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Eurozone Troubles; Irish European Affairs Minister Interviewed

Aired May 31, 2012 - 14:00:00   ET


RICHARD QUEST, CNN HOST: Disintegration, backlash, a total emergency. May ends in mayhem for the Eurozone. Cash, bonds or just money under the bed, we ask where is it safe to put your money, and heads or tails, more money. We celebrate 60 years of the Queen on Britain's coins. I'm Richard Quest. I mean business.


QUEST: Good evening on the final of a miserable May. The Eurozone is again poised for another month of reckoning, whether it's in Greece, in Ireland and in Brussels, June will be a month that will probably decide Europe's future. Already some businesses are securing the hatches and they are preparing for the worst. Join me in the library, and you'll see just what sort of a grim day it was.

OK, so it starts with Olli Rehn, who has a brutal warning. He says that there is the risk of disintegration. Now he's not forecasting it, but he says the culture -- he's economics commissioner, in case you have forgotten -- at today's news conference he says the culture of Europe needs to change.

There needs to be greater emphasis on stability, but more importantly, he reaffirms the call that European or Eurozone countries need to get together and work harder to stop contagion and ultimately disintegration.


OLLI REHN, VICE PRESIDENT, EUROPEAN COMMISSION: We need to bolster a genuine stability culture in the Eurozone and its member states and a much upgraded common capacity to contain financial contagion and reduce the borrowing costs for its members.

And let's be frank. This is the case at least in the case we want to avoid a disintegration of the Eurozone and instead make the euro survive and succeed for the sake of its member states, and especially over their citizens (ph).


QUEST: Now this morning a report came out from the Fitch rating agencies. It was talking about Greece's exit, or this horrible word, "Grexit." It says there was a rise in material risk of Greeks leaving. However, this is the interesting bit. It described a full breakup of the Eurozone and as unlikely. And it says that the situation is inherently uncertain.

But once again, people talking about what's happening with Greece and a full breakup. And this, perhaps, is the most significant event of the day. Euler Hermes, which is a private sector company, it is an insurance, a bonding, a factoring company and it now says it will not cover exports or trade with Greece.

It says those shipments on the high seas already will still be covered, but because Greece is significantly more risky, it has to protect its clients and it will no longer cover Greek trade. That is the sort of scenario and situation that we have tonight.

The IMF, incidentally, says that Spain has not asked for any financial assistance, even though there are reports around that suggest that's exactly what's happened. The IMF denies that Spain is looking for a bank bailout and it says it's not drawing (ph) up funds of its own.


GERRY RICE, DIRECTOR OF EXTERNAL RELATIONS, IMF: I can tell you the IMF is not drawing up plans that involve financial assistance for Spain, nor has Spain requested any financial support from the IMF.

Let me add in this context that the Article IV consultation will start as a visit to Spain on June the 4th and at that time we will be discussing with government officials and social (ph) partners the recent economic developments and the challenges facing Spain as we do every year.


QUEST: Those challenges are bigger than ever before. Paula Newton explains why the calls for action are getting louder and crucially more desperate.


PAULA NEWTON, CNN CORRESPONDENT (voice-over): The euro crisis may sound like old news, but in Spain, the credit crunch is in full swing. The collateral damage from the housing crash, empty and abandoned homes.

CARLOS ARENAS, EGI REALTORS ASSOCIATION (through translator): The authorities are giving a lot of aid to banks and businesses, but not to individuals.

NEWTON (voice-over): That property crash has ended up as a pile of bad debt in Spain's banking system. Spain is spooking markets, and for good reason, says its former prime minister, Felipe Gonzalez, calling this the worst crisis the country has ever lived through.

"It's a total emergency," he says. "I'm calling for dialogue, understanding and consensus." But consensus is in short supply in Europe, with the European Commission insisting Thursday Spain has to fix its own banking problems that Europe won't ride to the rescue.

NEWTON: And here's what at stake: Spain is now being labeled too big to fail, yet too big to bail. It could cost as much as $875 billion to bail out Spain, and that includes the crippling debt of its banks. That's almost as much as the E.U. and the IMF have already set aside to bail out Greece, Portugal and Ireland combined.

NEWTON (voice-over): The head of the European Central Bank, Mario Draghi, warned European bankers and politicians, they need to disclose their debt obligations quickly and honestly.

MARIO DRAGHI, PRESIDENT, ECB: We are more ambitious, really. We want to have early, candid, complete, thorough exchange of information.

NEWTON (voice-over): The origins of the crisis in Spain, Greece and Italy may be different, but across Europe, the debate is the same: austerity or growth. Italian prime minister Mario Monti has warned austerity can't be the only answer.

