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BP to Try to Reduce the Flow of Oil in the Gulf; Europe's Austerity Trend

Aired June 1, 2010 - 14:00:00   ET


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Gunning for BP, investors are starting to think the unthinkable.

A debt disaster, the ILO warns government cuts could set off a new recession.

And 2 million sold in two months, how can Apple's competitors catch up with the iPad.

I'm Richard Quest. I mean business.

Good evening. Tonight, whichever way we look at things the situation is getting worse for BP, British Petroleum. As the oil keeps on flowing into the sea, the money pours out of the company's coffers. And U.S. President Barack Obama has repeated his promise to hold BP's feet to the fire.

Today, in London, BP's stock closed down more than 13 percent and that hasn't happened to BP shares in some 18 years to be the level where they are now. More than 220 million shares changed hands, far more than usual, this shows that it wasn't just marking down the share price. There was real trading going on.

Traders had gone home on Friday hopeful that top kill, the BP policy of managing to pump things down into the well would plug the leak. Now they know crude oil will be pouring into the ocean until August. And the very best BP can hope for is to restrict the flow until then. The disasters in the Gulf of Mexico has wiped more than a third off the market value of one of Britain's largest companies and one of the world's biggest and most powerful oil groups. It's shares are down 43 percent since the explosion that destroyed the Deepwater Horizon rig on April 20. Now, if you quantified that into actual dollar terms and just look at the way the price has gone, particularly that precipitous drop right at the end. You'll see that BP shares have fallen by a staggering $60 billion in terms of corporate value.

Max Foster is with me now.

The situation was always grim for BP. But it does seem to have taken on a new seriousness?

MAX FOSTER, CNN CORRESPONDENT: Yes, if you look at the markets and all the figures coming out we get a real sense of how damaging this is really going to be to all areas, really, of BP's businesses. Traders are growing less confidence about BP's solvency. And that is a pretty bizarre development when you consider that BP made over $16 billion in profits last year. And BP will find it much more expensive now to borrow money.

According to Bloomberg, investors are now demanding a far higher return to lend to the company. The yield on its bonds is on average is almost 1.5 percent higher than on comparable government bonds. And that is known as a spread, and it has widened a very sharply this session. But here is another measure, really, of how BP shares are performing. How the company, financially is performing. And it is the price/earnings ratio. And it is dramatically different to its competitors. Essentially what we are doing here is comparing the value of the company to the profits the company will make.

So what we're doing it is looking ahead and saying perhaps some company is going to be more profitable in future. It is a measure really of how expensive the shares are. And BP's P/E ratio is a lot lower than the average for the rest of the industry, as you can see. And that is effectively the market saying, that profits will be less in future for obvious reasons.

Now, BP spent nearly $990 million on the response the spill so far. Huge cost, that includes trying to plug the leak, containing the oil and drilling relief wells, as well-and paying grants, also, to U.S. Gulf states, paying damages and federal costs. Now, BP says it is too early to quantify the other costs and analysts are speculating the eventual bill could be anything, Richard, from $4 billion to $25 billion. It is just impossible to measure at this point.

QUEST: Isn't that exactly the point, Max? That nobody knows. I mean, you talk about the P/E ratios which, as you rightly point out, is the measure of how you look at, quantify, backward earnings and forward earnings. BP's is quite remarkably different because nobody does know how much it is going to cost.

FOSTER: No we keep focusing on the cost of fixing the problem, but actually it is the cost of the damages which will accrue and it seems like Obama is putting more and more pressure on BP.

QUEST: The one issue is can BP withstand it? Does anybody actually know the answer to that?

FOSTER: At the moment they're saying profits will be down.

QUEST: Right?

FOSTER: But if you-there are people talking about, you know, as the price falls, the share price falls, it is going be more and more of a take over target. Hayward's position becomes more untenable. Will it be broken up? It depends on how long it is going to go on.

QUEST: Take over, broke up-lovely-well, not lovely. I mean, thanks for that.

FOSTER: Not for BP.

QUEST: Not for BP. Many thanks for making sense of that.

Last week we were speaking to Professor Iraj Ershaghi, the director of Petroleum Engineering at the University of Southern California. When he was with me he had a very interesting way of demonstrating the complex efforts to stem the flow of oil. The professor joins me now once again.

So, top kill didn't work, Professor. We now know they are going for cut and cap, and are you more optimistic that we know this is a short-term measure just to restrict the flow of oil. So we are, I suppose, to stop the oil literally now waiting for the relief well?

PROF. IRAJ ERSHAGHI, DIR., PETROLEUM ENGINEERING, USC: Yes, what they are doing right now is an absolute necessary step. They probably should have done it day one. Because the way the riser is broken it really can't do much. By cutting the existing riser above the BOP, if I can actually demonstrate this for you?


