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QUEST MEANS BUSINESS
Morgan Stanley's Net Profits Half of Expectations; Southwest Profits Up; Dodd-Frank Two Years On; US Stocks Struggle Amid Mixed Earnings; Nokia's Loss Grows; European Markets Make Gains; Singapore Banking Culture; Euro Holds Steady, Pound Rises; Four Major European Banks Linked to Rate-Fixing; Marks & Spencer Opens Bank Branch
Aired July 19, 2012 - 14:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MAX FOSTER, HOST: A Frank assessment. We talk to the author of Wall Street's reform act two years on.
A miss. Morgan Stanley shares tumble as earnings fall short.
And German lawmakers say yes to aid, Spanish protesters say no to austerity.
I'm Max Foster, this is QUEST MEANS BUSINESS.
Hello to you. Now, Morgan Stanley has missed earnings expectations, and investors are dumping shares. The bank made a net profit of $563 million in the second quarter. This time last year, it was reporting a sizable loss. Alison Kosik joins us now from the New York Stock Exchange. Was this a real shock, then, Alison?
ALISON KOSIK, CNN CORRESPONDENT: -- did, and this is number six and actually the most disappointing of the six banks that have reported. Morgan Stanley shares, by the way, are tumbling almost 7 percent right now.
With Morgan Stanley, both earnings and revenue fell short of analysts' forecasts, so it is the first bank, once again, to significantly miss expectations for the second quarter. And this came because -- partly because of a big drop in trading revenue.
And it's something that I've certainly heard here at the New York Stock Exchange, many traders coming up to me, worried about the volume every day, how the volume here is so low because people are just not trading.
For Morgan Stanley, it capped off what's regarded to be one of the worst quarters in recent history for the company. Many believe that Morgan, which was the lead underwriter for Facebook's IPO, was largely responsible for the botched public debut in May.
And though it's not immediately clear, Max, how big of an impact that had financially for Morgan Stanley, it certainly caused a huge hit to the company's reputation. Max?
FOSTER: Alison, also, another separate story. We'll come back to you in just a moment, but Southwest Airline's net profits jumped 42 percent it he second quarter to $228 million. Raising fares is one of the ways the airline is coping with higher costs, actually.
(BEGIN VIDEO CLIP)
GARY KELLY, CEO, SOUTHWEST AIRLINES: We have introduced a number of new initiatives over the last several years to provide more sources of revenue for Southwest Airlines to do combat with higher energy prices in particular. Competition is also more aggressive and stronger today. So, we have a number of challenges out there.
(END VIDEO CLIP)
FOSTER: OK, Alison, we're going to come back to you a bit later on in the program. We had some technical issues there. We've got to go to this next story, which is a system so broken it may be impossible to fix. The head of the international regulator, the financial stability boss, says libor may be too structurally flawed to survive.
On Saturday, it will be two years since the Dodd-Frank Act was signed into law in the United States. It was designed to clean up the US financial system by cracking down on complex trades and giving more protection to consumers.
But two years on, the controversies continue, while measures like the Volcker Rule still are stuck in limbo. The act's co-author, Congressman Barney Frank, joins us now, I'm pleased to say, live from Washington. Thank you very much, indeed, for joining us.
REP. BARNEY FRANK (D), MASSACHUSETTS: You're welcome.
FOSTER: It's been a momentous two years, in terms of this legislation of course. Are you pleased with where it's at at this point?
FRANK: Yes. I didn't have unrealistic expectations, and you have, for instance, in derivatives, which were going largely unregulated for a long time, we do have an unfortunate situation where the main derivative regulator is divided in two: the Securities Exchange Commission, which was the financial regulator, the Commodities Futures Trading Commission, which had its start in the agricultural era.
Logically, they should be combined. Politically, the agricultural interests would resist being merged with the financial. So, that's the delaying a little bit the derivatives, complicated by the fact that we had not anticipated a Republican takeover of the House, and they have used their power there to starve those agencies of funds.
But even with that, they are making, finally, the steps that we need. They recently, just a week or so ago, took the basic step towards putting the derivative regulation into effect.
In other areas, the Consumer Bureau, that's up and running, and in fact, a day ago, levied a big fine against the Capital One credit card company for abuses. There are others being said that are going to work. The shareholders of Citicorp voted down the pay package for the CEO and his aids under the bill.
So, yes, I think -- there is a problem of some of the industry people flooding them with comments and threatening to sue if they're not all read, and the Republicans carry the funds. We've been working through that, and I have no doubt by the end of the year, this will be fully up and running.
FOSTER: Let's just listen to Jamie Dimon, he's head of JPMorgan. He's part of the banking industry, a big figure, of course. Let's hear what he has to say about all of this.
(BEGIN VIDEO CLIP)
JAMIE DIMON, CEO, JPMORGAN CHASE: Regulation is not binary. It's not left or right, it's not Democrats, Republican.