MARIO MONTI, ITALIAN PRIME MINISTER: It is obvious that there is going to be, sooner or later, and equally in other countries, a backlash against the very fiscal and structure of discipline that we are imposing.

NEWTON (voice-over): The trouble is that even as Europe's finances are in intensive care, Europe's politicians can't seem to agree just how drastic the surgery needs to be -- Paula Newton, CNN, London.


QUEST: So you're getting a picture of the way things are looking, whether it's in the Eurozone or through the Spanish banks. And it's not surprising in that scenario, confidence is still in short supply on the stock market. It was the second straight day of losses for the DAX.

The FTSE did eke out a small gain, as indeed did the Paris CAC 40. The IBEX, interestingly in Spain, just was off one little tad. Eight Spanish regions were, indeed, downgraded by Fitch.

Now that's the way the equity markets -- we know equities have been such a difficult time. But we move things `round and you see on the bond market, Spanish and Italian yields actually fell back just a tad. Spain now just at 6.5; just Italy at under 6 percent.

But these are the numbers that you need to look at. Yields are still falling in Germany and the U.S. and government bonds, U.S. bonds hit a new record low in the U.S, the -- where, of course, the U.S. has economic concerns of its own.

If you want to know what those U.S. economic concerns are and why the bond continues to fall, look at this. It shows U.S. GDP downgraded to 1.9 percent in the first quarter. Now what's significant about this, down from 2.2 percent, obviously, if the growth is slowing down, if weakness is now becoming far more prevalent, then interest rates remain low for a lot period of time.

Hence, what we are seeing, of course, and what we saw with the German bond yields. We're also going to get job numbers, which, of course, were disappointing as well.

So sullen (ph) May, go away. Only one last day to do that. Alison Kosik is at the New York Stock Exchange.

Alison, didn't want to steal your thunder with the GDP number, but what I am interested in, everybody knew this GDP number was going to be weaker than the first estimate. But tell me why it was weaker.

ALISON KOSIK, CNN BUSINESS CORRESPONDENT: Oh, gosh, there are several reasons why that GDP number was weaker. For one, consumers spent less; and secondly, there was -- the government spending was cut even more, if you can believe that. But if you want to go into more detail, I pulled a trader here from the floor. Stephen Guilfoyle, he's with Meridian Equity Partners.

Richard wants to know why -- you know, we expected GDP to slow. It's 1.9 percent. But what happened here?

STEPHEN GUILFOYLE, TRADER, MERIDIAN EQUITY PARTNERS: Well, the government spent a lot less money, just like you said. I think it's significant that they didn't hang on to 2 percent. I think it's significant that jobless claims were higher than expected, that the ADP number was lower than expected.

This continued a trend we've seen all week of negative, I'd say less than spectacular macroeconomic data. And heading into tomorrow, it's a real big deal tomorrow, the non-farm payroll number and the ISM number as well.

KOSIK: So with this load of lackluster gain that we got today, you'd expect the market to be down much more, and look, the Dow's even in positive territory. What's going on here?

GUILFOYLE: OK. We hit about 1,300 on the S&P 500. That's significant. We bounce from there. Now heading into late June, we had the FRMC (ph) meeting of 20 June. That day, we might see something out of the bed (ph) if this lackluster performance continues.

KOSIK: Are you talking about a QE3?

GUILFOYLE: I'm talking about something along those lines, yes, not an extension of operations, which they can't do that. Probably they have not enough inventory as far as short-term securities goes. So if they do something, it will have to be a quantitative easing. It is an election year. There will be political pressure to do something, and we are starting to crawl rather than walk.

KOSIK: Is this is a situation of sell in May and go away for good? Or are we also in for a real volatile summer like last year?

GUILFOYLE: You're probably in for a volatile summer. But if you see action from the voting members of the FRMC (ph), it's not going to be a negative summer; it'll be a positive summer. You'll see progression in asset prices for commodities and equities.

KOSIK: OK, so Richard, you know what, the Fed could come to rescue, at least if Stephen Guilfoyle is right. He's with Meridian Equity Partners. I'm going to throw it back to you.

QUEST: All right. One (inaudible) -- one, I want just, in a word, Alison, is there a sense from Stephen and others that the wheels are coming off the wagon?

KOSIK: He wants to know, in a word, if there's a sense that the wheels are coming off the wagon.

GUILFOYLE: The wheels are not coming off the wagon. There's no panic. But there is genuine concern. And what's going on in Spain -- and Italy, to a lesser degree -- is a much bigger deal than what's going on with Greece.

So with Greece, I don't think there's going to be a sense of contagion over here. There might be in Europe, where Richard is. But here, I think if you're still exposed to Greece, well, you've made a mistake. As with Spain, much bigger exposure. It could be a much bigger deal if Spain were to leave the Europe or something would happen with their currency.