ERSHAGHI: Now you are probably it better. So, by cutting it you are creating a possibility. So this is-if I can show this to you?

QUEST: Yes, please do.

ERSHAGHI: I'm not sure whether you can see this thing or not. So, this is the riser coming up, and it is broken over here. So by cutting the riser here, you are creating the opportunity to connect another riser, that will come, a containment, but bring the fluid through this, to the drill ship and to a vessel. So, it will become like a floating production system.

And that way-

QUEST: But this will-but you would agree that that actually is a containment mechanism, isn't it? There is still going to be oil going into the Gulf.

ERSHAGHI: No, actually, if the seal is perfect and there is a good chance that the seal could be relatively perfect. The reason is that the pressure comes from the downward (ph) is much harder than the water pressure. Although BP is much concerned sometimes that the water may get in, but I think if they put the seal on top of that cut tube then what is going to happen is the high pressure from the bottom is going to force the fluid upward. And if they inject some methanol around that so there is no formation of hydrates, then they are going to continue to reduce it (ph) until the relief wells are drilled. There is no other solution.

Now, the only other thing that could happen, if for any reason this does not succeed, and I don't think it will be a problem. I think they are going to succeed. If this does not succeed, now that they have cut the pipe, they can go ahead and do the next option, which is putting another blow out preventer, which is the whole thing, about 48 feet tall. You put it on top of this pipe and then that will seal the whole thing. So the well is killed basically.

QUEST: Right.

ERSHAGHI: You can kill it.

QUEST: But now, let's just talk about the relief wells because we know, you and I talked about them last week. Since them I've been doing a bit of reading on relief wells. It is quite a difficult-particularly as they are going diagonally across. It is quite a difficult thing, isn't it? To be so precise that you intersect exactly where the blow out well is.

ERSHAGHI: Yes, this technology amazingly exists. It is an old technology actually. It has been perfected. In old technology what they used to do was they will use the detection of the metal in existing well, in a magnetic field that the drilling device will detect. But now they use an active magnetism. That means they will magnetize the existing casing in the well and so what happens is you create a field that operates (ph) at a distance of about 30 feet from the well you detected. And of course if you get to the fine tuning and you can exactly, with a little bit of alteration you can hit the well. This has been done successfully. I think the industry is great in terms of figuring out how you do this coordination system.

QUEST: Right. Professor many thanks and always we will impose on your good nature to come back and help us understand these things as we move on.

ERSHAGHI: Thank you.

QUEST: Professor joining us from Los Angeles.

Now, we talked all about-you just had us talking about cap and cut, or cut and cap. Let's get the latest on BP's attempt to actually do that. Hala Gorani joins me from New Orleans.

Two areas that we will now have to deal with, Hala. First of all is the work that is actually taking place at the moment. What do we know?

HALA GORANI, CNN INT'L. CORRESPONDENT: Right. Well what BP is doing is something similar to what it attempted a few weeks ago. And again, it is fraught with risk and uncertainty. It is trying to saw off a clean section off that riser pipe that is coming off the ocean floor in order to try to fit a cap onto it, to contain the leak. Now as you know, Richard, this is a temporary solution, because at best it will only contain a portion of the oil that is leaking. And the plan, hopefully if all goes according to plan is for the a ship on the surface of the water to siphon off that oil. Now if that doesn't work then that only leaves one realistic option and that is to continue drilling those relief wells on the gulf of- on the gulf ocean floor. In order to relieve the pressure from the main broken pipe and then create basically two new wells.

Here is the issue though, it is June 1st today, and what does that mean? It means it is the official beginning of hurricane season. If severe weather is headed toward the Gulf Coast, then that ship that is siphoning off oil will have to move and we're back to square one.

QUEST: And the other thing, of course, Hala, and the key question is the pressure being put on BP, which now, of course, for obvious reasons by the federal government and by President Obama. They continually ratchet that up, don't they, politically?

GORANI: Yes. And politically, in fact, being associated with BP seems to have become a liability; the Obama administration announcing today that they will not hold joint news conferences with BP anymore. This could be analyzed as an effort to, by the federal government, by the White House, to distance themselves from BP which has come under unbelievable fire over the last few weeks. So, yes, it is a political issue as well.

For BP, it is a financial one. I'm sure you've covered their stock price and how much of their market cap has been wiped off. But for the White House as well, the important thing for them now is to appear in control.

QUEST: Hala Gorani joining us from New Orleans, covering that part of the story.

