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QUEST MEANS BUSINESS
IMF: Job Market in Dire Straits; Banking on Basel
Aired September 13, 2010 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST: It's a wasteland of unemployment. The IMF says the job market is in a dire state.
Banking on Basel, a new standard is introduced to withstand financial shocks.
And investing in its pas to protect its future: I'm in Cairo for this week's "Future Cities".
I'm Richard Quest. The start of a new week, and yes, I mean business.
There is a serious warning from two major global organizations. That global joblessness is threatening the world's economic recovery. At a joint conference held in Oslo, the IMF and the ILO called for an international response to get people back to work.
Now, the conference is called the Challenges of Growth, Employment, and Social Cohesion. It is the big talking point. Dominick Strauss-Khan, of the IMF, said that the idea that the crisis is behind us is the wrong one. You may have growth without jobs. And he said the crisis won't end without a significant drop in unemployment.
There have criticisms about the growth strategy. The stimulus believing-that the stimulus packages can pay for themselves. The cuts have a human cost they too believe, and it could be a tragedy for a million of young people.
Now the IMF says that 210 million people are unemployed, globally; 30 million of them, came an increase from 2007. Putting this into perspective, jobs are needed now, not only for those have lost work during the crisis, but also to absorb new entrants into the jobs market. Reverse unemployment caused by the crisis.
Let's talk more about this. Joining me now is Juan Somavia from the International Labor Organization, the ILO.
Sir, the report that came out and what you've been talking about today, what is your fundamental fear if things go wrong?
JUAN SOMAVIA, DIRECTOR GENERAL, ILO: That we're going to have the greatest job crisis we've known ever since the Great Recession (sic). What we have is a triple whammy; 210 million unemployed now and with poverty growing the crisis, before the crisis, because 50 percent of the labor force was in vulnerable work and 80 percent didn't have access to social protection. And then, looking forward, 440 million young people coming into the labor force, you put those three things together and certainly have to act with different policies than the one we've been using up to now.
QUEST: OK, but the debate at the moment is whether stimulus should be maintained, or the austerity measures need to take over. Where do you stand on maintaining stimulus?
SOMAVIA: Could I answer that question by putting it in a context. What we discussed here is that we need to have a different growth path; that we need a major shift in the growth path that we have, by putting job creation at the heart of our macro economic policy. That is, alongside low inflation and sound fiscal policies you need job creation as a macro economic objective. This has not been the policy in the past.
QUEST: But the-the, in terms-
SOMAVIA: So it is a change that goes beyond the stimulus issue.
QUEST: But where at the moment governments are facing this-this Hobson's choice, or this difficult choice between starting the cut deficits, to maintain bond market credibility, versus the stimulus necessary. At the moment they're going for austerity.
SOMAVIA: The thing is, it is not about just what governments can do to solve the problem, it is about the private economy picking up, investments coming in and creating the enterprises that create the jobs. And private consumption to really increase.
I'll answer your question. I think it depends on the fiscal space that the countries have. Some have a space to do it. Others don't and others, you know, want to see and want to try it out. If you have fiscal consolidation with high levels of growth and job creation, great. Now there is a lot of people who believe that may not happen, but some believe that they do.
SOMAVIA: Others think that still some fiscal stimulus is necessary. But let me say that is not the key issue. The key issue is that you have to get the real economy going. And for that you need to get the private- the financial markets and the banks to lend to small and middle enterprises. And that is not happening today. It needs much, much more than what is happening today.
QUEST: But as we'll hear tonight, later on this program, new regulations coming in the so-called Basel III agreement, could restrict banking lending even further. But you want the banks, I think the phrase you used today was to "get back to boring banking."
SOMAVIA: Yes, let me tell you what I'm thinking. Banks are receiving money from, let's say in Europe, from the central bank at almost nil interest. They are putting them in German bonds at 3, 3.2, 3.5. By the time they get to lend to a small enterprise, I say, we already have 3.5 percent. So in order to take the risk we have to move up to 5 or 5.5 percent. That doesn't work. We need the banks to get to transfer the very low interest rates that they are receiving into the small enterprise that create jobs. That is the urgency.
QUEST: So you have to-
SOMAVIA: It has nothing to do with regulation. It has to do with the resources they are receiving now.
QUEST: So how do you propose to get them to do it? If they won't do it voluntarily, are you suggesting, and be blunt if you are, that they are forced to do it?
