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America's New War: The World Economy

Aired September 24, 2001 - 01:30   ET



RICHARD QUEST, CNN ANCHOR (voice-over): Relief at last. European governments publish emergency insurance (ph) cover for it's embattled airlines. On Testing Times, world markets face another volatile week as a worldwide recession looms.


Hello. Welcome to WORLD BUSINESS THIS MORNING. In London, I'm Richard Quest and I'll have full market analysis in just a moment. First though, let's go to Colleen McEdwards of CNN center for the latest developments in America's war against Terror.

Colleen, bring us up to date, please.

COLLEEN MCEDWARDS, CNN REPORTER: Hey there, Richard, thank you very much. I will do that right now. U.S. Secretary of State Colin Powell says that he believes the government will be able to publish a paper linking Osama bin Laden to the U.S. attacks. He also says the suspected terrorist network must be "brought to justice." U.S. officials are scheduled to meet with Pakistani leaders Monday in Islamabad. They're expected to discuss the specifics of Pakistan's support of any U.S. military efforts.

British Foreign Secretary Jack Straw will try to win Iranian support for the International Coalition against terrorism on his visit to Tehran. He'll also bring a message from the United States to Iran.

Now, in New York City, tens of thousands of people gathered Sunday for a prayer service honoring the dead and missing. More than 6,400 people still missing in New York; 261 are confirmed dead. Those people, as you know, from right around the world.

While flags across the United States have returned to full staff, nearly two weeks after the attacks on New York and Washington, it is a symbolic end to a national mourning period in the United States.

And as CNNs Kelly Wallace tells us, it may signal the beginning of the next phase in the U.S. war on terrorism.


KELLY WALLACE, CNN REPORTER (voice-over): A solemn moment. President Bush and the First Lady look on as U.S. Marines return the American flag to full staff at the Presidential retreat. The message: Americans should try and get on with their lives; while on the Sunday talk shows, a different message.


WALLACE: Secretary of State, Colin Powell, says the campaigns first phase is targeting suspected terrorist, Osama bin Laden, and his al Qaeda network, and announces the administration is compiling the evidence against him.

POWELL: I think, in the near future, we'll be able to put out a paper, a document, that will describe quite clearly the evidence that we have linking him to this attack.

WALLACE: Such a document would help solidify the support of tentative Arab and Muslin allies as Bush advisors step up the pressure on Afghanistan's ruling Taliban.

CONDOLEEZZA RICE, NATIONAL SECURITY ADVISOR: The Taliban's roll in this is to stop harboring this network, to stop harboring it's training, to stop harboring Osama bin Laden and his Lieutenants.

WALLACE: But the Taliban leaders announce they no longer know where bin Laden is; a claim that Defense Secretary calls 'laughable.'

DONALD RUMSFELD, UNITED STATES SECRETARY OF DEFENSE: The fact is that the Taliban's do know where the al Qaeda organization is and the fact that they're saying that they don't is simply not credible.

WALLACE: The President also focuses on the financial war; planning to sign an executive order, freezing al Qaeda's assets in the United States, while he and his aid's continue gearing up the American people for what is to come.

POWELL: War is war and there will be casualties. I think the American people understand that this is a difficult situation.

WALLACE (on-camera): That is a message the President and his aids will continue to deliver. Mr. Bush may even travel outside Washington this week urging Americans to be patient and preparing them for a war unlike any the U.S. has ever seen.

Kelly Wallace, CNN, The White house.


MCEDWARDS: British police have been more time to question three people arrested in connection with the attacks on the United States. One of the suspects is a 27-year-old Algerian man who had been training as a pilot.

Terry Lloyd has more now on the investigation.

(BEGIN VIDEOTAPE) TERRY LLOYD, CNN REPORTER (voice-over): Police have begun a thorough search of this house in Birmingham, where a 40-year-old man was arrested after tip-offs from the FBI. Until this weekend, the Muslim family lived here; giving neighbors and police no cause for suspicion. Now the man's being questioned by anti-terrorist branch officers.

Also under arrest is 27-year-old Lot Phi Raesi (ph) and his wife, Sonya (ph) . They were seized at this rented house in Bockshire (ph), directly below the Heathrow flight path. Raesi (ph) is said to have upgraded his flying skills at this nearby aviation school. According to neighbors, his wife works for Air France (ph) . Today, his uncle said they were both innocent and would soon be released.

RAESI'S UNCLE (ph) : This is a scapegoat or something like that. I know that, honest, honest. In two days' time, (UNINTELLIGIBLE) you will know the truth. Honest. I'm not wrong.