When we come back in a moment, last year governments all agreed the thing to do was spend, spend, spend. It's good for the economy, they said. When we come back, it is the new prevailing wisdom. Cut, cut and cut some more, we'll see who is cutting what and the question of austerity. This is CNN.


QUEST: This week we're focusing on austerity. And today the European Union defended the need for plans to help governments cut their budget deficits. Laszlo Andor, the EU's employment commissioner, told trade union leaders the short-term priority is to make a credible exit from the crisis. If all this sounds very familiar it is because it really is. At the G20 in April finance ministers said pretty much the same thing.

And now we're left with a period of belt tightening. A diet of fiscal responsibility, Euro Zone countries such as Spain, Italy and France are embracing austerity before bond investors leave them no alternative. Spain cuts civil service wages by 5 percent in 20210 and then froze them for next year. More than $2.6 billion will be cut from public investment funds. The $19 billion of total Spanish spending cuts will cut the deficit to 9.3 percent this year, 6 percent, next.

And in France, the priority there aiming to (ph) resort to retire is tackling the deficit, a national priority. The country has pledged to cut France's deficit to 3 percent by 2013. Central government spending is frozen the country is aiming to raise the retirement age from 60, but there is fierce public opposition.

And so to Italy, well, one of the more recent countries; $30 billion in budget cuts for 2011 and 2012. The object here to reduce the deficit to 2.7 percent of GDP by 2012.

All this week on this program we are going to be looking at the various effects on the questions of austerity, looking at it from economics, from workers, from politician. Let's begin tonight by talking on the question of the economists. Earlier I spoke to Jim O'Neill, the head of global economic research at Goldman Sachs, International. And I asked him about the fact that exit strategies have become linked to austerity measures. I wanted to know how serious he thinks the crisis is.

JIM O'NEILL, GLOBAL ECONOMIC RESEARCH, GOLDMAN SACHS, INT'L.: I think there is a lot of evidence to suggest people need to be careful. You know, I talked to you off camera, and I'll repeat it. You know, I came into this business 29 years ago and Italy's budget deficit was 105 percent-or its debt, sorry, it was 105 percent of GDP. First country I ever followed. It is about that today. And you know, Italy has managed to keep things going, ever since then. So, having a high level of debt isn't a valuable indicator of anything. Rising deficits and debt, you know, that's a pretty worrying sign. So, and there is a number of countries that have got that.

QUEST: But the markets have punished countries that have this scenario of high debt and high deficits. To some extent governments-

O'NEILL: They've not punished the U.S. and the U.K.-yet.

QUEST: To some extent-


QUEST: To some extent the governments that have introduced these austerity measures have had not choice.

O'NEILL: Well, that was what I was going to go on to say. There is a lot of evidence, historically admittedly much of it from the emerging world. It is when the markets do, do that you can see a different path between those that respond by raising taxes, and/or ignoring. And those that respond by cutting government spending and throwing in a few supply side reforms. Generally speaking that latter camp, let's call it the responsive guys, actually end up doing pretty well from it. It doesn't feel like it at the time, but they end up prospering on the back of it.

QUEST: What those that?

O'NEILL: Countries that cut spending, introduce supply side reforms like-a highly important thing in this instance, right now, in Europe- raising retirement age, it all sounds very tough on people, but actually a lot of history suggests you do those things you are going to end up with a happier life.

QUEST: Are you worried that we are in a second stage of this crisis?

O'NEILL: What worries me is beyond what we have talked about so far. I'm worried that our governments, who realize they have to preside over all this stuff have got to stick with a lot of populism. So, blaming finance in many different parts of the world is even more popular and more trendy than being austere. And that, I think, and it is tough coming from the investment bank saying stuff like this. Because people are like, oh, yeah, he would say that.

But what is key is that we have a resurrection of the G20 coordinated spirit on financial market improvements. You have these random unpredictable things coming out of Germany recently, with the short sale ban, the sudden (UNINTELLIGIBLE) with the Volcker rule in the U.S. The various oddities going on the U.K. ever since the bonus tax. And, you know, the one thing that connects them all is let's punish people in finance. Which is great and probably justifiable, but you can't choke off the mechanism of providing capital to those that need to take risk. Because that is why people won't buy Greek bonds and Spanish bonds, because they are being scared with-you know there isn't the same marginal capital around. And that is absolutely key.

QUEST: Back to austerity. Red, amber or green, if you have an austerity meter, as to what you think is happening out there at the moment. What do you think it should be?

O'NEILL: I think it should be amber.

QUEST: You just go for the easy option there. I'm going to get it to flash.