SOMAVIA: Look, I am not suggesting what the way to do it is. I think that the banks having been saved by governments, only just a year and so ago, have a certain responsibility to respond to the needs of the global economy and the real economy to get going. Now, up to them if they want to assume that responsibility. The public will judge, the political system will judge, and public opinion will decide, you know, the role that the banks and the ratings agencies played here. I believe that they should because it is in their own interests.
QUEST: Finally, Mr. Somavia, if they do not, if this unemployment issue is not tackled, do you believe we will see civil disturbance?
SOMAVIA: Look, I don't know to what extent, but the fact is you already have enormous tensions, because people feel that they have nothing to do with creating this crisis, and yet, you are being affected by it. So that is a normal reaction. Looking towards the future, Dominick Strauss- Khan, with home we organize jointly this conference, was talking about the impact on peace and democracy.
There is certainly a question that people will say, well, what is the social contract with banks, now that we are talking about banks. But in general, you know, what is the capacity of those that have the power to take decisions to respond to the simple question of saying, look, what I want, what I hoping for my family and my community, is to give me a decent chance at a decent work, and I'll do the rest. I'll work it out.
QUEST: Juan Somavia the ILO director general joining me from Oslo. Many thanks Director General for talking to us.
SOMAVIA: Thank you, Richard. Thank you very much.
QUEST: Now sweeping new rules to rein in risk. We were talking about them a second ago. It is called Basel III. It is changing the way the world's banks do business, in a moment, QUEST MEANS BUSINESS.
QUEST: We'll talk with Jim Boulden in just a moment about the banking world's new rule book. It is called Basel III. The agreements designed to put the world's banks on a firm financial footing. Regulators from 27 countries drafted and drafted the new rulebook, in Basel, in Switzerland. And they hope that the rules will prevent a repeat of the global financial meltdown. When, of course, the global business banking scenario nearly fell off a cliff.
This is what it is all about. The EU concerned today over the U.S., Christine Lagarde the French finance minister, she said that she welcomed the new regulations on Basel, but she warned that the European Union would not implement these new strict capital requirements if the U.S. fails to do so. It was the failure of the U.S. to implement and enforce Basel II that was widely regarded, or contributing to the crisis that we have just been through.
The U.S., for their part, says they do welcome Basel. Regulators, this is from the Treasury, from the FDIC and the controller, and the Fed. They say Basel III, "Represents a significant step forward in reducing the incidence and severity of future financial crisis."
But still no firm guarantee that the U.S. will actually implement the Basel III regulations.
This is the way the market looks. The market was up very sharply. And it was largely on the back of banking stocks. The FTSE over 1 percent, of course, London has such a huge selection of banking stocks. Mines were also very, very prominent. But if you look at the banking of-the actual banking stocks themselves, in Paris, now that really tells its own story. Up, 6, 6, and 5 percent in some major banks. They are the leading gainers if you like, on the market.
Now banks will have several years to implement the new Basel rule. The key thing is that they have to drastically raise the capital that they hold on their balance sheets. This is all very complicated stuff. So let me explain.
QUEST (On camera): Think of this block as the Bank of Quest. And think of all these various bricks as the assets that the bank has on its balance sheet. Some of them will be simple loans at the top of the bank. But others will be right at the base of the bank, the so-called capital that is supporting the bank in good times and in bad. And what the Basel process aims to do is ensure that these banks can withstand the worst economic scenarios. It wants to replace the various blocks with better quality assets, particularly, equity capital.
So, whilst Basel certainly intends to improve what is happening at the top of bank, it is down here, right in the basement, that the real work will be done. Over the next few years, banks will be adding billions of dollars of capital to their balance sheets. Of course, this is money that can no longer be paid to investors, or indeed, in some cases, lent to members of the public. Replacing the core part of the bank, will ensure that this really does remain as solid as a brick.
JIM BOULDEN, CNN FINANCIAL CORRESPONDENT: Glad it didn't fall.
QUEST: It is over here, and it still may yet.
Jim, I mean this Jenga really did make the point, doesn't it?
QUEST: That all these bricks are not equal, when it comes to the banks.
BOULDEN: Well, that is the problem, if you look at the decisions that were made and there are a lot of detail, but it still hasn't been decided and one of the criticisms is that banks quality of capital changes over time. And over this very long period of time that these rules are being implemented, something-the value of something could change, even if it is a perfectly good asset.
So some of the banks are going to find it a little bit tough. They might just be tittering on those, you know, the 4.5 or the 6, or the 7 percent.
QUEST: But fundamentally, the idea is to shore up the bottom part of the bank. So that it doesn't topple over when the top gets a bit wobbly.
BOULDEN: With very good, what they call common equity, and equity like debt. The good stuff.