LLOYD (on camera): Does he have any links to terror groups?

RAESI'S UNCLE (ph) : You are asking me a silly question. He is just 25 years old, he is bright, should be pilot. He's got link with terrorist company?

LLOYD (on-camera): Detectives have been granted an extension, enabling them to keep the three suspects in custody until mid-week, but they have until Friday, at the latest, to decide whether to charge them, or they must be released.

Terry Lloyd, ITN, Stockland Yard.


MCEDWARDS: All right. That is the latest for you from the news desk. Now, back to Richard in London.

Richard, a new week has already begun for some of the world's markets, but I suspect it may be a volatile one.

QUEST: Oh, I think that's putting it mildly and in fact, Colleen, that is the key word of the week because coming up next, we'll get an update on the trading day in Asia; has there been more volatility there? Plus, staying in business; European airlines get help from their governments.

It's CNN at 37 past the hour.


QUEST: It's CNN WORLD'S BUSINESS THIS MORNING and world market's heading for another volatile week. In Europe, all the main indices were sharply down last week. Here are the numbers: London's FTSE was off almost seven percent over 123 points; Frankfurt's DAX was down 22.4, that's nine percent on the week. The Paris CAC 40 and is down 178 points, that's a loss of six and a half percent on the week and Zurich's SMI down 288. Now, some corporate news that's just in: Deutsche Bank has said that it's agreed to buy Zurich's Scudder unit in a deal worth some two and a half billion dollars. Scudder's fund unit is worth, as I say, two and a half billion.

It's been widely speculated that Duetsche would take over Scudder, now we've received confirmation.

The industry hardest hit at the moment is, of course, the airline sector. The immediate problem has been the insurance companies' threat to withdraw war and terrorism coverage. That would have grounded most carriers almost immediately. Now EU finance officials will provide guarantees to cover these risks. However, cover will begin, for a limited period, possibly after 30 days. And individual governments will have to write to charge a premium. European carriers have threatened to stop flying this week without such cover.

Tom Bogdanowicz reports.


TOM BOGDANOWICZ, CNN REPORTER (voice-over): European Union Finance Ministers throwing the continent's beleaguered airlines a lifeline. For a month governments will provide essential war risk insurance that is no longer available from the insurance market.

The emergency measure stops far short of the $15-billion aid package the United States is providing for its airlines. But it satisfies one of the requests of European carriers.

DIDIER REYNDERS, BELGIAN FINANCE MINISTER: will be immediate to address a specific short and failure in the commission insurance market to insure that third-party cover for war and terrorism remain available.

BOGDANOWICZ: Even before the terrorist attacks in the United States, some European carriers were in trouble, Belgium's Sabena and Swiss Air both suffering from heavy financial losses.

Since September 11th, airline space not only increased security costs, but an estimated 30 percent downturn in passenger numbers across the Atlantic. In response, British Airways is cutting 7,000 jobs. Germany's Lufthansa is postponing plane orders, and Spain's Iberia says it cannot rule out job cuts.

ANDREW BARKER, UBS WARBURG: If the airlines are very seriously impacted by this in a way that they weren't a week ago, none of the big airlines could have remotely considered trying to get state aid of any kind. They've been campaigning for years against that.

BOGDANOWICZ: But some low cost carriers aren't sympathetic. They're responding by cutting fares to fill up their planes. They say bigger airlines should do the same.

MICHAEL O'LEARY, CEO, RYAN AIR: Aircraft prices will fall; airport costs will certainly fall, and I think our immediate reaction here is not to stick out the begging bone and ask governments to pick up the tab. It's to get out there, let's lower the airfares, and let's keep people moving.

BOGDANOWICZ (on camera): The longer-term outcome of the current plights of airlines could be more mergers and alliances among them, with the once difficult regulators removing some of the obstacles that have stood in the way. More mergers will likely job losses, but it could prevent some airlines going out of business altogether.

Tom Bogdanowicz, CNN, London.


QUEST: Now, separately, finance officials have stepped up their efforts to investigate any suspicious movements on Europe's financial markets, both before and after the attacks.

British Airways, which has seen its market value drop by some 40 percent, has said it may consider selling key assets to help the balance sheet, selling part of Heathrow Airport, the airline's main hub, could bring in as much as $3 billion. But BA denied reports that it's considering a huge reduction in service at Gatwick Airport south of London, and that it may quit the base altogether.

More woes for the European carriers. I'm afraid we must go through them all in one by one. Pilots, at the loss-making Belgian airlines, Sabena, failed to meet a Sunday deadline to reach a deal with management over a crucial restructuring plan. That plan called for a 13 percent cut in staffing levels. The two sides are expected to call in an outside mediator.