O'NEILL: Listen, I think that the key is that it is right to respond to the market pressures, but you don't want to go overboard. Because there is evidence, ironically, increasingly throughout many Western economies, of recovery of a more normal nature happening. And you don't want to choke it off, because then the whole problem and ultimately for those most threatened by it, it would become even worse. There is one thing to have government cutbacks but it is coming on top of an economy going back into recession as well, not nice.


QUEST: That's Jim O'Neill of Goldman Sachs International. And there is his flashing amber as we consider the question of, indeed, austerity.

Here in Europe the trading day started off dreadfully. Shares mostly shook off their losses by the close of play. There is hope that the recovery in the U.S. is beginning to build a bit of a momentum, largely on the back of some economic numbers. Join me over in the library, if you will. At one point, London's FTSE was down more than 2 percent. But there was a bit of a rally and as you can see, and this is even more impressive, because BP, which is a very large component, within the FTSE, was actually down 13 percent. So, for the FTSE to end just around there is OK. PRU, the Prudential was among the best performers. It is failing in its attempt to renegotiate its take over of AIA, part of the AIG Group, the AIA, the Asian Assets. And frankly, investors loved that. They didn't like the deal. They thought PRU was paying too much. And now the fact that it may collapse is giving them some respite. Look at that, even the DAX and the Zurich SMI managed a little head up there.

The euro staged a bit of a come back. It's all relative. Having touched a four-year low, against the dollar, of 1.211, we are now back above $1.22. And bordering upon, just bordering upon $1.23.

The resignation of the German president over the weekend did undermine confidence in the Merkel government. The German government, of course, remains the anchor for the euro, and indeed for the bunde, which is the main reference government bond within the euro system.

Gold up $7.82, we're still some way off the all-time high, just about $20 or $30 off from that. But even so, at that sort of level there is an interesting-well, you can see the momentum. Up $7.82, perhaps that is what we might have expected, bearing in mind the touch and tinge of uncertainty.

Now, when we come back, we're going to continue looking at the questions of austerity. The international labor organization says the actions of governments slashing their deficits could be enough to tip economies back into recession. They are also worried about the affect on ordinary working men and women. The director general is next.


QUEST: Welcome back.

The electronics manufacturer Foxconn has come under severe criticism over a spate of suicides amongst it employees in China. In recent months 10 workers at the huge Foxconn plant, in the city of Shenzhen, have taken their own lives. Labor activists say that workers poor quality of life is to blame. CNN's John Vause was allowed into the complex to see for himself how they live and work.


JOHN VAUSE, CNN INT'L. CORRESPONDENT (voice over): Rarely does the world's biggest supplier of electronic and computer parts open up to the outside world. Foxconn, best known as the maker of Apple's iPhone and iPad is obsessive about secrecy and security. This complex is spread over less than a square mile, and 300,000 mostly young workers from the countryside, live, sleep and work, here.

(On camera): And this could be their first job away from home, right?

LIU KUN, FOXCONN SPOKESMAN: Most of them, most of them this is the first job.

VAUSE (voice over): And a growing number of these workers are either killing themselves or trying to. And Foxconn doesn't know why.

"We've never seen anything like this before," says Liu Kun, the company spokesman.

Workers spend long hours on the assembly line, not only supplying parts to Apple, but also for tech giants, Dell, Hewlett-Packard and Nokia, earning less than $300 U.S. a month. Under the watchful eye of Mr. Lu we talked to this young woman.

(On camera): So, a model happy employee?


(Voice over): But critics say that is not the whole story.

GEOFFREY CROTHALL, CHINA LABOR BULLETIN: They wake up, they have breakfast, they go to work, they work a solid shift, they come back to their dormitory, they sleep. It is a very dehumanizing place and the workers are little more than machines there.

VAUSE: Employees live in dormitories, eight to a room, common to factories in China. Often roommates, though, will not know each others' names.

(On camera): Do you know these guys? Do you know their names? Do you know where they are from and all that kind of stuff?

"She arrived three days ago. I don't know her name," she says.

CROTHALL: There is no real sense of community there. And I think that is one of the significant factors behind this alarming number of suicides.

VAUSE: And Foxconn admits managers have been known to abuse workers if they make mistakes or miss deadlines.

"What we can, and must, change is the rude attitude some managers have toward their workers," Liu says.

While this complex is like a city within a city, with three hospitals, fire stations, restaurants and supermarkets, recreational facilities are few. Five pools, libraries, and 400 computers. That is one for every 750 workers. The company has set up a hotline.

(On camera): How many suicides have you prevented in recent weeks here?

UNIDENTIFIED MALE: Already in one month.

VAUSE: In one month, yeah?

UNIDENTIFIED MALE: Actually maybe over 30 or more.

VAUSE: More than 30.