These are complex things that should be done the right way, in my opinion, closed rooms -- I don't think you make a lot of progress in an open hearing like this -- talking about what works, what doesn't work, and collaborating with the business who has to conduct it. We want a safer system, too.
(END VIDEO CLIP)
FOSTER: Well, there's a key banker talking about this, but actually, you faced a lot of resistance, haven't you, from the banking sector? So, on the face of it, you're both saying the same thing, but this is one of the problems, isn't it? Just 123 of the rules have actually be finalized, so less than half of the rules that you wanted --
FRANK: But it's in the nature -- it's in the nature of journalism, I don't fault that, to focus on the areas of disagreement. There are, in fact, several things that are already at work that are in agreement, and we talked to all of the financial community when we went forward with this.
In the Volcker Rule, by the way, it was delayed because they were listening to the community. I think in the end, they're going to come up with a fairly tough rule. It's going to look something like what's being done in the UK, and that's, of course, another factor.
We've worked hard to make sure that, to the extent possible, the United States, the United Kingdom, and the European Union at the very least are in coordination. And we've done better on that than some people have predicted.
FOSTER: In terms of popular support, it does have a lot of popular support, according to many of the polls that have been carried out in recent times, there, in the United States.
But is more regulation really the answer here? We've seen in so many banking crises recently that it's about a bad culture, lack of oversight, as opposed to problems with the regulation. Are we not being distracted here? Should we not be focusing on oversight.
FRANK: Excuse me. Excuse me. Lack of oversight and regulation -- that's what regulation is, to some extent, it's oversight. In the first place, much of what has now been uncovered, for instance, libor, predates the legislation. The JPMorgan Chase losses predate the legislation being put into effect.
Yes, you want to change the culture, but one way you do that is by penalizing people who abuse things. And in fact, what you've seen, particularly from libor, which is really a shocking example of dereliction on the part of some of the leading financial people, it under -- it argues for more regulation. It argues against this self-regulation and deferral.
It's also the case, as I said, that in -- with regard to derivatives, the Republicans have deliberately underfunded the agency. We are fighting to try and get that up. But it seems to me a little unfair not to give the agency the funds it asks for and then complain it's not doing its job.
FOSTER: You've also got a support in this legislation from Barack Obama, less so from Mitt Romney. Are you concerned that as we go into the presidential election, actually a lot of your rules are going to be pulled back because Mitt Romney may win the argument.
FRANK: If Romney wins -- if Romney wins -- and you're right, it is a popular bill, and that's why the Republicans, they've tried to repeal the health care bill, for example. They've had votes on that. But they won't put the repeal of this to a vote, because they know it would be unpopular.
But if Romney were to win, which I don't expect, but if that were to happen, then he would make the bill very, very weak, because he would simply appoint to the regulatory positions people who would not do anything.
So, yes, that's one of the great differences between Romney and Obama. If Obama wins, this bill will be fully in effect fairly soon and have, I think, a very good impact. If Romney wins, we will be back virtually to the era of no regulation, with all the risks that entails.
FOSTER: Barney Frank, thank you very much, indeed, for joining us. We appreciate your time.
Now, let's have a look at the big board, then, because there's been some ups and downs today on Wall Street. And actually, it's only up very slightly right now, 12,928 coming up towards the 13,000 mark, psychologically important, of course. Weekly jobless claims rose more than expected, one of the factors playing in there.
A mixed bag of earnings, as we'll show you, now. We're looking at Nokia, for example, here in Europe. Q2 net loss ballooned to $1.7 billion from $450 million in the same period last year. It warns the third quarter will be just as bad, actually, as it continues its transition from its own Symbian software to Microsoft's Windows Phone.
Nokia shares were among the top performers in Europe this Thursday, up by nearly 12 percent. They're still down more than 60 percent, though, for the year so far. Investors were delighted that the company wasn't bleeding cash, actually, cash reserves, as fast as analysts had feared, at least.
Elsewhere, in Europe, all the major indices showed some gains. Electronic sector shares rallied. In Paris, Alcatel-Lucent was up 5.5 percent. In Frankfurt, Infineon, 4.6 percent up, and in London ARM Holdings up 2.8 percent.
Coming up, the finance minister of Singapore on bringing back a culture of responsibility in banking. Richard is there, too, when we come back.
RICHARD QUEST, CNN INTERNATIONAL (voice-over): Singapore built its economy on exports and foreign investment. Now, as the economy's matured, this city-state in Southeast Asia have had to rethink and work hard to diversify.
It wants to encourage the growth of new industry, those like biotechnology, tourism, high-tech, value-added.
And now, the efforts of government with industry, a part of a proactive policy that defines the place.
TAI HUI, STANDARD CHARTERED: The forward thinking is critical. If you look at the ways government drives policy, you'd be thinking a lot of the Singaporean, how they talk about their own personal career or their lives. There's a certain survivor mentality.