QUEST: (UNINTELLIGIBLE) earnings.
BOULDEN: They have down there that they don't want you to touch, except for that little bit of 2.5 percent that you can absorb, to use, so that you don't come to government looking for-looking for a loan, or looking for a bailout.
QUEST: But, but, how many banks, at the moment, fail Basel III?
BOULDEN: There is two different definitions. One is the 4.5 percent of common equity. One is the tier one ratios of 6 percent. We went through that with some of the stress tests, didn't we?
BOULDEN: Some analysts say that you could look at some of the big U.S. banks not meeting this. In fact, KBW says Bank of American and Citibank might not reach one of these ratios. However, then you look at NAB who put out a report as well. And they said that all the banks in the U.S. are compliant. So, we are going to have to hear from each of these banks and see whether they reach these minimums.
QUEST: So when are I read, like I did today, banking analysts saying that 100s of billions of dollars-
BOULDEN: Oh, yeah.
QUEST: -will be needed to put in place at the bottom of some of these organizations.
QUEST: Why do they need to do it? If we have already been told that they have passed the stress test why does more-100s of billions, they say- have to go into this thing?
BOULDEN: Including some of the German banks. And we saw Deutsche Bank today already say they are going to raise over $12 billion to shore up some of the capital in one of its presumed subsidiaries.
BOULDEN: Because the rules are very complex. The liquidity rules haven't even be decided on yet. And so each bank will have to look and see exactly what it will need to do. And some of the banks will. And they could do it by not paying dividends. They could do it by obviously selling shares. They could do it by saying we are going to restrict some lending. They could raise the prices of things like mortgages and things, do it that way.
QUEST: And they could reduce their asset base accordingly.
BOULDEN: Or bonuses, not pay out so many bonuses. So each bank will have this very complex system to go through over the next five, 10, even 12 years, to make sure they comply.
QUEST: Jim, you now know more about Basel III.
BOULDEN: What's so interesting, Basel II took a decade. And there is a criticism out there that Basel III might have been a bit too quick for central bank governors to get together and make these kind of decisions, within a year. Because they are feeling the pressure from Obama and others at the G20 meetings. So this is a very unusual thing for these guys, got together in Basel, and made such a decision, a momentous decision, and were able to agree to it over the weekend.
QUEST: Many thanks.
QUEST: You are going to go home and read Basel III to your wife?
BOULDEN: We'll talk about Basel IV in a few years, won't we?
QUEST: Many thanks, indeed.
(DESK BELL CHIMES)
"Time" magazine, fascinating article that time has. Because a core question is whether or not the Basel regulations will actually dampen economic growth. I've posted it on my Twitter site. You can take a read and respond. Twitter.com/RichardQuest, is where you can read that.
(BEGIN VIDEO CLIP)
QUEST (On camera): Coming up after the break, we're in Cairo, on "Future Cities", looking at how the Egyptian capital is driving the tourism revolution.
QUEST: Pyramids and the Sphinx, symbols of Egyptian magic and mystic; and at times, quite honestly, poor business management. Things, though, they are a changing in Cairo. There is a concerted drive to build new infrastructure and museums to accommodate the ever increasing number of tourists choosing Egypt over traditional European destinations.
Today's installment of "Future Cities" begins with one man's vision for the site of the great pyramids.
DR. ZAHI HAWASS, SECRETARY GENERAL, SUPREME COUNCIL OF ANTIQUITIES: I get up in the morning, I see the pyramid, every day is different from yesterday. That is why this pyramid has magic.
I've been excavating this site for all my life. To stand in front of the pyramid, it will tremble your heart.
I went to the States in 1980, I came in 1987, I saw a big change. Almost the houses are next door to the Sphinx. We have to preserve the past. We have to protect the pyramid. We have to look at the people who really do not know the value of the pyramid. The first decision is to start the site management of Giza Plateau. How to change the Giza Plateau from a zoo, to be an open museum.
QUEST: Officially, he is secretary general at the Supreme Council of Antiquities. Rarely seen without his hat, Doctor Zahi Hawass is Egypt's answer to Indiana Jones. It has become his life's mission to establish a lasting legacy for the care of Egypt's ancient sites and monuments.
HAWASS: People who are in charge of tourism, their goal only to bring more tourists to Egypt, but they never look at the value of the sites. If masses of tourists will go like this, for 100 years, all of these monuments will be completely demolished.
QUEST: Opened in 1902, the Egyptian Museum is a must-see on Cairo's booming tourists trail. Each year more and more visitors come to see the world's largest collection of Egyptian antiquities.