(voice over): Counselors have been called in. And in this stress room, employees can work out their frustration. Even so, Mr. Lu says another suicide is a matter of when, not if.

"I don't think our prevention is enough to stop the suicide trend."

(On camera): So, what could be happening here, according to some experts, has all the hallmarks of what is known as a suicide cluster. When the idea of suicide quickly spreads amongst a group of people, often teenagers or young adults. Still, none of that is putting off the hundreds who line up everyday hoping for a job.

(On camera): Have you heard about people who have been dying in Foxconn, some people who have committed suicide?

"Some people might find it stressful and difficult work," he says, "but it's not a problem for me. Because for many young workers moving to the city, a job at Foxconn is still a much better option than staying at home on the farm." John Vause, CNN, Shenzhen, China.

And when we come back, if you are looking for a job you are not alone. More than 200 million people around the world are unemployed. We'll look at their prospects of finding work, in a moment.


QUEST: Hello.


This is CNN, where the news always comes first.

The Turkish prime minister says Israel's attack on an aged flotilla is an important turning point, saying the world is facing a state that he called "openly murdered innocent people."

Israel says its commanders were attacked when they stopped a Turkish flagship from breaking the blockade of Gaza, so they fought back, killing at least nine activists on board.

And Fionnuala Sweeney will have more on this, of course, including a report from outside the Israeli detention facility at Beersheba. That's on "WORLD ONE" in just over half an hour from now.

Al Qaeda has posted a message on Internet Web sites saying its number three leader has died. It didn't give any details about the death of Mustafa Abu al-Yazid, commander of al Qaeda operations in Afghanistan. U.S. sources tell CNN they believe Yazid was killed recently in Pakistan's tribal areas. They say he facilitated terror plots and controlled the group's finances.

A sad anniversary is being marked in Paris and Rio de Janeiro.


QUEST: It's been a year since Air France Flight 447 crashed into the Atlantic on a flight between Brazil and France. Two hundred and twenty- eight people on board were all killed. A mass was held in Rio and a monument has been unveiled in Paris. The plane's voice and data recorders have never been recovered, so the cause of the crash is still an aviation mystery.

The death toll from Tropical Storm Agatha has jumped to 149. More than 80 percent of the fatalities took place in Guatemala, where at least 90 people are still missing. El Salvador and Honduras were also hit hard by the weekend storms. The rain stopped Sunday afternoon and river levels are now finally beginning to drop.

And so, an E.U. report says the jobless rate in the Eurozone hit 10 percent a one point in April. It's the highest level since the 1990s. The ILO -- that's the International Labour Organization -- is warning politicians not to make things worse. Now, the ILO, in its latest report, says financial instability is putting the global economy -- economic recovery at risk. It forecasts for the worldwide unemployment rate this year at 6.5 percent -- historically high and, of course, it's very disparate between the developed and the developing countries.

But it does mean that more than 210 million people -- that's putting it into real lives.

I'm joined now by the director general of the ILO, Juan Somavia from Geneva, in Switzerland.

Director General, the -- the position is as follows. Governments are now starting to in -- introduce their austerity measures with a view to cutting their deficits. But you believe now may not be the time and the effect is going to be too serious.

JUAN SOMAVIA, DIRECTOR GENERAL, INTERNATIONAL LABOUR ORGANIZATION: Probably the objective is a -- is necessary and a good one. We need to reduce debt and deficits. But the timing is wrong. We have to be able to -- this will -- to combine growth and job creation with reducing the -- the excessive spending.

This essentially means that if we continue on this track, growth will come down and unemployment will grow and social tensions will become higher.

But it is not inevitable. You can certainly combine policies to have a balanced approach in which you...

QUEST: Right.

SOMAVIA: -- maintain policies that stimulate growth, that you reduce the -- the debt, but as you keep a global economy going. It is all interconnected. There are spillovers all over the place. You cannot have an either-or approach to this.

QUEST: Right. But as we look at the jobless numbers and the -- the levels of growth necessary for bringing it down, there's no doubt from the ILO's point of view that those who are least able to withstand the pressures are the ones going to be affected, is that right?

SOMAVIA: Yes, that's -- that's -- that's what history and practice tells us. They say it's not about not reducing the debt. It's about having an exit strategy...

QUEST: But...

SOMAVIA: -- that protects the most vulnerable and maintains the policies that create jobs.

QUEST: But let...

SOMAVIA: You can combine those things.

QUEST: But let me ask you, if you have a situation like we saw with Greece and we've seen with other E.U. countries, where the market is saying cut your debt or we will punish the government with higher bond rates, surely economics dictates that we have to take these measures.

