Return to Transcripts main page


Massive Floods Wreak Havoc on Australia's Economy; Motorola Splits in 2

Aired January 4, 2011 - 14:00:00   ET


MAX FOSTER, ANCHOR, QUEST MEANS BUSINESS: Massive floods in Australia wreak havoc on communities and the economy.

Motorola splits in two. The chief executive of its mobile unit tells us he can win back market share.

And more pain, little gain. The housing market in 2011.

I'm Max Foster in for Richard Quest. This is QUEST MEANS BUSINESS.

Hello to you.

Australians are counting the costs of the worst floods on record there. The water is still rising in Queensland, where an area the size of France and Germany is flooded. Half the state has been declared a disaster zone and we won't know the full extent of the damage until the flood waters recede.

So far 10 people are dead and around 200,000 are either displaced or cleaning up their homes. The disaster will cost coal industry in at least $1 billion in lost production. BHP Billiton and Rio Tinto, two of the biggest players in the industry, have declared force majeure at mines across the flood-hit area, a declaration which limits the liability for failure to deliver. It affects around 98 million ton of capacity to produce coal; coal that is vital for making steel.

According to Reuters that is equivalent to around 35 percent of Australia's coal exports. Half the region's wheat crop could now be unfit for human consumption. The industry group, Cane Growers, says 18 percent of the 2010 sugar cane crop will never be harvested.

If major industry is suffering the impact on small business is just as severe. Sean Berry from Australia's 7 News met some people who are fighting for their livelihoods.


SEAN BERRY, REPORTER, AUSTRALIA'S 7 NEWS (voice over): Many Rockhampton homes are abandoned, their owners forced to evacuate, but some just don't know how to quite. Like these blokes from the North Rockhampton Bowles (ph) Club, fighting a river that is now higher than the greens.

LES WARR, CLUB PRESIDENT: People are just fabulous, what they have given to us, you know? Off the street, little girls and boys coming in, you know? Can we help you?

BERRY: If the river wins it would cost $60,000 to repair each green.

WARR: You know, we'd have to close down.

BERRY: The same spirit is alive at the local fish and chips shop. They built a damn around it, just earth, sand bags and plastic. People laughed at first, but it is working.

UNIDENTIFIED MALE: They're not laughing now. They think it's a good idea.

BERRY: The river reached 9.2 meters today. Tomorrow it may be 9.4.

(On camera): This is Key Street. It runs about a K and a half to the center of town, and it is water like this nearly all the way. Most of these houses are now deserted, but some residents are refusing to go.

(Voice over): Like Glenda Conway, high and dry in her classic Queenslander. But apart from family, some unwelcome visitors.

GLENDA CONWAY, FLOOD VICTIM: Snakes, rubbish-lots of rubbish.

BERRY: And now there is the threat of more heavy rain.

UNIDENTIFIED FEMALE: I don't want no more rain. I've had enough of it.

BERRY: People who have lost just about everything say they just can't take anymore.

ALISON SWANSON, FLOOD VICTIM: I've worked all these years so hard to get what I had and it's just gone. It's gone. Sorry.



FOSTER: That was Sean Berry reporting.

Of course, the damage to the Australian industry has left importers scrambling for supplies and that is meaning rocketing prices. The price of coking coal, that is the kind used to make steel, is up 10 percent on last month. And it is set to rise further, we're told. Wheat futures are trading at close to a two-year high, as fields, railways, roads remain submerged. Wheat is twice it was a year ago. Partly because of the Russian drought, which prompted a ban on wheat exports.

Now, sugar prices are at 30-year highs. And the country's big sugar firms are having to import raw cane sugar to fulfill orders now. Colin Hamilton is a commodities analyst at Macquarie. I spoke to him earlier and began by asking what exactly are we grappling with right now.

COLIN HAMILTON, COMMODITIES ANALYST, MACQUARIE: The potential (ph) effect (ph) as to how much time it is to be affected, how long it could go on for, because we are right at the start of the season, the traditional wet season.