HISHAM ZAAZOU, MINISTRY OF TOURISM: While tourism has become a very important pillar of Egyptian economy, just a few years back we had only 6 million visitors, less than five years ago, now we have doubled it to last year, 2009, we reached 12.9 million visitors. And the income generated from tourism is almost $11 billion U.S. and it is growing. And we are trying now to meet the demand for Cairo, for instance, and the demand to preserve the antiquities.
QUEST: This museum's tired, dark interior is perhaps symptomatic of the need for urgent modernization.
(On camera): Managing the shear number of tourists who come to see antiquities like Tutankhamun's death mask, has become the focus of something like a revolution here in Cairo.
HAWASS: This is really, actually, one of the most important projects that we are doing for the future of Giza Plateau. All this activity, camels and horses, buses, cars, will be south, in this area, in the desert. And electrical cars will bring people to take them to the sites. For the first time all the activities will be away from pyramids.
QUEST (voice over): And 17 kilometers of perimeter fence now surrounds the last wonder of the ancient world still standing. In about a year the revamp of the Giza Plateau will be finished. In the long run, Doctor Hawass believes only the most drastic and controversial ideas will solve the tourism problem.
HAWASS: In my opinion I really need the maximum tourists to come to Egypt, not to be more than 6 million, only. But you have to make Egypt expensive for people to value what they are seeing.
QUEST: With security in place and tourists under control, Doctor Hawass will be able to focus on what he really loves.
HAWASS: Still excavating every day we discover a tomb, or a statue, or something. It is an excavation that will continue for at least 50 years from now.
This is actually a unique tomb. It is just found. It is the most recent discovery in the suburb of Cairo. This is a tomb based on the type that is in hieroglyphic, it was an inspector of the priests, connected with the caferine (ph), the builder of the second pyramid, son of Kufu (ph).
Then you are the first ones and the first camera to enter inside one of the most recent discoveries that happened in Egypt.
QUEST: Egypt's archeological sites continue to give up their secrets from the sand. And their treasures will soon find new homes.
HAWASS: For the future of Egypt and Cairo, we are building 22 museums now. We are in the site of the Grand Museum (ph), the largest project in the Middle East. We finished phase one and two, which is the conservation lab, and this could be larger, maybe twice, then the Britz (ph) Museum, only the conservation labs.
QUEST: In state of the art laboratories antiquities of all shapes and sizes are now being preserved. Taken out of storage they will be seated in the new museum.
HAWASS: This museum will show the magic of 50,000 objects. This area will be alive and the most important thing, it is connected with the shadow of the pyramids.
QUEST: Construction of the Grand Museum will begin next year. It will open in 2013, it will cost $700 million.
HAWASS: The Grand Museum is the symbol for the future of Cairo.
QUEST (On camera): In just a couple of years Tutankhamun's Death Mask will be moved from here to the new museum on the other side of the city. And one of Egypt's greatest treasures will finally have a home fit for pharaoh.
(voice over): Cairo is investing in its past to protect its future.
QUEST: The beauty and the majesty of the pyramids in Cairo, which incidentally, apparently is the No. 1 recognized building or artifact in the world.
In a moment, millions of people are hard time finding a job in the shaky economy. One country is making employment its top government policy.
QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS. This is CNN. And here the news always comes first.
Our top story, a passenger plane has crashed in Southeastern Venezuela and a local governor says there are survivors. The plane went down 12 minutes after take-off about 10 kilometers from the Guyana Airport in Bolivar State. Two people are confirmed dead. Miraculously, 21 survivors have been taken to nearby hospitals. Government officials say the plane was carrying at least 47 passengers and crew. It belonged to a government- owned Conviasa Airlines.
US and Iraqi officials are denying allegations that detainees are being tortured and abused in Iraq prisons. The accusations are in a report by the human rights group, Amnesty International. It says Iraq is holding as many as 30,000 detainees without trial. It says some faced physical and mental abuse. A U.S. official says Iraqi detention facilities meet international standards.
Catholic Church leaders in Belgium are urging pedophile priests and other church workers who have abused children to tell their superiors. The public request comes just days after the release of a damaging report on church sex abuse, which cited hundreds of claims spanning four decades. The report said not a single Belgian congregation escaped the abuse of minors by one or more members of the clergy.
A Mexican drug kingpin nicknamed "El Grande" is behind bars in Mexico City tonight. Sergio Villarreal is an alleged leader of the powerful Beltran Levya drug cartel. His arrest follows last month's capture of another cartel heavyweight known as La Barbie. Two of Villarreal's accomplices were also captured and the Mexican authorities say the arrests are a major victory in their ongoing drug war.