SOMAVIA: Look, I understand the reaction of governments to markets, because they have the power to do what they're doing. But let's not forget that the public policy cannot be guided by the anxiety of traders. We know that they can get it wrong. We know that they can have -- be over reactive. And we already saw that in 2006, 2007, 2008 -- the rating agencies, they don't see the problem coming. They don't see the crisis coming and they now may be creating a crisis that was not there.

QUEST: So what is your fundamental worry, though, if we get -- I mean, obviously, the balancing act has to be correct. But you are assuming that they're going to get the balancing act wrong in saying that they shouldn't even start doing it.

What's your fundamental fear for social cohesion?

SOMAVIA: No. I am not saying that they should not begin to do it. I think that we should begin. But you have to combine it with policies that continue the growth stimulation and with policies that don't affect the global economy.

For example, keep credit flows going. They have gone down 10 percent in the U.S. and around 4 percent in Europe. Ensure that if you withdraw, you leave social protection and job policies in place and an active labor market policies. In -- if you put these things together in a different format, you can deal with both problems.

Certainly, you need to act on the official consolidation, but you need to keep growth going.

QUEST: Do you fear, sir, that as the policies bite -- and we know that the austerity measures will not take effect or not bite for another 18 months.

Do you fear a risk of so -- of a breakdown in social cohesion -- putting it crudely, more trouble on the streets?

SOMAVIA: You see, I -- I think that people want to know that whatever you do is fair. You know, in crisis conditions, people understand that, you know, you have to cope with it. But when you feel that the measures are not fair, then -- then you have the complication. Let me tell you about the way that I'm talking from the perspective of the real economy of the -- of this tripartite position (INAUDIBLE) of employers, workers and governments.

You know, many governments are looking at what's happening in Europe and are getting worried. And a lot of investors and employers are saying well, where is my...

QUEST: Right.

SOMAVIA: -- demand going to come from in the future?

So this is not just the (INAUDIBLE) of social cohesion, it's about the (INAUDIBLE) of the real economy. And you cannot concentrate on one measure if you don't balance it off with another that produces jobs and growth.

QUEST: Director General, many thanks, indeed.

The head of the ILO joining me from Geneva in Switzerland.

Many thanks, sir.

All this week on QUEST MEANS BUSINESS, we're going to come back to this issue of Europe's age of austerity. We'll be talking to Robert Zoellick, the president of the World Bank -- how he thinks Europe is coping and whether developing countries should make similar cuts.

QUEST MEANS BUSINESS all this week -- the question of austerity.

The World Cup is about more than just football, not for the fans perhaps watching TV. But when you're the host nation, the bottom line is just as important as the score line. South Africa is spending more than expected.

Can it afford it and is it worth it, in a moment?


QUEST: Welcome back.

FIFA has made a record amount of money ahead of this year's World Cup in South Africa.

What about the host country?

As Nkepile Mabuse now reports, the games are costing South Africa more than expected and the predicted revenues are falling fast.


NKEPILE MABUSE, CNN CORRESPONDENT (voice-over): South Africa has spent over $4 billion on stadiums, airports, roads and public transport. In just under three years, the cost of hosting the first football World Cup on African soil has more than doubled while the jobs, tourism and economic growth the tournament was supposed to bring with it now appear to have been overstated.

Udesh Pillay of the Human Science Research Council has been doing the World Cup some (INAUDIBLE) gears. In his recently published book, he argues that initial predictions just didn't add up.

UDESH PILLAY, HUMAN SCIENCE RESEARCH COUNCIL: If you look at contribution to GDP through the event, it's going to be marginal, anywhere between .2 and .4 percent. Now that figure has been calibrated from about 4 percent four years ago.

MABUSE: Foreign visitor numbers have also been scaled down, from an expected half a million to 250,000 and less. And many of the jobs the tournament has created were temporary -- doing little to dent unemployment figures.

But the government insists World Cup-related spending shielded the country from the effects of its first recession in 17 years.

KGALEMA MOTLANTHE, SOUTH AFRICAN DEPUTY PRIME MINISTER: (INAUDIBLE) were going through the recession. The only sector of our economy that showed positive growth was construction. And -- and it was precisely because of what we had invested in -- in -- in this delivery of this infrastructure.

MABUSE: There's no question that the improved roads and airports will stand the country in good stead. Whether spending billions on a sports tournament was the best way to improve infrastructure is what's being debated. The decision to build new stadiums when old ones could have been renovated at a fraction of the cost has also come under fire, the stadium in Capetown being a case in point.

PILLAY: FIFA wanted a stadium right next to the beach in the middle of the city (INAUDIBLE) in order to create that image and the spectacle associated with the World Cups because that's what FIFA is about, it's about the spectacle. It's about money. It's about profit generation. The legacy that it leaves behind in economic and social terms, FIFA has real -- really no direct interest in that.