QUEST (on camera): Singapore is one of the world's leading banking centers, so the latest crisis in banking is of great concern here at the treasury. The minister for finance, Tharman Shanmugaratnam, told me there needs to be a return to a culture of responsibility.
THARMAN SHANMUGARATNAM, SINGAPORE MINISTER OF FINANCE: Well, I think at the heart of it all, is culture. We have to find a way of getting back to a system where you have individual and collective responsibility.
QUEST: Have you seen the sign outside the elevator to your office? "Integrity is doing the right thing when nobody's watching."
QUEST: How did the banking community lose that moral?
SHANMUGARATNAM: Yes. Well, first, I think we went through a phase of regulatory naivete on both sides of the Atlantic and globally. Deregulation went to far. Second, self-regulation didn't work. Part of the reason was an excessive faith in mathematical models. And a loss of the role of judgment and responsibility amongst boards and senior management.
If you think about it, these are not problems inherent in banking or global finance. These are problems especially of the last ten years, and we need a whole new phase of supervision that involves being part of the game, being in the institution, being in constant touch with what's happening.
QUEST: I cannot remember a more complicated, complex, and risky time, because there are so many pitfalls, and there are no easy solutions to any of them. Is that a fair assessment?
SHANMUGARATNAM: I think it's a fair assessment, and part of the problem is that the solutions, if implemented immediately, can make the immediate problem worse. So, for instance, re-regulation of banking, capital, liquidity, and so on, if you move too quickly, it doesn't help the current situation, which is one of deleveraging and a downward cycle in economies.
Second is the more fundamental problem, which is social compacts. A whole system of social entitlements has been built up, particularly in the most advanced countries, that now has to be unwound.
QUEST: That's a very big third rail of politics.
SHANMUGARATNAM: And it's the most fundamental problem we face. Not the financial crisis, but the crisis in social policies.
QUEST: You're asking people who have grown up expecting to lower their expectations.
SHANMUGARATNAM: And to find a way in which we are fair to the younger generation. Because the easiest thing that politicians can do is to appease voters who are older by taking something away from younger people who are not yet voters. And that's what's been happening, and I don't think that's sustainable.
QUEST: Change is taking place in Singapore. It's taking place at all levels. It's taking place in industry, it's taking place in politics, it's changing placing -- taking place in government. The last elections saw that. Do you believe managing that change is going to be painful?
SHANMUGARATNAM: Managing that change will be more complex. Why? Because the population is no longer homogenous. It's a diverse population. People have different interests. And it's no longer a situation where everyone is on an escalator and regardless of what job you're doing, you tend to move up year to year.
You've got to make much more effort, now, to help the lower end of society to keep up to upgrade and to be part of prosperity.
QUEST: What I'm asking is whether or not having a more open form of government here --
QUEST: -- will necessarily change the economic model.
SHANMUGARATNAM: What is critical is that as we become a more pluralistic society, we keep a certain compact. The core has to be very visible, very clear, and has to be a core that inspires confidence not just in our own population, but amongst investors. And I believe we can.
In other words, we can agree to disagree on some issues, but we feel very clearly what's in our interest as Singaporeans and about maintaining stability and maintaining some common vision for the future.
QUEST: To manage that change and maintain stability. That's the goal of the government. The critics say it will be a challenge that will be difficult to do.
Richard Quest, CNN, Singapore.
FOSTER: Richard, thank you very much. And it's time for our Currency Conundrum, now. Here's today's question. What is the lightest coin ever to be produced by the US Mint? Is it A, the silver three-cents, the bald eagle quarter, or C, the Roosevelt ten cents? We'll have the answer to that later it the show for you.
The euro is holding steady against the US dollar. We're seeing some decent gains for the British pound, though. It's up by almost half a percent against the greenback. One pound buys you $1.57. The yen is also moving higher this session.
FOSTER: It began with Barclays, now the rate-fixing scandal is getting wider. Four more major banks in Europe are now on the investigators' radar for allegedly fixing the Euribor. Reports today suggest the investigation is focusing on a single trader with links to all four banks. Emily Reuben explains.
EMILY REUBEN, CNN INTERNATIONAL CORRESPONDENT: The scandal of libor- fixing first exploded here in London, but the shockwaves are now spreading across the world. There's a rate-rigging investigation in South Korea. Singapore and Hong Kong have also announced reviews, and Reuters say the TIBOR has been under investigation in Tokyo since March.
And in Europe, the European Commission has confirmed that it's investigating the fixing of the Euribor rate.
STEFAAN DE RYNCK, SPOKESMAN, EUROPEAN COMMISSION (through translator): We're going to propose the manipulation of these references indices should be penalized, should be deemed to be market abuse that is open to criminal sanction.