HAMILTON: And therefore what the knock on affects will be on the damage (ph) to the industries.

FOSTER: And it is going to take a long time to clear away all these flood waters and get the area going, right?

HAMILTON: Even if, let's say, the big problem for Queensland has been the rail lines for coal. And the rail lines have been out about (UNINTELLIGIBLE). Even they get them up and running, you would be operating at speed restrictions. You effective capacity will be reduced. So you won't be going flat out for a long period.

FOSTER: OK. So what sort of predictions are you making?

HAMILTON: We're looking at the situation whereby you will see (UNINTELLIGIBLE) prices, of course, start to spike. We have already seen them move. Perhaps to levels we saw them in 2008, but we'll see them move quite dramatically. And we'll also see a situation where steel prices will spike. And that will-we will see steel prices from where they are at the moment, roughly $700 a ton, at $800, plus.

FOSTER: And the problem is that a lot of-there is a particular type of coal in this area, which is used in steel making, isn't it?

HAMILTON: That is correct, yes.

FOSTER: So it would have a big impact on the global steel making industry?

HAMILTON: Exactly. Particularly for those countries which have a line on the distributing (ph) coal. So you are looking at Japan, India, Brazil. Again, these countries source a lot of their coal from Queensland. And there is no replacement, I mean the Queensland quality coal is very hard to find in the world.

FOSTER: OK, and that is-earlier you were telling me, something like 20 percent of the coal used in steel making.

HAMILTON: So, if you look at our production worldwide, about 20 percent of that iron is made using coal from Queensland.

FOSTER: OK, so this is a big problem for that region.

HAMILTON: It is a big problem for the global steel industry.

FOSTER: And the other area that will be affected is energy, because the coal-fired power stations will be without coal as well?

HAMILTON: Queensland exports about 50 million tons of thermal coal every year, which is used for power generation. Now, again, that tonnage is going to be lost, moreover. That tonnage is going to be longer to come back because when the railways are back up and running again metallurgical coal, the higher value coal, will be given priority. So thermal coal will take longer to get back to a normalized basis. Therefore we do see the price of that rising already in the trading we've seen thus far.

FOSTER: And so energy prices in what sorts of countries will be affected?

HAMILTON: Again, I mean, thermal coal is very much a global commodity. So you will see that price push up globally. You will see it pushing onto the electric utilities in all regions.

FOSTER: So you are saying electricity prices around the world, and steel prices around the world, which affect all sorts of products, are all going to be going up because of this one flood?

HAMILTON: Again, it depends on-it depends on the individual country, the individual economics. For example if you are a country that nuclear based, then you are not going to see the same sort of price pressures on your electricity prices. However, if you are in a coal fired country and a lot of Asia is coal fired, you are going to see further inflationary pressures there coming through the system, which later will have to be passed onto the consumer, or borne by the utilities themselves.

Where as in the steel industry, again, you are looking at a situation where there is no real replacement for Queensland coking coal supply. It is 51 percent of the global seaborne (ph) market. Again, that tends to lead to a situation where the world just can't produce enough steel. And the steel makers gain some pricing power.


FOSTER: Still working out the numbers on that story.

No big moves to the U.S. markets this session. Things look fairly subdued at the moment. Traders are waiting to get the minutes of the Fed's latest meeting, which was in December. The Fed then decided to hold rates steady, but moved ahead with quantitative easing. We'll get some details on that. Let's have a look at Board, the Dow is actually up just slightly. It's pretty much unmoved.

Some interesting figures coming from the auto companies, which are releasing their sales figures. GM had its best sales month of the year in December, U.S. sales up 8 percent; the auto industry very much on the mend, continuing in that vein.

There was a mixed session here in Europe. London's FTSE 100 took the lead, gaining almost 2 percent and climbing past the 6,000 mark. It was playing catch up after public holiday on Monday. There was solid gains in Paris, meanwhile, the CAC 40 ended the session around 0.39 percent higher. But the new year cheer was worn off, or has worn off. In Frankfurt the DAX dropped by around 0.21 of 1 percent.