Sabena's main shareholder, Swiss Air, is also under pressure. The company's board asset group is reported to have met on Sunday to discuss a rescue plan for the loss making airline.

Great deal on airlines, but there have been markets that were open, Tokyo wasn't one of them, it's been closed for a public holiday. Now that we will catch up on those that have been open and doing business, and Jill Neubronner is in Hong Kong to bring us up to date.



Well, most Asian markets are lower in Monday trading, following the fallen Wall Street. But Hong Kong Hang Seng index is more than one percent firmer as investors pick up stocks, such as Banking Group HSBC, that have fallen sharply since the September 11th attacks in the U.S.

Seoul's Kospi is also edging higher on games and telecom shares, which is seen as a less-affected by the external impact of the U.S. attacks.

Mobile carrier, SK Telecom, and state run Career Telecom, are both up more than two percent. South Korea's economy is not likely to be as resilient. On Sunday, the country's Finance Ministry lowered its growth forecast for the year to a range of two and three percent from an earlier estimate of four percent.

Taipei weighted index is off its lows for the day. It had been down more than three percent in early trade. Traders say the selling is due mostly to another rise in the island's unemployment rate.

Taiwan's jobless rate rose to a record high of 5.12 percent in August, topping the previous record of 4.92 percent in July.

Airlines around the world have less than 24 hours to obtain the necessary insurance cover for their jets or be grounded, major insurance and capping their war risk and terrorist coverage as of midnight Monday, GMT.

The South Korean government will allow Korean Air and Asiana Airlines to pass on the higher costs of risk premiums to passengers, a move which could save the carriers millions of dollars each month.

Australia's air industry is receiving $5 billion U.S. dollars in government aid to protect it from rising premiums. And Hong Kong authorities are expected to outline their own insurance plan for carriers, such as Cathay Pacific, later Monday.

Well, the Japanese yen continues to strengthen against the U.S. dollar despite repeated attempts by the Bank of Japan to reverse the yen's rise. The BOJ reportedly bought up to $10 billion worth of dollars in New York trading hours Friday in order to weaken the yen and help Japanese exporters. Despite those moves, they say the dollar is likely to weaken further.


CRAIG CHAN, ING BARINGS: I think for the short term, yes, we'll continue to see the dollar lose its strength against the currencies. It's very much dependent on this growth story. Investors have been much heavily dollar buyers. We're going to see that disappear as the profit really continues to deteriorate. But I believe that, once we do see growth stabilize, that's going to come from the U.S. Fed cutting rates from the fiscal stimulus from the government, then we'll certainly -- the dollar could gain strength again against the global currencies.

NEUBRONNER: Well, the yen is currently trading at 116.30 to the dollar, compared with Friday's close of 116.61 in New York.

Well, that's a wrap of Asia's financial markets of the day, and now it's back to Richard in London.

QUEST: Jill, many thanks.

Still ahead for us, the risk of recession and some grim predictions on what's likely to happen to the U.S. economy. James Stewart will join me from Weavering capitol. It's going to be WORLD BUSINESS THIS MORNING in a moment.


QUEST: It's a Monday morning. It's coming up to roughly 10 minutes to the hour. Traders will return to Wall Street more in hope than expectation this Monday.

The Dow Jones industrials suffered its worst week since the Great Depression in 1930, dropping 15 percent in a week, down 140 points. The NASDAQ composite also took heavy losses, down 47. The S&P 500, the broader markets down 18 points, lowest levels since 1998.

Exactly what's happening in the economy might become clearer after this week's economic reports are published. And as CNN's Allan Chernoff reports, the United States, we might not like what we see.


ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): Pomtamkin Buick and Chevrolet in Mid-town Manhattan says vehicles are selling again as low finance rates lure shoppers.

PHILIP LOMBARDO, POMTAMKIN BUICK AND CHEVROLET: People are showing up again this week, as opposed to last week when there was a problem getting in and out of the city and because of the disaster that happened.

CHERNOFF: It is the critical question facing the economy now, to what degree will consumers resume spending, especially on the big ticket items like cars?

UNIDENTIFIED FEMALE: I'm still a little anxious about what's happened. I think I'm still suffering from some post traumatic stress.

CHERNOFF: Given the public's concerns about security, declines in the stock market and rising layoffs, no one can know for sure.

ROBERT HORMATS, GOLDMAN SACHS INTERNATIONAL: It's awfully hard to predict how severe the damage to the economy will be because of the terrorist acts. The economy was weakening even before those terrorist acts. It will be considerably weaker as a result of them.