REUBEN: Not surprisingly, confidence in the world's rate-setting systems is now being questioned. Mervyn King, the governor of the Bank of England, has written to all central bankers asking for a meeting in September in Switzerland to discuss radical reforms to libor.
And there's more. Today's "Financial Times" reports that one former trader at Barclays was the conduit for libor and Euribor fixing. The FT says that four banks are now being investigated: HSBC, Credit Agricole, Deutsche Bank, and Societe Generale.
According to the paper, the Barclays senior trader is suspected of requesting traders from other banks to submit particular rates. The paper links the trader to the person known as "Trader E" in documents published by the UK regulator the SSA into the Barclays libor scandal.
In one e-mail, he writes to traders with other banks, "If you know how to keep a secret, I'll bring you in on it. We're going to push the cash downwards on the IMM day," and finishes by saying, "If you breathe a word of this, I'm not telling you anything else."
Well, today, the Fed chairman, Ben Bernanke, and the global financial regulator Mark Carney suggested possible alternatives to libor. "The markets," said Carney, "must have absolute confidence in libor."
Maintaining that confidence is critical. These benchmarks are closely woven into the fabric of the world financial markets.
Emily Reuben, CNN, London.
FOSTER: Now, an iconic British retailer whose reputation is built on socks, frocks, and good quality food. Now, Marks & Spencer is turning up his shop as a High Street bank. The first branch of M&S bank is now open for business in London's Marble Arch. It's one of 50 branches which are due to be trading by the end of 2013.
Marks & Spencer will offer things you can't get at most High Street banks. It'll be open until 9:00 PM on Monday to Saturday, and even on Sunday afternoons. But it will all come at a price. An M&S current account will cost you around $23.50 a month.
Marks & Spencer is one of the UK's most trusted brands. In the wake of the scandals at Barclays and HSBC, that could be a big draw for those who've lost faith in the bigger High Street banks. I spoke to M&S money CEO, Colin Kersley. He told me that more and more retailers are venturing into banking, and that for Marks & Spencer, it was a logical next step.
COLIN KERSLEY, CEO, M&S MONEY: We've had a business that's been going successfully for 27 years, we have a full range, a full suite of products outside of the current account. We sell cards, we sell loans, we sell savings. And three and a half, four years ago, we were looking at where we continue to take our business and how we continue to grow.
So, in talking to our customers, looking at he environment, which was changing, it was a natural extension of the business to go into current account and banks. What we didn't know at that time was the world would still be in such a mess three and a half years on.
FOSTER: And you must be benefiting from that, because Marks & Spencer are a very well-regarded brand, constantly comes up very high on trust ratings, doesn't it? So, people are looking to trust their banks. So, you'll try to capitalize on that, and the fact that they don't trust the big banks?
KERSLEY: Well, Money Supermarkets sent out some statistics yesterday that basically showed --
FOSTER: That's a website.
KERSLEY: It's a website, an aggregator, that 19 percent of customers now are just absolutely fed up with their banks and will move. That's the highest figure ever.
Add that to the fact that the M&S brand is the most-trusted brand in the UK, yes, yes, we are benefiting anyway, but we have been doing for some time. We've taken on almost half a million new customers across our product range in the last three years.
FOSTER: And how do you live up to those expectations? Are you a safer bank in terms of higher deposits, which you balance against what you loan out? Or how are you going to guarantee that there won't be any problems?
KERSLEY: We're no safer in the sense of we're a member of the financial compensation scheme. So, if a customer saves with us, we'll guaranteeing for 85,000. But that's the same as any big bank.
What we will do is we'll do things the M&S way. So, we'll bring the trust, the service, everything that you believe is right with M&S, we'll bring those retail values into banking and into the current account.
And little things, like we've opened Marble Arch today. That store, that bank within a store, will be open every hour M&S store is open. So, if you want to go down there tonight at 10 PM, our bank will be open.
FOSTER: You're also charging for the account, which probably wouldn't have worked a few years ago, because there's a tradition of free banking in this country. But of course, banking isn't free. So, are you appealing to people's logic as well, saying, actually you have to pay for this?
KERSLEY: I don't think there's any such ting as free banking. Somebody has to pay. By doing what we're doing, what we're able to is to say to our loyal, regular customers at M&S, we can reward you through the retail vouchers that you really enjoy. We can also give you --
FOSTER: So, we get vouchers in return for --
KERSLEY: Yes, they get vouchers --
FOSTER: -- banking with you?
KERSLEY: -- to spend at M&S.
KERSLEY: And we've been doing that for three years with an account called Premium Club, and people have been paying 15 pound a month for that already. So, our customers like that, we have redemption figures of 90 percent on these vouchers, so they're very, very well-liked.
But it's not only that. We can bring a credible alternative to their banking arrangements. It's a fee-free banking account. We're offering a savings account at 6 percent. And of course, behind that, we'll have a telephone center in Chester that does 24 hours a day, we'll have full internet banking, and as I say, we'll have the stores open, as well.