Next, a double dose of Motorola, as the company splits in two. We'll speak to the man in charge of the new mobile phone division, about winning back market share.


FOSTER: Motorola is now a double act. As of today the company's business and consumer units are trading independently on the New York Stock Exchange. Motorola Mobility, with the red logo, will make the phones and set top boxes. Motorola Solutions will focus on business communication products, (UNINTELLIGIBLE) the logo. Motorola pioneered the mobile phone, creating the first handset back in 1973. Just three or four years ago its global sales were second only to Nokia. Now, Ferguson Gartner (ph) put it down in seventh place-a disaster story on many levels.

Sanjay Jha is the CEO of Motorola Mobility now. He says a focus on smart phones and tablets will start bringing in the money again. He told me the spinning off of business and consumer units is about giving more choice to shareholders.


SANJAY JHA, CEO, MOTOROLA MOBILITY: In a sense it has been that these two businesses are quite different businesses and that we could focus, each of us, Greg Brown on the enterprise business, which is a much slower moving business than a much faster, fast technology base, short cycle business, that I run. And that we could focus in each of our businesses better if we were separated. That was one thing. I certainly subscribe to that view.

There is also the view that there are different shareholders for each of these businesses. The Motorola Solutions business, there are more value and growth at reasonable price, investors. Where there are growth investors in the Motorola Mobility business and we wanted to separate so that we can each focus on our businesses and offer the right option to our shareholders.

FOSTER: And one of them could potentially be sold off later?

JHA: I don't think that is the anticipated outcome. I think we will both trade as independent companies and we will execute our own road map in Motorola Mobility. We participate in the smart phone marketplace that is growing at over 30 percent compound annual growth rate. We will participate in the tablet marketplace we have very large international footprint. So I think we will go execute in our strategy and we will grow and create shareholder value. I'm sure Greg Brown has similar plans.

FOSTER: I think just going back to 2007, cell phones accounted for something like two-thirds of the company's entire revenue. Motorola was a giant in this business, wasn't it? And if we go back to the Razor, when was that 2004? That was the best-selling phone on the market.

JHA: 2006.

FOSTER: OK, so that was the best-selling phone on the market, wasn't it? What went wrong for Motorola since then? And what are you going to do to turn it around?

JHA: You know, I joined the organization in 2008 and I am probably ill-placed to opine on what went wrong. I can tell you what we're doing right. We are focused on smart phones. It is the fastest growing segment of the consumer electronics business, in fact. And I think you are seeing convergence with computing an mobility, creating this new opportunity in tablets. We are participating in the tablet marketplace. We are playing, in fact, a leading player in smart phone marketplace. That is our strategy going forward.

FOSTER: But you are just playing catch up, aren't you? Because Apple has done all of this already. How on earth are you going to catch up with what is now being dominated by Apple?

JHA: You know, I think smart phones is very much at its infancy. People believe that by 2014, this marketplace will be close to 900 million phones. I don't subscribe to the view that someone has come and played the game and taken the ball home with them. I think the game is just developing. There are lots of convergences occurring in this marketplace. There is a convergence with computing. Tablet marketplace is only 9 months old. If you look at the media convergence, more and more people are watching media on their smart phone. There is a dramatic shift happening in the smart phone marketplace and I think we are extremely well positioned to capitalize and win in this market.

FOSTER: Well, everyone is piling into that market. Which bit of the smart phone is where the money is?

JHA: It depends on which part of the world you are in. In the United States a vast majority of operating profits are still in the high tier, what we call performance tier of the marketplace. In China and Latin America it is middle tier of the market. In Europe it is middle to high tier of the marketplace. You will see us introduce a fairly comprehensive product roadmap in 2011, as we did, in fact, in 2010. We are already a significant player in the United States. We are coming to Europe, and China, and Latin America. Our brand name is quite strong. And leveraging our brand name, I think you will see us deliver operating profitability.