Australia is putting jobs at the forefront of its economic policy. The deputy prime minister and reappointed treasurer, Wayne Swan said he's making employment his top priority. The country's job growth exceeded forecasts in August. The unemployment rate has fallen to 5.1 percent. Australia was the only major developed economy that escaped recession. It runs one of the lowest budget deficits and debt levels in the developed world.
The big challenge for Australia may not be revving growth, but preventing overheating.
Philip Aiken is the chairman of Australia business group, Australia Alive.
He joins me now.
And you are on -- you are in the Northern Hemisphere.
So convince Europeans and the U.K. that Australia is a route to Asia.
PHILIP AIKEN, CHAIRMAN OF AUSTRALIAN BUSINESS: Well, I think it's been shown over recent years with the strength of the Australian economy that Asia has been one of the reasons -- the markets there -- has been one of the reasons Australia did not have a recession during the GFC.
A lot of people think about Australia as purely resources, but, in fact, now 70 percent of the Australian economy and 75 percent of the people are actually employed in the services sector.
QUEST: But if I want -- but wait. If I want to do business -- I mean services aside, because it's English speaking, it certainly is a nice place to live and all those things.
But I want to do business with China or with Hong Kong or with Southeast Asia.
AIKEN: Well, I think you just said it yourself. Australia gives you the infrastructure and the ability to go in from the same time zone and it gives you the ability to have the services and the infrastructure to service those markets.
QUEST: But you're talking here more about service industry, rather than nuts, bolts and widgets?
AIKEN: Oh, definitely. I think -- if you look at the Australian economy, most people always think about resources. But it's the services sector which is probably growing more and more.
QUEST: Isn't -- I mean what you're really saying -- let's be -- let's be -- let's be honest, Philip. What you're really saying is Australia has got the infrastructure and it's a nice place to live and Anglo -- Anglo business leaders would feel comfortable there?
AIKEN: Well, that's been said. But to some degree, also, if you look at the growth of the Australian economy in recent years, technology and services have been leading the way. And in business education now, Australia has become a very, very major source for Asian students.
QUEST: You used to work with BHP.
QUEST: You were a senior director at BHP. BHP now heavily involved in -- in the Potash take over.
Will that deal go ahead, do you think?
AIKEN: Well, it's four years since I left BHP. But BHP has always said it's in long life, low costs assets. Potash is obviously a great opportunity. It's all about price, I suppose. But it's very hard for me to say, having left four years ago.
QUEST: Right. But what about the -- the big turn on this resources question. The new government of Australia is still committed barely and justly in office just in office -- to a mining tax.
Do you fear that the new government's economic policies are the right ones?
AIKEN: Well, I think it's very interesting that it showed when the mining companies and the public basically were against the super text which was brought in that led to a change of prime minister. The new government said very strongly it's going to review the text. And I believe that reviewing that mine text will be a part of that text review.
QUEST: The Australian economy has been this engine of growth. But there are reports of a property bubble in -- in parts of the country that - - that could explode spectacularly. There are worries about China's slowdown and what effect that will have.
AIKEN: Well, you know, I think probably markets in a lot of places have been quite buoyant. I think they've slowed down in recent times. And, you know, to some degree, I think that's probably good, because it make housing, probably more affordable.
You know, there's more to the resources market than China. China obviously is the large one, but I think there's other markets in Asia which are very, very good and they show good signs for growth in the future, also.
QUEST: Philip, many thanks, indeed.
AIKEN: Thank you.
QUEST: Many thanks, indeed.
Now, with the U.S. unemployment rate stubborn hovering near double digits, frustrated job seekers are increasingly looking overseas.
As Pauline Chiou reports, Asia is one of those places, maybe just not Australia, but Asia generally, is hiring.
ROXANNA BLANCO, ENGLISH LANGUAGE TUTOR: How do you say it?
UNIDENTIFIED FEMALE: Big charm.
PAULINE CHIOU, CNN INTERNATIONAL CORRESPONDENT: Roxanna Blanco considers herself lucky to have this job as an English language tutor. Even with a degree in international business and marketing, the American could not find a job for an entire year. Finally, she told her mother she was going to take a bold step.
BLANCO: I think I just want to go to China. I think I'm going to go to China.
She's like, are you crazy?
You're going to go to China?
I was like, yes, China. That's where I'm going to go.
There. Good job.