CHERNOFF: Many forecasters do expect a recession, and for some industries, it can already be labeled a virtual depression. Airlines flying near empty planes, slashing schedules and awaiting a $15 billion government bailout package. U.S. carriers have announced 80,000 layoffs since the attacks. In the next few days, Delta plans thousands more.

Hotels have seen occupancy rates sink.

J. W. MARRIOTT, MARRIOTT CORPORATION: It's very tough. We rely tremendously on air travel, and as you know, air travel is way down, and so we're going to have a very tough September. CHERNOFF: Aircraft maker Boeing is suffering order cancellations, and insurance companies are facing claims in the billions of dollars.

Yet, some industries stand to thrive, military contractors and security services. Then, there are companies whose sales tend to hold up no matter what the economy is doing, supermarkets, food and drug manufacturers, as well as makers of medical products and the hospitals they supply.

(on camera): Increased Federal spending and lowered interest rates from the Federal Reserve should help businesses, but most important of all to the future of the economy is the degree to which Americans return to one of their favorite pastimes, shopping.

Alan Chernoff, CNN Financial News, New York.


QUEST: You know that all saying, "When the going gets tough, the tough goes shopping." But a U.S. recession may be all but inevitable. So, will Europe escape a full-blown recession? Too soon to tell, according to two key European central bankers.

The Bank de France, is Jon Claude Trichet said over the weekend, that it was totally inappropriate to talk of recession in the case of Europe. And the Bank of England's, Sir Edward George, also speaking on Sunday, said it was too soon to say whether the UK would slip into recession.

James Stewart, a Chief Economist at Weavering Capitol, joins me here in London. And are they right to say 'too soon'? I'll allow them a little leeway to give a -- to put a brave face on a worsening matter, but are they -- are they just basically ignoring the obvious?

JAMES STEWART, CHIEF ECONOMIST, WEAVERING CAPITAL: Well, I think Sir Edward George is closer to the mark. He says he's unsure. Trichet says he's very confident there will be no recession.

I think in the case of the UK, we'll just escape a recession. But in the eurozone, and I think several economies are already very close to recession. For example, Germany, zero growth in the second quarter.

QUEST: I mean, I support it is essential -- it is essentially a banker's job to try and put a brave face on matters, but I can't see how a recession can be avoided.

STEWART: Well, you've got to say, what are the policy levers that would prevent one? And in the case of the UK and the U.S., there are two levers available: fiscal policy, basically tax cuts; and, monetary policy. In the eurozone there's only one, that's further interest rate cuts. Because of the rules of the stability pact, there's no room at all for fiscal stimulation of the economy.

QUEST: And what's your gut feeling for how far interest rates will be cut at the next various meeting, the Fed meets later in the month, as does the ECB. What's your feeling?

STEWART: I think we're looking at a range of 25 to 50 basis points, depending on the Central Bank that we're talking about. But the key thing is that we cannot rule out intermeeting rate cuts. If the situation develops somewhat seriously, and I'm thinking here particularly not just of the economic data, but in terms of equity markets.

QUEST: Now you're saying what economic data. We've got a raft of it out this week. Very briefly, take me through what we've got and why is it important.

STEWART: We've got U.S. final second quarter GDP. That might show negative growth, which would be very worrisome indeed. And we've got inflation data out in France and Germany. That's significant because it will show then the core of the Euro zone, we're close to hitting the two-percent target of the European Central Bank, which will lead to lower interest rates.

QUEST: Many thanks indeed for coming in and bringing us up to date.

The effects of what happened, of course, have rippled across many businesses in just about every sector. The few have been spared, unusual perhaps, the video game market. Some companies like Sony and Microsoft are already changing the content and packaging of their games, in the aftermath of the attacks.

For example, games featuring counter terrorism, or the New York skyline, have been removed. The $20 billion industry also faces an overall slowdown in consumer demand, and with the new uncertainty in the world's economy.

Box office business suffered over the weekend for movies. The top 12 films grossed just $44 million; that's down 15 percent from last week.

The most valuable player was Keanu Reeves' baseball drama, "Hardball," which hit $8.2 million in its second weekend.

A disappointment though was the pop singer, Maria Carey's big screen debut. Her musical drama "Glitter" ended up at number 11, with $2.5 million for the three-day period.

I'm Richard Quest in London. I'll be back for another business news update in 30 minutes. As we come to the top of the hour, stay tuned to CNN for continuous coverage of America's war against terrorism. It's CNN.




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