FOSTER: Now we are going to hear from more CEOs in just a moment. Stay with us for a behind the scenes look-excuse me-of their daily work. It's "The Boss", next.


FOSTER: Time to look behind the scenes of business now. To find out what it takes to be "The Boss". From New York, London and Hong Kong, we have been following these three CEOs as they go about building their businesses. This week, Sarah gets a taste of bigger and better business HQs. And Michael gets a chance to share his business skills with the next generation.


UNIDENTIFIED MALE: Previously on "The Boss": Sarah Curran lost out on the prize of the global fashion awards, but still she celebrated success.

SARAH CURRAN, CEO, MY-WARDROBE.COM: It is a massive honor to be shortlisted.

UNIDENTIFIED MALE: And in Hong Kong, Michael Wu tasted his next signature product, a new chocolate cake.

MICHAEL WU, CHAIRMAN, HK MAXIM'S GROUP: I think this is a acquired taste, of knowing what would sell.

UNIDENTIFIED MALE: Michael Wu is taking time out from a busy day to meet with business students from Hong Kong University.

WU (Speaking Chinese, translated captions): Sit down, sit down.

UNIDENTIFIED MALE: They want to know what it is really like to manage one of the city's leading companies. And Michael is happy to share the lessons learned from his years as "The Boss".

WU: As a leader what you really have to do is, you have to filter all this information, how to act, how to react, what to say, how to know the consequences of actions before they occur. And really, how do you compress so much information, at one time, and know how to make the right judgment.

UNIDENTIFIED MALE: He uses one of Maxim's recent success stories as a teaching tool. Explaining how the company created the concept and the brand behind its signature Angel and Devil cakes.

WU (Speaking Chinese, translation captions): We are building a brand. We are not just selling cakes. How do you build a brand name? It requires special packaging. In this case, to bring a famous designer together with a TV commercial.

UNIDENTIFIED MALE: Michael credits his own experience at Brown University for helping prepare him to take on a leadership role.

WU: I remember at my graduation ceremony, in 1992, the president of Brown, at that time, Vartan Gregorian, his speech was that this was not end, this is just the beginning of your journey. The university gave me the skills to excel, to be a leader, to be of service to others.

(Speaking Chinese, translation captions): There are many factors leading to our success.

UNIDENTIFIED MALE: These students are hanging on his every word, hoping to gain some insight here that will help them make their own way in the business world.

WU (Speaking Chinese, translation captions): Even though we continue to welcome older customers, we are also trying to target more younger customers like one of our new brands, Simply Life. The first branch is at IFC. Did you even know it's actually one of Maxim's outlets?


WU: If you didn't know, we're actually successful in branding.

UNIDENTIFIED MALE: As "The Boss", Michael knows the importance of leading and motivating.

WU: Oh, thank you.

The message I gave them, which is very important, is that there is no shortcut in life. Don't be afraid of working hard and starting from the bottom. Because at that moment, you may think, why am I doing this? But at the end when really, you know, grow up and become successful in your own right, you'll look back at that moment and you say, that was a very valuable learning experience, which I just had. So I told him to treasure every moment they have.

UNIDENTIFIED MALE: Sarah Curran has a new office to call home.

CURRAN: This is our new reception. We moved in about a week ago.

UNIDENTIFIED MALE: The chief executive of My-Wardrobe has moved her online retail company to a spacious warehouse. For Sarah this is a testament that her company is doing well and growing fast.

CURRAN: When we moved into our first location in London, it just seemed as though we had so much space. And then within about 12 months, it started to get a bit tighter. So now we are back to loads and loads of space. But I'm sure that we are going to have to become resourceful again, with space.

UNIDENTIFIED MALE: Previously the teams were spread across different floors, making it difficult for communication. Sarah believes the new layout will improve workflow, more importantly allow her to become more involved.