KOSIK: All right. There you go, Richard, your answer.

QUEST: We thank you.

KOSIK: (Inaudible) silver platter.

QUEST: A silver platter, indeed. The only thing we would expect for that. (Inaudible) worth anything.

Coming up next, Ireland votes on austerity. We'll speak to the country's Europe minister (inaudible). She joins me next, live. This is QUEST MEANS BUSINESS. We're live tonight (inaudible).



QUEST: Ireland is voting on its referendum on the E.U.'s fiscal compact, turnout limited. It was nasty, the weather. The latest polls indicate voters will back the plan. The outcome will have critical consequences, certainly for Ireland's economics and for the future of the Eurozone.

Brian O'Donovan from our affiliate TV3 joins me now live from Dublin.

Brian, simple question, voting may have been brisk in bad weather and -- but the result, would you guess from the people you've been speaking to, if you're allowed to say, give me an indication.

BRIAN O'DONOVAN, TV3: I'm afraid, Richard, it's a case of whoever -- it depends on who you're speaking to. The S side thing (ph), we definitely have, at the north side, saying (ph), oh, there's momentum there; maybe we've convinced people that this is not the best choice for Ireland.

You mentioned in your introduction, however, that pretty low turnout so far, turnout they're estimating to be pretty much as low as 25 to 30 percent, as low as 15 percent in some areas, up to 35 percent in other areas, so really too early to call. Normally for a European referendum, you'd probably be looking at a turnout of about 59 to 60 percent.

It was raining here all day today. That's obviously going to affect turnout. The time of the day as well. At the moment, it's just after 7 o'clock here. The polls are open for another three hours and the hope would be that a lot of people will vote on their way home from work. So we could see that turnout increase.

Three million people in total have the right to vote in this election, in this referendum, rather. But as I say, we're probably going to see a turnout of about 60 percent. Certainly the polls in the lead up to this had things in favor of the S side (ph), some polls suggesting we strip out those "don't knows," 60-40 in favor of the referendum.

However the don't knows are key here, as we've seen in referendums past. If the don't knows swing one way or the other, of course, it can move the balance.

QUEST: Brian, many thanks indeed, Brian at affiliate TV3 joining me live in Dublin tonight.

The fiscal compact is aimed at restoring confidence in the euro. It centers around the balanced budget rule. Now this means a country's deficit cannot be higher than 1 percent of GDP, the structural deficit we're talking about here, not the systemic.

If a country -- or cyclical deficit, I should say. If a country's budget isn't in balance, it will be automatically penalized. The compact says this rule must be written into a country's national law, preferably by the constitution or whatever has the same force. The E.U. doesn't really need Ireland's approval.

The treaty only has to be ratified by 12 of the 17 Eurozone countries to become into effect, and today, parliaments in Sweden, Denmark and Latvia ratified it. They join Romania, Slovenia, Portugal and Greece. In March, the European Commission's president, Jose Manuel Barroso said this treaty was about confidence and reputation for the euro.


JOSE MANUEL BARROSO, PRESIDENT, EUROPEAN COMMISSION: The treaty is an important part in our global strategy to restore stability in European public finances. As we have said before, stability is a prerequisite of confidence, and confidence is indispensable to sustainable growth.

In the eyes of the world, what is at stake is the very credibility of the euro area and of Europe as a whole. Its ability to deliver sustainable fiscal consolidation growth and employment.


QUEST: Ireland's Europe minister, Lucinda Creighton, joins me now, again live from Dublin.

Minister, you may get the votes you want tonight, but with a voting turnout under 30 percent, and with a reluctant yes, it is hardly the endorsement, perhaps, that you would like to have for the way forward.

LUCINDA CREIGHTON, IRISH MINISTER FOR EUROPEAN AFFAIRS: Well, I expect that the turnout will be a lot higher than 30 percent by the close of the polls tonight, and I think that we can certainly expect a turnout in the high 50s, if not 60 percent. So I'm optimistic about that.

In terms of it being a reluctant yes, well, that's a matter of opinion. I've been campaigning all over the country, obviously in my own constituency here in Dublin, and I can assure you that a lot of people are voting yes with great enthusiasm and see this as being absolutely vital for Ireland, for playing our part in stabilizing our currency and --

QUEST: Surely, Minister, I mean, you may be talking to the -- those who are, but you can hardly say with a straight face, surely, that Ireland is voting for this fiscal compact with ebullience and enthusiasm. I mean, it's being voted for, if that's the way the decision goes, on the basis that Ireland needs the support that will come as a result of this compact.