FOSTER: So, you're selling reliability, and you're also selling transparency by saying this isn't free, so you do have to get charged for it.
KERSLEY: Everything we'll do will be simple, open, transparent, and consistent.
FOSTER: And what do you think about the bigger banks? Have they created a real mess? Because there's obviously an opportunity for the likes of you.
KERSLEY: I just think the world is changing and has changed, and what I like about it at the moment, we're seeing new entrance, there's a sales co-op today of banks from Lloyds. You've got Virgin, you've got Tesco, you've got Metro. The banking world, the financial service, is evolving. It's not a revolution, it's evolving.
FOSTER: Retailers are taking over banking, aren't they?
KERSLEY: Retailers are getting very much involved. And I just think that's good for the consumer.
KERSLEY: Because it'll give them choice.
FOSTER: It's all about choice. Anger is mounting, meanwhile, in Spain over the country's austerity program. These are live pictures for you of protests in Madrid this evening. We'll be live in the Spanish capital in just a moment. This is QUEST MEANS BUSINESS.
FOSTER: Welcome back, I'm Max Foster. These are the latest news headlines.
For the fifth straight day, heavy clashes have erupted in parts of Damascus between government troops and rebels. Video posted online appears to show a bus on fire in the city's Kadem neighborhood. An opposition group says at least 94 people have been killed nationwide this Thursday.
Syria's president has sworn in a new defense minister a day after a deadly bombing killed his predecessor and two other defense officials. State TV aired these images of General Fahd al-Freij taking the oath of office. This is the first time we've seen Bashar al-Assad since Wednesday's attack, but it's unclear when and where these images were shot.
Investigators are working with surveillance video, fingerprints, and DNA samples to determine who carried out Wednesday's suicide bombing against Israeli tourists in Bulgaria. Bulgaria's interior minister tells CNN the reports the attacker had been identified were wrong. Israel is blaming Iran and Hezbollah for the attack.
The US Agricultural Department says nearly 40 percent of the corn planted across the nation is in poor or very poor condition. The situation is so dire because the US is in the middle of its worst drought in more than half a century. American consumers can expect to face higher prices on foods derived from grain, including beef and dairy products.
Rafael Nadal has pulled out of the Olympic Games due to injury. Nadal is the reigning Olympic tennis champion and was supposed to carry the Spanish flag at the Opening Ceremony in London. Ongoing knee problems mean he will not be able to defend his men's singles title.
FOSTER: German lawmakers have given Spain's E.U. bailout the green light. Members of the lower house voted in a wide majority to give Spanish banks money from the EFSF bailout fund, and with benchmark Spanish bond yields topping 7 percent again today, that is a timely intervention. There are more anti-austerity protests in Madrid tonight, and Al Goodman is amongst them. Al?
AL GOODMAN, CNN CORRESPONDENT: Hi, Max. Well, it is 8:30 pm local time, and that's when this march is supposed to start in Madrid. And take a look. It clearly is underway. Now the U.S. Embassy issued a warning to Americans in the Spanish capital and in Barcelona saying to stay clear essentially of these demonstrations.
There has been some violence in recent days. They said that the Spanish authorities were expecting at least 50,000 people in each of the main demonstrations in Madrid and also in Barcelona.
They are over the austerity cuts and the tax hikes with basically the people out here saying that the attempt by the conservative government to get out of this economic crisis is on the backs of the working people. I'm with a young Spaniard who is out of work, like so many others, Alejandro Erquicia.
You've been out of university for three years. What's it like trying to find a job in this situation?
ALEJANDRO ERQUICIA, SPANISH JOB SEEKER: It's tough. I mean, there isn't job opportunities. There isn't job creation. For young kids, young, recent out of graduates, there are no job opportunities. So without that, it's frustrating and you know, we have to claim for our -- the creation of new jobs.
GOODMAN: OK. You've told me you're going to move. You're dual American-Spanish national, but you've lived mostly in Spain. You said you're going to move to the U.S. soon to try to look for a job. Why are you out here tonight and why have you been to some of these other protests?
ERQUICIA: Well, because this is the only way of showing the government, showing the ones in power that the society, we don't want to -- we don't want to be the ones who are paying for this crisis. We haven't caused it and we're the ones who, with the tax increment, we're the ones who keep on paying for it.
GOODMAN: OK, Alejandro, thank you very much.
Max, back to you.
FOSTER: OK, Al, thank you very much indeed. We'll follow those demonstrations as they continue tonight.
And now Greece needs an image change to win the hearts and wallets of tourists. The admission from the country's tourism minister comes with hopes of last-minute booking surges. Now the end of a grim holiday season.
Tourism revenue, the country's biggest moneymaker, fell 15 percent in the first quarter as the country faced political turmoil, economic decline and social unrest. A little earlier, I asked the minister, Olga Kefalogianni if Greece was fighting back.