MABUSE: Not so, says the football governing body's Jerome Valcke.

JEROME VALCKE, SECRETARY-GEN, FIFA: That may be a benefit people will feel. But I really think that the country has changed.

MABUSE: He argues that the World Cup has speeded up necessary improvements in South Africa.

VALCKE: The country is a different one. Even in terms of security, I mean the security people have obtained from the government more money than ever they could imagine without having the World Cup.

MABUSE: Finances aside, there is consensus on one soft intangible -- that bringing the World Cup to Africa may begin to change negative perceptions about the continent.

Nkepile Mabuse, CNN, Johannesburg.


QUEST: Well, one thing that we know, come rain or shine, those -- that World Cup will get underway later next month -- this month.

Rain and floods in Eastern Europe are the order of the day. Appalling weather in London this afternoon.


QUEST: Guillermo is at the World Weather -- oh, well, there you go.

ARDUINO: Yes, it is.

QUEST: Oh, no. I know...


QUEST: Are you sure?

Are you sure about that, Mr. Arduino?

ARDUINO: Yes, I am, 100 percent. Thank you very much. We'll catch up tomorrow.


ARDUINO: I think -- it is going to improve, yes. And especially you mentioned Eastern Europe. You know, the problem there is that we have the floods. And the rivers, of course, go northward into the Baltic Sea. So Poland, I'm concerned about Poland, the Czech Republic, Slovakia here.

You see the low?

It's unrelenting bad weather. It is not moving. It's stationary. So it remains in here. It's bringing rain so we may see rivers flooding. You see, that's the problem. It is transitional weather.

Richard, look at this, through Thursday, clear and mild. So you see it's going to get better.

I mean how often do we get that, that we get more rain in the east than in the west?

Not so much, especially if we compare Britain with what's going on in the Ukraine now, Moldova, Romania, Bulgaria and Turkey and even Belarus. There we'll see some more strong storms.

Now, look at what's going on -- Richard said awful weather in Britain, in London, especially, you see, because this is in the last 12 hours.

Guys -- everybody in London was under this event -- rain event, bad weather. But behind may get a little bit cooler. But things are getting better. And you see the rain that we're going to have is going to skirt along the coast here of Ireland and move northward. So we do not expect such bad weather.

Galicia is also bad, you see here, and northern parts of Portugal all the way into the Cantabrian coast in the Bay of Biscay, Andorra, too.

So I would say in the Low Countries, it's not nice either.

But OK at airports anywhere from Paris into Dublin, Copenhagen, Vienna, as we get the east -- to the east, that's where the problems start. So we see probably delays at the airports.

Temperature-wise, not so bad for Wednesday. I said it was going to cool down, but it's not bad. Maybe in the morning and in the evening in London, but 22 degrees sounds good; Madrid, 32; on the other side, ahead of the storm, in Kiev, 29 there in Ukraine. So it's pretty warmer. And also here in Turkey and Greece, the Aegean Sea, Crete, Cyprus looking fine, you see. So high pressure in here taking over.

Another area that I'm looking at is the tropical cyclone in the Arabian Sea.

You know why, Richard?

Especially India and Pakistan that are talking about like 50 degree marks. And I'm -- I'm speaking Celsius. In Pakistan and India, they're waiting for the monsoonal flow that it's not getting. But look at how this is forming so nicely, this tropical cyclone. This is going to bring, of course, battering waves and very intense winds, but maybe we will see a relief from these dry and hot conditions in India and in Pakistan, up to 50 degrees, especially in the north. It is not until July that we see some winds of change or some monsoonal flow hitting the northern parts of India and Pakistan -- Richard.

So we'll see what happens.

I'll keep you up to date -- back to you.

QUEST: We thank you for that, Guillermo, at the World Weather Center.

I have made a note and I shall be following closely.

ARDUINO: Thank you.

QUEST: Besides, I might even follow his forecasts on the ap that I downloaded on this contraption, because I bought one.


QUEST: So did one million -- thank you, Guillermo. You didn't get one yet, not that I'm aware of.


QUEST: So did 1,999,999 other people in the space of 59 days. Find out why the iPad has been flying off the shelves at the rate of one every two-and-a-half seconds.

But more importantly, what does it mean for competitive?

Can anyone compete at that sort of rate, in just a moment?


QUEST: All over the world, tech funds are going rather potty for the iPad. IPad -- now, I've actually also managed to go out and buy one. And you will see, assuming I manage to do this properly and manage to sort things out, if we just take a look, you'll see what I mean. Apple says it sold more than two million worldwide since it launched the tabloid computer back in April.