CHIOU: Roxanna says she sensed the opportunities were in Asia. So last year, she applied online for teaching jobs in China and got three offers. Roxanna's pull toward Asia is not unusual these days. Hays Recruitment firm says its Asia office has handled a 30 percent increase in job applicants over the past six months. Most job seekers are from the U.S., U.K. and Australia.
EMMA CHARNOCK, HAYS RECRUITMENT: They're feeling frustrated in that they're wanting to kick start their careers again and they've got a tough 18 months. It's simply the general -- the general attitude of they've -- they've had enough.
CHIOU: Emma Charnock says banks are hiring again and casting a wide net for top talent.
But are the salaries the same?
CHARNOCK: A good question. We've certainly seen at least 50 per -- 15 percent increase on -- on base salaries.
CHIOU (on camera): While the bulk of the jobs here in Hong Kong are in banking, finance and law, on the mainland, a lot of sectors are hiring. China needs industrial engineers for its high speed rail; also, urban planners and architects for stimulus projects.
(voice-over): On the mainland, recruiters report an upswing in overseas Chinese returning of jobs. Charnock says she's also noticed an interesting spike in demand for math and science teachers at international schools on the mainland. Perhaps as a result of more expats moving to cities like Beijing and Shanghai, some schools are even offering relocation and housing allowance to attract teachers.
Back in Hong Kong, Roxanna plans to eventually return home to California. But with the U.S. unemployment rate at 9.6 percent, she's not ready to buy her plane ticket.
BLANCO: Actually, I'm very nervous to go back. Like we're talking about maybe going back in -- in a year or so. And I'm really -- I still don't -- I still don't know if I'll find work.
CHIOU: Until then, it's a waiting game until the time is right.
BLANCO: Not U, not O.
UNIDENTIFIED FEMALE: A. A good job.
(END VIDEO TAPE)
QUEST: Getting a job. And, of course, we'll talk about this. It's one of the key priorities for us on this program, to cover that story in its extremes.
Now, hurricane season is amongst us. Mother Nature's devastation has got the insurance claims piling up. It is a bumpy year when it comes to natural disasters.
So why aren't more companies insuring they're properly covered?
We'll cover that, in a moment.
QUEST: If you're living in the path of Hurricane Igor, it's time now to batten down the hatches. The hurricane is heading west across the Atlantic Ocean and it is intensifying. These are pictures of the storm from space. The National Hurricane Center says Igor could become a category five hurricane in the next 24 hours. If it makes landfall at that strength, communities living along the Atlantic and the Gulf Coasts face a costly clear up operation.
They are far from alone. According to the insurance company, Swiss Re, the number of natural disasters has nearly tripled since the 1980s. As you might expect, in the same time frame, insured losses have exploded annually, from less than $10 billion to more than $100 billion in recent years.
Think of -- think of the emotional and financial devastation Hurricane Katrina wreaked on the Southern U.S. Katrina is the most expensive hurricane to date, at a cost of more than $81 billion. Recently, we've seen damage caused by widespread flooding in Pakistan. The United Nations says the long-term rehabilitation costs there will run into billions of dollars.
In any given year, there are dozens of typhoons, tropical storms, hurricanes, volcanic ash clouds. And yet, business, it seems, isn't wise to natural disasters and the effect it has on the profits.
For more on how we should all be preparing for the worst, Shivan Subramaniam is the chairman and chief executive officer of FM Global.
He joins me from New York.
A very simple question -- this year is going to be a disastrous one for natural disasters, one of the worst, isn't it?
SHIVAN S. SUBRAMANIAM, CHAIRMAN AND CEO, FM GLOBAL: It is. We already have had significantly more disasters in the first eight months than we have seen in a many -- in many, many years.
QUEST: So why don't companies ensure against them?
SUBRAMANIAM: Well, more than ensuring against them is -- is taking action to prevent loses from occurring when a natural disaster occurs. Fundamental, what happens is most people always seems to be that it's not going to happen to them and if it does, the damage is going to minimal.
QUEST: But common sense says, after Katrina, Hugo, after numerous earthquakes, after Chile -- Chile's earthquake, after Haiti, after tsunami, I mean what -- one is tempted to say, Shivan, what more do they need?
SUBRAMANIAM: Yes. So -- so what's happening now is that commercial establishments are focusing more on the risk management parts of all of this. And they're starting to recognize it. At FM Global, that's what we tend to do, we tend to help people not have losses with our engineering expertise. And that segment of the population is starting to do more and more to prevent loses from occurring to their facilities.
On the homeowners side, on the people's side, there's still -- there's still the psychological basis that somehow it's not going to be my -- my property.