(BEGIN VIDEO CLIP)
OLGA KEFALOGIANNI, GREEK TOURISM MINISTER: It's very important for us to change Greece's image. Actually, to restitute Greece's image, because a lot of the negative publicity was exaggerated in this (inaudible), you could say, it was also unfair.
Therefore, we want to give out the message that after the information the coalition government in June, Greece is back to business. There's political stability and this means that businesses can be reassured that they can have a great time in Greece as they always have.
FOSTER: You're having to deal with the businesses involved, aren't you, the big tour operators, for example. So you've been meeting them. What have you noticed about how holidays are being planned right now?
KEFALOGIANNI: Well, there's a trend that was last-minute bookings and this is very important for us because it's actually in the end of this season, but I think we can still have time to recover from low bookings during the two election periods at the sort of stalemate (ph). And the bookings towards Greece.
But it's very important for us also to give the feedback from the industry. It's important to work with them and have their ideas and proposals. We're open up for new and creative ideas from them --
FOSTER: What are they saying the problem is? Why aren't people booking with Greece as much as they were?
KEFALOGIANNI: Well, actually, they are quite satisfied with the rate of bookings after June. Therefore, we understand that it's important that Greece's image is again what it used to be, that Greece is a safe country, a hospitable country and that people can enjoy a great vacation.
FOSTER: Can I ask you, as a minister, how talks are going in the coalition about meeting all the targets that you have to reach in order to get the creditors on size (ph)?
KEFALOGIANNI: Well, it's very important for these that have a coalition government. This means that we can focus on how we can all work together towards our common goal, getting Greece out of the economic situation that it now faces.
It's a challenge for everyone and it's better to join forces than to keep on relating to our political problems. So I think that this coalition government can actually have a positive outcome. It can negotiate in a better way. And --
FOSTER: When do you think a package might be agreed, because pressure's on, isn't it?
KEFALOGIANNI: Yes, there's a lot of pressure. But I think that if we are committed to what we are aiming at, we will have a very positive outcome in the end.
FOSTER: Has there been progress this week?
KEFALOGIANNI: Well, I think that next work is crucial and we're keeping fingers crossed that things will work out in the end, in the best way, not only for the Greek economy but for the European economy as a whole.
FOSTER: Well, wet weather has washed out this year's spending in many parts of northern Europe. In a moment, we'll take a look at why the damp squib summer has sent retail profit margins down the drain.
(BEGIN VIDEO CLIP)
FOSTER (voice-over): It's time for the answer to today's "Currency Conundrum." Earlier, we asked you what the lightest coin ever to be produced by the U.S. Mint was. And the answer is A, the silver 3 cents.
The coin was introduced in the mid-1800s to allow people to buy 3 cents' postage more easily. They were 75 percent silver and 25 percent copper, not only are they lightest U.S. coins ever minted, they're also the smallest. So there you have it.
(END VIDEO CLIP)
FOSTER: Now the IMF is warning the U.K. it may have to relax its austerity measures and cut rates to restart its stalled economy. Its annual report on the country says the U.K. economy has been flat since 2010 and is now in a mild recession. A deluge of wet weather, which we've superimposed here for you, isn't really helping matters.
First of all, Halfords, their chief executive quit after wet weather hit demand with 10.5 percent falls in bicycle sales, camping and leisure product sales in the -- in the second quarter.
Fullers, which is a brewery, covered in rain, as you can see, superimposed, partially blames wet beer gardens for a 1 percent sales slump.
Also Puma says that profits for this year will fall significantly and says a wet summer in northern Europe has added to retailers' pain with some stores starting sales earlier.
Marks & Spencer, we talked about them earlier in their new bank, but they say poor figures are due to the unseasonable weather as well. Quarterly sales down 6.8 percent in the U.K.
JJB Sports partly blame the weather for disappointing demand for replica football kits during the year 2012 championships. Sales were down more than 8 percent and it says England's poor performance may also have had something to do with that. I suspect it did.
And Mitchell & Butlers, pub owner -- the pub owner there blames persistent wet weather for stagnant sales growth in its last quarter.
Jenny Harrison is at the CNN International Weather Center. We moan about the weather, of course, Jenny, all the time. But it is particularly unusual, isn't it?
JENNY HARRISON, CNN METEOROLOGIST: Is it particularly unusual? It certainly is, we know, been the wettest quarter on record across the U.K. and obviously, of course, we've just been hearing it's had a huge impact on all those different areas of business.
But, you know, we have to plan for these sort of things. And the one thing I can tell you is that things are going to finally actually look a little bit better. There's still plenty of cloud and rain showers in the last few hours.
Germany in particular, really seeing a bunch of these storms, very swift moving, though, these storms. But even so, they can do some damage and bring a fair amount of rain, of course, in that short time.
