the official opening of the 2012 Olympic Games. Now, at this moment next year, millions will be watching the opening ceremony at the brand new Olympic stadium. The Olympic stadium's complete. The Velodrome's complete. The Aquadrome's (ph) complete.

Pedro Pinto is at Trafalgar Square and is also complete.

PEDRO PINTO, CNN CORRESPONDENT: I am. I can confirm that, Richard. It's a big day for London. Let's face it. I think we could say that for the first time the Olympic bug has really bitten the Londoners because I think it's the first time people are realizing this is just around the corner, one year away.

Now, Richard, I could ramble on about what the Olympics mean to me, what it means to the British people, but why get my opinion when you get the opinion of a man who's very much involved with the organization and who's very much involved with the passion of being an Englishman welcoming the Olympics to town?

The London Mayor, Boris Johnson, joins me. Thank you so much.

I just saw you welcome the world to London to invite people to come here. How excited are you about this?

BORIS JOHNSON, LONDON MAYOR: It's an amazing experience, being mayor, an amazing privilege to be leading this city in the run-up to the biggest thing, the most exciting thing, that our people have done together for fifty years.

You know, this is just a truly, awe-inspiring thing to be running and daily, daily, daily we are grinding away at the problems and solving them, hopefully, and preparing for what I think will be a really fantastic day.

But you've seen (the paths) today, you may have seen the venues are really a long way down the track. They're 88 percent complete. We're looking at all the issues now around the live sites, all the festivities we're going to be laying on, what London will look like and feel like when people come. And, if you want a flavor of what it's going to be like, well, just look around you here today in Trafalgar Square and we've got 366 days to go.

PINTO: It's a big event. It was a big investment, around 9 billion pounds.


PINTO: Thank you very much. With such an economic crisis going on and the pressure to turn a profit, do you feel that pressure to make money in these games?

JOHNSON: It will be an investment that reaps dividends for London and for the whole of the U.K. for generations to come. It's kept us going in Olympic investment in Stratford, around that site. Of course, a huge chunk of east London. It's kept a huge part of the London construction industry moving. They're keeping people in jobs in a very tough time.

And what we're doing is transformational for that part of east London. We're doing things that haven't been done in that part of the city since the Great Fire of London in terms of bringing east and west together. East end has always been the poorer part of the city, a place which people leave instead of arrive into. And it's going to be absolutely transformational. We've got the Olympic Village, the Stratford railway hub, it's going to be quite remarkable. I should think you'd do an in-depth program about it.

PINTO: Oh, we are. Trust me. I wanted to talk about security because, in light of what happened in Norway just a few days ago, there has been talk of a severe threat here in London. Can you assure people that this is going to be a safe games and what have you been doing to make sure that people are protected?

JOHNSON: Well, obviously, as soon as we got news of the tragedy in Norway, our counter-terrorism people were in touch with the Norwegians and at first it looked like it was an al-Qaeda business, the first couple of hours or so, but that rapidly changed. It became clear what it was. And our intelligence (INAUDIBLE), there is no read across for London. There's no real reason for us to change our preparations.

We've got fantastic team ready in the Metropolitan Police Service. Our counter-terrorism operation is very, very experienced and, forgive me, the threat level. I mean, you can never be complacent about this, Pedro. This is always something that you've got to devote the maximum effort to, security, but the threat level is down now from severe to what's called substantial. That means we're making progress, I hope, but, as I say, this is a top priority for us.

PINTO: Boris, finally and very quickly, can you guarantee that this city will still be able to operate on a transport level? Sometimes my commute to work is a nightmare, a lot of my colleagues as well. How is it going to cope?

JOHNSON: As your mayor and as the man responsible for your daily commute, can I sincerely apologize to you for any hassle that you experienced? And quite sincerely. But I just would stress that what some people are experiencing now are the pains that are necessary to put in some of the new signaling that's going in on the Jubilee line, improving the capacity of the central line. We're putting in a 6.5 billion pounds worth of investment in London transport. It's going to be a massive improvement for the whole city and that's thanks to the Olympics. That's one of the reasons why the Olympics is such a great thing for our city.

PINTO: Boris, I can tell you're excited about this. The people here are excited about it. Richard, one year to go. I have to tell you. Growing up, Portugal really didn't have much of an Olympic history. We only got four gold medals. I expect more from my countrymen here in London next year. For now, though, we're just happy that everything from an infrastructure point-of-view is ready and the people are getting excited.

QUEST: You got an apology from the mayor for your commute. What more do you want?

PINTO: I don't want anything else. I want so medals, though.

QUEST: All right. Portugal can wait for its medal. This is where you're going to see the very worst of our nationalities here at CNN. We've got so many hundreds of nationalities working at the network and we'll all be rooting for our own home teams. And that's just as it should be.