QUEST: OK. So let's talk about risk management. If insurance is one aspect, we've -- hot sites have been around for years, disaster recovery plans have been around for decades.
So what's new?
SUBRAMANIAM: Well, there's continuous -- continuous research going on in trying to prevent looses from hurricanes. So what's different is that there's a lot more work going on in terms of what is the fact of wind on -- on roof and roof designs. And there's a lot more technology in place that helps people not have their roofs peel off when the wind is blowing very hard. And that's the same thing as what's happening with flood in terms of coming up with mechanisms that keeps the water out. The same kinds of research is going on, similarly, with earthquakes, again, trying to come up with buildings that are -- that stay up. And, most importantly, with earthquakes is to make very sure that when there is an earthquake, you don't have a fire following an earthquake.
What most people don't realize is that that's where the bigger exposure is when -- when an earthquake occurs, is the fire following the earthquake.
QUEST: In the -- at the end of it all, Shivan, isn't the truth of it that in most, or in many cases, it is not the actual natural disaster that takes out companies, it's their failure to be able to continue in business afterwards?
SUBRAMANIAM: Absolutely. But -- but there's a preface to that, is that, first, to make very sure that the damage is minimal when a disaster occurs. And once the damage is minimal, then they have a good business continuity plan to then come back up after that.
QUEST: Whenever we look at some -- we're looking now at Hurricane Igor, which we're going to get an update from in just a moment.
As somebody in the business, if there was one piece of advice that you would give to a chief exec, a CFO, a board director that he needs to ask his people tomorrow, what would it be?
SUBRAMANIAM: One thing is, is is that facility exposed to that particular hurricane?
And if it is, do they make very sure that the -- that the roofs were secure and are they going to make very, very sure there's nothing outside the facility that could blow around and damage their -- their facility?
If we're talking about an event within the next 48 or 72 hours, that's about the only things that they could ask.
QUEST: Shivan, many thanks, indeed.
We'll have you back for more about how -- protecting yourself against these things.
Shivan joining me from New York.
Now, Hurricane Igor, I was just talking about.
Guillermo is at the World Weather Center.
And I suspect, by now, the track of the hurricane is quite -- I mean I don't know much -- well, only from what I've ever heard from you. The track must be quite well established. You're probably looking at water temperatures.
How bad is it?
GUILLERMO ARDUINO, CNN METEOROLOGIST: It is getting to become a category five at any time. If we take that 72 hour forecast period and then it appears that it's going to weaken a little bit. It will continue to be a very significant cyclones -- cyclone. The indication is that very clearly the fine center of the system. We have hurricane force winds within 75 kilometers from the center and tropical storm force winds 280 kilometers away from the center.
So it's a humongous thing. We're lucky that it's not close to anybody right now. Actually, is it going to take the general direction of Bermuda. And this is where the -- the precise words that we use are very important to take into account.
General direction -- because it is quite far away from it. But it all indicates that it's going to go there. And it will make it close to Bermuda in a hurricane status. Now, it's a little bit too early to say again. The winds, if they reach 250 kilometers per hour, it will be a category five.
So we turn to computers and we want to all these systems that get data and they analyze it. And they say ,yes, there's pretty much an agreement - - the red is the National Hurricane Center -- that it's taking the general aim of Bermuda.
Now, if you remember, this is what we have seen this year, with the exception of a couple of systems. Now, this is the most significant one this season. It is not a surprise. September is the busiest month when it comes to tropical cyclone activity. And this year, we're expecting a lot. We've been talking about it.
So we do not have anything going on within the next three days.
In the meantime, another system is forming from the same area, around the Cape Verde Islands, becoming a hurricane very soon, too. And it seems that it's taking the same direction, a little bit closer to the east. So this is it. This is the generic path. This is where Bermuda is. And this is what they -- the tracks they are thinking right now.
So we have some time. We are, for a while, you know, enough -- we have enough time to see what's going to happen.
Where we do not have time, it's where -- in the Caribbean. We have a 40 percent chance of development in this case of a cyclone. But at the same time, that time that we don't have, it's going to promise that this may not be a very, very significant system. So here we have the spaghetti models again. So anywhere in -- it is over -- most of the convection is over Jamaica right now, Richard. But we're going to look at Cancun and Playa del Carmen and all that.
The rain is coming back to Scotland. We will see some clouds here in the south, lots of wind. But I'm looking, also at another area farther to the south, Richard. And it has to be to the -- with the Black Sea. And we see some rain over there. Italy may see some bad weather again -- back to you.
QUEST: Guillermo, many thanks.
ARDUINO: Thank you.