And you can see the showers actually coming down from the north across the U.K. And the reason for that is because of the position of low pressure, and more importantly, high pressure. But in the meantime, the golf, well, it's been a little bit damp and blustery the latter half of this Thursday.
But to Friday again, there is a chance of showers. But they should be pretty swift moving, again, those showers. But the temperature's probably a little bit below average.
So this is the storm coming through. The lows to the north, but look at this, for the first time in I do not remember how many weeks to be quite honest we have got high pressure pushing in across the northwest of Europe. So that means mainly dry. There should be some good sunshine as well.
But as that front sweeps across Europe, we've got a level warning number 2 across these central areas, where we could have some very severe thunderstorms, strong wind gusts and also some large damaging hail.
And then most of the week, beginning the 25th of July, we will hopefully have that high pressure still in control. It means that we should have mostly dry conditions and, in fact, slightly drier than normal for this time of year.
Temperatures, however, a little bit cooler. So it is still going to be fairly cloudy week, but I think the main thing to take from that is that at least the rain should be coming to something of an end.
Now across the north, there are those temperatures, are just below average. Meanwhile across the south, we have had some very high temperatures and as usual these high temperatures in particular across areas of Greece, we have seen it lead to a number of fires. This is Patras, an area about 200 kilometers to the north of Athens.
And this is where there are many fires burning across some very hilly and mountainous areas. So of course, very difficult to actually get to to fight these fires. And then if we head out just off the northwest coast of Africa to the Canary Islands, Tenerife in particular, big fires been burning here.
And of course these are traditionally very dry areas, but the Canary Islands are also very, very windy islands. They're known for some pretty good water sports because of that. But, again, the firefighters really are battling a lot of blazes that are continuing to break out and with the hot, dry conditions, again, of course, these fires are really spreading.
So there is some rain still coming in across the north. Then we have this high pressure and that is looking good across much of the northwest for the next few days. Temperatures beginning to rebound, 19 in London, 20 in Paris. But by the beginning of next week, Max, you could feel temperature in the low to mid-20s with some sunshine.
FOSTER: Goodness me, we won't know what to do or what to wear, Jenny.
HARRISON: I know.
FOSTER: Thank you so much.
Now a programming note for you. We have an interview coming up with one of the most talked-about players in basketball. Fans around the world are following Jeremy Lin's move from the New York Knicks to the Houston Rockets. Tonight on "WORLD SPORT," Mark McKay sits down with the player that gave the term "Linsanity," 22:30 in London.
That is QUEST MEANS BUSINESS, though. Thank you very much for watching. I'm Max Foster in London. "MARKETPLACE EUROPE" continues on CNN.
RICHARD QUEST, CNN HOST: From Madrid, this is MARKETPLACE EUROPE. I'm Richard Quest. The bear eating the berries from the madrono tree, it is the symbol of the city and a symbol of growth. But it will take more than a bear and berries to help the Spanish economy, now in a double-dip recession.
And even as the summer tourist season gets underway, this country has the highest unemployment in Europe, more than 24 percent. A decade-long building boom that turned to bust is now really wreaking havoc across the country.
(BEGIN VIDEO CLIP)
QUEST (voice-over): Coming up, I visit the Spanish town that's weighed down with debts, that will take decades to repay.
And the chief executive of the engineering group, SENER, is looking for trust before recovery.
UNIDENTIFIED MALE: We need to start again, trusting each other and thinking that, yes, we can. We can get out of this situation.
(END VIDEO CLIP)
QUEST: This is Kilometer Zero in Puerta del Sol, the point from which all distances are measured in Spain. I'm going to head east to the town of Pioz. The town has a debt of some 16 million euros, not a great deal, you may say, except there are only 31/2 thousand people living there, and it's the most indebted town in the country.
QUEST (voice-over): Less than an hour's drive from Madrid, and I'm on the outskirts of Pioz. Row after row of new houses, all empty. It's deteriorating, vandalized. Five years after the property bubble burst, it's an all-too-familiar site, 20 percent of housing across Spain sits empty.
Regional government spent millions of euros on the hope that the boom years would continue. They built new homes and infrastructure projects. But today, no one can afford to buy or rent (ph).
QUEST: There. Time to find out what went wrong.
QUEST (voice-over): Amelia Rodriguez was born in Pioz. She became the mayor about a year ago.
AMELIA RODRIGUEZ, MAYOR OF PIOZ (through translator): As the money was coming into the town hall then, they didn't realize this had to stop at some point, that there would come a time when they weren't going to have any money left to pay for the infrastructures.
QUEST: You thought the good times would never end.
RODRIGUEZ (through translator): Spot on. And the good times do come to an end. We'll go back to the good times. But for now, we've got to wait. I hope this is a lesson for everyone.
QUEST (voice-over): The town's landmark castle may be from the 15th century, but it looks in better shape than the empty houses now falling into disrepair. In the shadow of the castle sits the community's swimming pool. It cost a million euros.