America is maxing out its plastic and about to hit the limit. When we come back, what happens when (INAUDIBLE) in a moment.


QUEST: Right. Here it is. The credit card the "Bank of Borrowers" in the United States has been living on for the past 50 or 60 years. On this credit card from the "Bank of Borrowers," that's taxpayers, the bond markets, the U.S. government has been racking up debt after debt after debt. Unfortunately, for the "Bank of Borrowers," who've been lending them money, time has run out.

The credit card bill has now arrived and it shows the sorry state of affairs. It shows from the U.S. Treasury that, basically, spending is now they are overspending by about $118 billion a month. That's minus the interest. And when you look at where the numbers are going, defense has a huge whack of spending. And that really can't have too many cuts. Medicare and federal insurance, not too many cuts. Social security can't have too many cuts. No, the final cuts are left with things like non- security discretionary and the other. It's not a lot to actually save a serious amount of money.

So, the spending is a really serious problem. The debt limit's at 14 trillion. It's been raised 74 times since the year I was born, 1962. And the due date, the U.S. Treasury has just said, in the last hour or so, that August 2 is when they can no longer borrow any more money. There are some people who're suggesting that date might actually be August 5 or August 15. That they can still fiddle around with robbing Peter to pay Paul. But, eventually, it will become clear. The money going out will be greater than the money coming in and they will have to either default or raise the debt ceiling. That is the system and the system that it is at the moment.

So, the "Bank of Borrowers" lending to the U.S. government. The argument may be in the narrow corridors of Washington. The effects of stalemate is felt in every part of the U.S.

Joseph Bencharsky is an internet marketing consultant. He joins me from Mill Valley, California. Joseph, we want you on the program. We don't want a political view, but, as an American, how do you feel about the situation today?

JOSEPH BENCHARSKY, INTERNET MARKETING CONSULTANT: Oh, incredibly frustrated. I feel it's way too politicized and they're really not dealing with the underlying issues.

QUEST: What is your fear? When you and your family and your friends get together, are you really worried about an American government defaulting?

BENCHARSKY: Absolutely. I mean, that's going to cost us more money in the best situation and that's the thing that we can least afford at this point.

QUEST: How did you weather the Great Recession of 2008?

BENCHARSKY: Poorly. I know a lot of people, personally, who are still unemployed after that and the situation hasn't improved. Businesses are just not confident in increasing hiring.

QUEST: Joseph, when we look at the spending that takes place and you can't see this chart that I've got, but when we look at the spending -- defense, Medicare, health, social security -- where do you think cuts should be made? Or do you believe that maybe taxes have to go up to balance this somewhat?

BENCHARSKY: Well, everybody's talking about taxes going up, but it's a matter of undoing the cuts that were done over the past ten years. They haven't generated jobs. They haven't helped the deficit. They've exacerbated it, if anything. I think, defense spending, there's been some recommendations from within the Pentagon as to where there can be cuts. But the social programs, right now, businesses are not expanding because nobody has money to purchase.

QUEST: Joseph, coming back to this idea, if the U.S. loses its triple A rating, it's not the end of the world, but, as an American, how will you feel?

BENCHARSKY: Well, it's awful. It undermines the confidence of the people, the confidence of business, the confidence of finance. It's just a bad decision and it shouldn't even have gotten this far.

QUEST: That's the point, isn't it? It shouldn't have gotten this far.

BENCHARSKY: No, this is not doing your job. Here in California, we have an amendment that said that if the budget is not passed by the deadline, then congress does not get a salary or reimbursement for expenses. And I think we should be doing that at the federal level, too.

QUEST: Joseph, we appreciate your West Coast perspective as an American on what's happening over there. We'll be having more voices from America, the ordinary voices from America.

You can find us, of course, on Facebook. If you've got a view on this, you can email me. The email address is and, as always, the Twitter is richardquest. I'll have a Profitable Moment after the break.


QUEST: Tonight's Profitable Moment.

Within the last hour, the Federal Reserve released its "Beige Book." It paints a cautiously optimistic picture. Economic activity's growing. Consumer spending is up. Read between the lines and there's plenty to keep Ben Bernanke busy.

For a start, 8 out of 12 U. S. districts reported a slowdown. And while that certainly isn't Euro-style two-speed, a patchwork recovery won't work in the United States.

And, as for jobs, a perennial problem, according to the "Beige Book," the labor market is still soft.

And, finally, not once does the "Beige" talk about default or downgrade. Make no mistake. Debt, downgrade, default is the single most pressing issue facing the world's most important economy.

And that's QUEST MEANS BUSINESS for tonight.

I'm Richard Quest in London.

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

"PIERS MORGAN" is next.