CREIGHTON: Well, I think it's very much about the fact that Ireland needs to see our currency stabilized and the fiscal compact, well, it's not a solution of itself. It's a hugely important element of a solution. And I think Irish people see that very clearly. I mean, if we want Ireland's economy to recover, which we clearly do, well, we need the euro to recover. So the two are absolutely interlinked.

And so I think a lot of people actually are voting enthusiastically for this treaty. Obviously a substantial number of people will vote no, and that's their prerogative. And I think that we have to address some of the concerns that exist in relation to the currency and relative to the European Union more generally, in relation to the whole European project.

We have a big challenge on our hands. I don't underestimate that for one second.

QUEST: Let's just talk, finally, (inaudible) Minister, because today on our program we've heard Olli Rehn talking about how damaging the disintegration would be. We know what's happening in Spain. We've had Mario Draghi talking about it.

The truth is surely now we must be coming to a make-or-break, to use Cameron's words, moment. It's time to, you know, I can use many crude analogies, but it's time to do it or get off the pot.

CREIGHTON: Absolutely, and I couldn't have put it better myself, and I think that the opportunity over the next few short months will be great. If you look at the Greek situation, for example, I think it's hugely unhelpful that people speculate about a Greek exit from the Eurozone.

I think that we have to be determined to work together to find an ultimate solution to the Greek situation and, indeed, to the general Eurozone crisis. But there are some really encouraging signs.

For example, you know, the explicit announcement by the commission in relation to the role of ESM (ph) and the prospect of ESM (ph) being in a position to lend directly to banks. That's something we understand very well in this country because of course, we have been burdened with an enormous debt, which is now sovereign debt, which was originally private banking debt.

And so we want to ensure that that mistake is not repeated.

QUEST: Minister, good to have you on the program. Thank you for joining us. I appreciate you giving us time on what I know is a very busy day for you in Dublin. Thank you.

The Europe minister for Ireland there.

Today's "Currency Conundrum": the biggest and heaviest gold coin in the world. Now it weighs more than a ton. But whose image will you find on this coin? Will you find President Sheikh Khalifa bin Zayed Al Nahyan, Her Majesty Queen Elizabeth II or Lady Liberty? There's the conundrum.

These are the rates. The euro's back below 1.24. It's a two-year low. The single currency's likely to support further, say analysts. Morgan Stanley's forecast is 1.15 if Greece stays in the Eurozone. And that's the rates. This is the break.



QUEST: Now we've been talking a great deal about cups of tea over the last few days. I would imagine a couple of ounces, maybe four, five, six ounces goes into a nice cup of tea. Well, that certainly wouldn't -- in New York City, officials are proposing a ban on super-size sodas to help the city slim down.

The rule would apply to the sale of sugary drinks in cups larger than 16 ounces. That's just (inaudible) considerably more than my dainty teacup. Nearly 60 percent of the adult population of New York is overweight. I've got to be very careful as I say this one.

Maggie Lake joins us from New York.

Maggie, this is my dainty cup of tea. What is your 16-ounce water?

MAGGIE LAKE, CNN CORRESPONDENT: Sixteen ounces, forget about that. Check it out. How about 32 -- 20 ounces, 32 ounces. You're looking at public enemy number one as far as Mayor Bloomberg is concerned right now.

Listen, first it was smoking, then transfats, then calories listed. Now the mayor is setting his sights on sugary drinks, saying that you cannot sell these soon, if he has his way in about a year, in New York City in restaurants, movie theaters, stadiums, even the corner store bodegas. What will be exempt, diet soda, fruit juices, dairy products and alcohol.

But the mayor's saying these things are contributing to a health epidemic that's costing the city about $4 billion a year and that the city simply cannot stand by, wring its hands and do nothing about it. You can imagine, though, that it's got the beverage makers of at least these two drinks in an uproar.

Let me tell you what they have to say about it. It starts with McDonald's. They say that "Public health issues cannot effectively be addressed" by these type of measures, "narrowly focused" bans, as this is way too complex and it needs a comprehensive approach.

Coke goes a lot further, saying the people of New York deserve a lot better than this, and they can choose what they want to drink, that there's transparency.

Here's the thing, though, Richard, and this is what the supporters of Bloomberg are saying. Take a look at this. Now you could say, oh, I don't do the super-size McDonald's thing. I don't really need to worry about this. Why is, you know, the nanny mayor getting in my face?

In our own cafeteria upstairs, this is the maximum, this small drink is the maximum that you're supposed to have, 16 ounces. Even that's big by health measures. Twenty ounces, 32 ounces. This is a small, medium and large on offer right upstairs. So people are saying, listen, consumers don't really know how much they're consuming. It's not that transparent and we need to sort of rule --

QUEST: Maggie, need to pause you there. We'll talk more about it. We need to go to our sister network, CNN, for the John Edwards verdict.