And a further 12 million euros were spent on a sewage and water treatment plant. The disgrace here is that even when the project is completed, there isn't the money to keep it running.
QUEST: So here we have a toxic recycling plant costing 400,000 euros and now there's an issue with the person who owns the land.
JUAN YUNTA AYILON, DIRECTOR OF PUBLIC WORKS, PIOZ (through translator): Four hundred thousand euros subsidized by the E.U. and the industry ministry, and everything has been built on land which doesn't belong to the town hall.
AYILON (through translator): As far as I know, fiasco is something that breaks, that can get damaged due to natural causes. This is something far greater. This is utter madness.
QUEST (voice-over): This is the last interview Rodriguez will do as mayor. A motion of censure brought by her predecessor will put the man who oversaw the spending spree back in charge. When you look at the possible solutions, she insists wiping away the debt and starting again is not the answer.
RODRIGUEZ (through translator): No, no, no. Bankruptcy isn't the solution. What it takes is not to spend what we haven't got. It's like in a family. You can't spend more than you earn per month. It's the same with a town hall. We can't spend what we haven't got.
QUEST (voice-over): What they haven't got is people. In 10 years, the population of Pioz has risen from over 600 to around 31/2 thousand. Woefully short of the 25,000 they were expecting, for whom they were building. The numbers simply don't add up today. The residents can't generate the income needed to run the town.
MIGUEL ANGEL MARTIN, RESIDENT (through translator): We can't make it any harder for people, but if there's a good employment policy in place, I think people can work and pay their taxes, and taxes can be raised. Spain is going to come out of it. We're going to recover. Let's be confident and let Europe and the world know they can invest in Spain.
QUEST (voice-over): The financial 11th hour has arrived in Pioz and in towns and cities the length and breadth of Spain that can no longer pay their bills. What they are learning the hard way is that there are no easy answers. It took a decade to get into this mess. It will take just as long, if not longer, to put things right.
(END VIDEO CLIP)
QUEST: The problems in the little town of Pioz. After the break, we're back in Madrid to meet the chief executive of one of Spain's largest private engineering companies. He tells me the recovery won't arrive until trucks return.
QUEST: Welcome back to MARKETPLACE EUROPE in Madrid. They call these towers the Gate of Europe. Ironically, that one is the headquarters of Bankia, which is to receive a multi-billion euro bailout and is the touchstone for Spain's banking crisis.
The towers, though, are a good example of Spain's industrial and engineering success and expertise.
(BEGIN VIDEO CLIP)
QUEST (voice-over): SENER is one of Spain's biggest engineering companies. It's privately owned and started in Bilbao in 1956 on marine- based projects. It now operates globally across a range of sectors, from aerospace to solar power, transport infrastructure and satellites. SENER employs more than 5,000 people across four continents, and it generates an annual turnover of $1.4 billion.
JORGE SENDAGORTA, PRESIDENT AND CEO, SENER: In Spain we have lost our (inaudible), our last year or so in a dramatic way. And we need to recover the trust (ph) in ourselves, the confidence in ourselves. And we are starting to recover the trust in each other.
QUEST: So talk to me (inaudible) kind about the challenges you face doing business here now.
SENDAGORTA: The opportunities that we have in Spain have disappeared (inaudible) many months ago if not years, depending on which sector. And therefore, the challenges, if you want, are over. The challenges are simply continuing the intake of (inaudible) in the world and that would -- that is what we are doing.
QUEST: How quickly did you realize that you would have to either shift resources or shift strategy to pick up the slack, basically.
SENDAGORTA: I would say immediately.
QUEST: What did you do?
SENDAGORTA: We basically reinforced our international life (ph), if you want. So our business development elsewhere. I mean, in Spain, only 3-4 years ago. If you ask a part of your team to move to the Arabic Gulf, they would not move because here they had a good salary and basically they don't want to move. Now they do.
QUEST: Did you see the crisis coming?
SENDAGORTA: (Inaudible) more housing than the rest of Europe combined. And that is -- that is really not sustainable (ph). Now maybe what we did not foresee were the full consequences of that as we have seen later on. But the fact that that (inaudible) would explode, yes, we saw that.
QUEST: On the wider issue, the austerity question, the way in which the books are being balanced, do you believe this is the right way?
SENDAGORTA: Well, I think this is something that has to be done, right? But, no, I don't think that is the only thing that needs to be done. We also need an industrial policy. We need a technology policy. We need policies to support several sectors in which Spain is (inaudible) another world player, such as tourism, such as food production, et cetera. And I think that will come.
(END VIDEO CLIP)
QUEST: The head of SENER, giving us an insight into industrial Spain.
And that's MARKETPLACE EUROPE for this week. I'm Richard Quest in Madrid. Whatever market you're in, I hope it's profitable. And I'll see you next week.
Oh, all right. I can't resist it.