QUEST: Please keep us informed. I know you will...
ARDUINO: I will.
QUEST: -- on Hurricane Igor.
In a moment, so, the end of the line for hotel rooms at retro prices. After a run of falling room rates, hotel bills are probably about to go up.
Business travelers, beware.
QUEST: The large hotel industry could soon be seeing a turnaround. An annual report by Hotels.com says falling rates and prices will likely to bottom out this year. Now, look at this. The Hotel Price Index uses the rates that we actually pay, rather than what the hotels say companies are advertising. Rooms booked through Hotels.com showed a price drop of 14 percent in 2009. Ah, not bad. That actually made prices for rooms last year basically as cheap as they were in 2004. The report says supply and demand is at the heart of the decline -- 4,000 extra rooms added in Manhattan alone at a time when business travel and consumer spending demand remained weak. David Roche is the president of Hotels.com.
David is a good friend of the program and joining me now from New York.
David, this -- this bargain basement of hotel prices is not continuing in certain key markets, like London, New York, Los Angeles and Singapore?
DAVID ROCHE, PRESIDENT, HOTELS.COM: Well, I think that's the case, Richard. I mean, what we're seeing is that pricing has, you know, after seven consecutive quarters, it appears to have hit a bottom. Now, how long it will stay here and whether it's going to move from this point upwards again is unknown. But there are a handful of cities where this is already happening. I would say New York and London and Singapore are pretty good examples. And what we think we're seeing there is these places have got a macroeconomic benefit. And layered on top of that, they're also seeing the benefits of being, you know, international business hubs.
And as business returns and the business traveler is returning, so are the prices.
QUEST: You see, as I look at the latest statistics from -- from ARTA, for example, and you look at capacity on airlines and you look at the fact that rates for premium travel -- British Airways, only a couple of weeks ago, pointed out that that was starting to come back, that's going to feed through, because the hotels are the next -- they are the next point in the chain, aren't they?
ROCHE: Yes. Well, I would say that room rates in some of the top American cities would probably be rising even faster than they're currently doing if transatlantic air fares were lower than they currently are. I mean what's driving New York, for example, at the moment, is really the strength of the domestic economy, much less so than travelers coming from Europe into New York, because, first of all, there's the currency; second, there's these really, really high transatlantic fares -- higher than a very, very long time; and, thirdly, the economies in Europe aren't faring so well at present.
QUEST: So it begs the question, if rates are going up -- and we know hotels are desperate to try and get some pricing power back in again -- what to the -- what does the traveler do?
What is the best way?
Or -- or is it just inevitably a suck it up and see?
ROCHE: Well, you've got to remember that this stabilization -- I would say it's more of a stabilization than a recovery, it's too early to say it's a recovery -- is a very uneven one. Just because New York is rising, that's not true at the border. Chicago is flat in the U.S. And, you know, San Diego is down. Rome is down in -- in pricing terms, as well, in -- in Europe.
So I think it really depends on where you're trying to go. What I think would probably be a bad idea would be to endlessly postpone travel that you think you need to do thinking that rates are going to go down. I have a feeling that they won't go down, but of course it really depends on what happens on -- you know, the -- the wider economic scenario.
QUEST: OK. David, many thanks, indeed.
David Roche with Hotels.com joining me from New York.
ROCHE: Thank you.
QUEST: A quick look at the Dow Jones Industrials as they are trading at the moment. The Dow is just up a nice little -- a nice little tick at the beginning of autumn, up 56, just half of 1 percent, over by 10,500.
Are we at the start of the next bull run or are we plateauing for a while?
I'll have a Profitable Moment in a moment.
QUEST: Tonight's Profitable Moment.
We all know that buying insurance is a sensible thing to do. So it's all the remar -- more remarkable when we hear, as we did tonight earlier, that so many companies not only don't insure against natural disasters, but fail to prepare properly for them.
There are all sorts of reasons. Some say lightning doesn't strike twice in the same place. Then there's the need to cut costs and save money. Some people simply go through life with sheer optimism -- the view it can't or won't happen to me.
Oh, and then, of course, there are those that believe that insurance companies will wheedle out of paying just when they are needed most.
As we've heard this year, it's already, in 2010, shaping up to be a bumper one for natural disasters. And that inevitably means, by the year's end, more individuals and companies will be asking themselves why I didn't plan properly?
A fascinating complex equation which pits psychology risk taking and a very simplistic view. You know the simplistic view. We've all fallen foul of it. It can't happen to me. That is, until it does.
And that's QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, I do hope it's profitable.
"WORLD ONE" starts now.