Now, if you think about it, there are more than a million of those that were sold in the United States. Looking at the total sales, that's one every two-and-a-half seconds. It took Apple 28 days to sell the first million. It's faster than the iPhone in 2007.

And the important thing, of course, is that Apple has now eclipsed Microsoft as being the most valuable tech company in the world.

So, that is what we know so far about this particular machine and gadget.

Jon Fortt is the technology writer for "Fortune" magazine.

And Jon joins me from San Francisco.

It's -- the iPad is, you know, to some extent, has been the game changer. Dell came out with the Streak. We know there are others coming along.

Is the Apple lead on tablets unassailable?

JON FORTT, "FORTUNE" MAGAZINE: Well, at the moment, they are so far ahead, it's really hard to overestimate. You look and you just see a tablet at first and you think well, you know, anybody can build one of these. Google has got some free software out there. Microsoft's software is going to be out there for tablets.

But you've got to think about exactly what Apple has built around the iPad. They've got an amazing distribution strategy with their retail stores. They've got a really amazing ap store with tens of thousands more applications than anybody else has right now.

QUEST: Right.

FORTT: So they've built this valuable ecosystem around the iPad that's going to drive their sales faster than others.

QUEST: But the interesting thing is, is there any evidence that people are -- buyers, iPad users, that those sales will translate into the more expensive Macs, the bigger computers, the notebooks that they are desperately trying to push?

Because so far, the sales there are nowhere near in that same capacity.

FORTT: Well, you know, it's interesting, Richard. What we've seen is that iPad sales rate for the past couple of months has actually been above that of the Mac. We've also seen, in the past, that products like the iPod and the iPhone have created a halo effect around the Mac and have managed to boost sales.

Apple has so many retail stores that as these hot products draw people into the stores, they're more likely to look at other Apple products and snap them up, Macs included.

QUEST: Now, we saw today what -- one of the issues you and I need to talk about. We've seen that Google is now saying -- pardon the pun and the rather bad joke -- but Google is saying it's curtains for Windows. I thought that was quite funny.

And the -- the point being that they're now saying that no new Google employee at Google will be allowed to use a Windows operating system because of fears -- of security fears.

You have awry smile.

Is this more to do with competitive rather than security issues?

FORTT: Hey, I think so. I mean you can't ignore the fact that Google is really attacking Microsoft on many fronts. They're in a battle over search. Google is coming out with Chrome O.S. Which is going to be a computer operating system to compete with Windows. Google has got Google Docs that goes up against Microsoft Office.

If Windows were really that much of a security risk, you wouldn't just be seeing Google backing away from it, you'd be seeing, you know, huge Fortune 500 companies backing away from it, too. And that's just not happening.

QUEST: Right.

FORTT: But really interestingly, on the -- on the tablet front, we've got Google with Android. We've got Microsoft coming at it with Windows 7, which is a really different way to go. Google is attacking it with cell phone software like Apple is. Microsoft is coming at it with PC software. There's really no guarantee that Microsoft's efforts in tablets are going to work. We might see Google as the main competitor with Apple.

QUEST: Briefly and finally, if we take the iPad, it is perhaps unrealistic, is it, to expect sales to continue at this rate?

FORTT: Boy, that's a tough one. It would be really interesting if sales do continue at this rate. You've got to consider that Apple is still in the midst of...

QUEST: Right.

FORTT: -- an international expansion and they haven't built out to all countries yet. And we've got Christmas coming up. So it's possible that through the end of this year, we could see this rate continue.

QUEST: Jon, you and I will talk more about this in the days, weeks and months.

Many thanks.

Jon Fortt joining me from San Francisco.

And when I return with you, we'll have a Profitable Moment, in just a moment.


QUEST: Tonight's Profitable Moment.

Austerity is a hard word. It conjures up thoughts of deprivation, going without, cutting back. And that's what governments now are doing across the European continent.

The cutbacks have been demanded by the markets. Traders determined to enforce fiscal discipline, usually long before governments themselves were ready to introduce their own exit strategies.

Well, we won't see the effects of these higher taxes and spending cuts for up to 18 months. But as the head of the International Labour Organization told us tonight, then those -- the most disadvantaged -- will feel the pain all over again.

It also reminded us, of course, that it is a very delicate balancing act whether we should start cutting now or later. And promises to protect front line services will, perhaps, have to be broken. It's simply not possible to cut serious sums from deficits by skimping on the cakes at teatime.

All this week, we are looking at the effects of the new austerity measures and hearing from the people taking the decisions. And, of course, you will be part of that debate.

And that's QUEST MEANS BUSINESS for this evening.

I'm Richard Quest.

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

WORLD ONE is next.