CURRAN: I think what was really important for the business was that all creative elements of that business were together under one roof to help communication, so that there is this core synergy and theme that runs throughout. It is so exciting for everyone to be under one roof.

UNIDENTIFIED MALE: As "The Boss" of My-Wardrobe, Sarah has never had her own corner office. She never had the need for it. Her Blackberry has allowed her to work on the move. But that is now changing.

CURRAN: I actually sit there.


I don't know why I'm walking past my desk.


It is such a novelty to have a desk.


It was so important to me to have an open plan office. I didn't want to be in an office, locked away. I wanted to be in the team so I could hear what was going on. And that, again, is another way of easing that flow of communication. So I sit on the buying desk, with the buying director in the men's wear buyer, and the women's wear buyer. And it just means that rather than setting up appointments, or meeting the boardroom, we can just have those key, everyday discussions, face to face.

UNIDENTIFIED MALE: Sarah is hoping the new office layout will make her team more productive. After all, it is her job to get the most out of them.

CURRAN: When you look back 12 months from today it was a very different business. The team have grown and developed and matured, at such a rate, it is just a really exciting time.

UNIDENTIFIED MALE: Next week on "The Boss", Michael Wu looks for innovative ways to keep his brand fresh. And we catch up with Richard Braddock in New York as he celebrates a successful 2010 with his FreshDirect team.


FOSTER: We have had the minutes to the last Fed meeting coming through, the meeting from December. Just looking at the highlights and effectively it is saying that the QE2 program, quantitative easing program, that is that $600 billion purchase of-a bond deal, basically, is going to carry on. There is nothing in the improving economic figures which would put that off. That is the headline, basically.

This is how they put it: "While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments of the asset purchase program, QE2, and some noted that more time was needed to accommodate information on the economy before considering any adjust-uh, adjudge-adjustment. So, effectively, no change, but the economy is improving.

Oil prices have come off their two-year highs. But for how long? We'll talk with one expert who says they'll soon be hitting the again.


FOSTER: Welcome back. I'm Max Foster. You are watching QUEST MEANS BUSINESS. And these are the latest headlines.


FOSTER: Wall Street's New Year stock boost is looking pretty short- lived. Alison Kosik joins us now from the New York Stock Exchange.

But was it anything in the minutes to encourage traders?

ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: Yeah, you know what, Max, we did see a pop in the Dow. Right after the minutes came out the Dow went back into the plus column. And here's what the minutes pretty much said, from the Federal Reserve's last meeting in December. Once again, these were released a short time ago.

Mostly about what the Fed's quantitative easing policy has been about. And it has really been a driving force behind the rally in the market that we have seen since late August. Now in the minutes that we got, the central bank said that the recent strong economic data is not enough to change course on the plan. The Fed also noted that the economy and the labor market are improving, which are other reasons why they are not going to veer from course and go ahead and continue purchasing the total of $600 billion in bonds.

But they did say on the flipside that problems in Europe, those debt problems and home prices are still a risk to the recovery. So those are still obviously on their radar.

A couple of other things that investors are keeping their eye on today: We did get a report on November factory orders, really not doing much to keep the market afloat, either. We also got some auto sales numbers. They came in pretty good. But overall you are seeing the market turn a little bit higher, at least for the Dow, because of those minutes that just came out, Max.

FOSTER: Yes, Alison, you just spoke to those car makers' figures, the sales figures. They were -- they were within the range of expectation, weren't they, but they were, you know, at the top of those expectations?

KOSIK: Yes, I mean they weren't at the top. I mean Ford came in with a -- a 19 percent gain in sales for the year, a little less for G.M.. Actually, one of -- it was one of General Motors' weakest showings. But you have to remember how far G.M. has sort of been pulled up by the bootstrap. You know, they went bankrupt. They had a -- a government bailout. You know, they just -- then they just became public again. And their sales are really coming back and their business model is really showing that General Motors is making a comeback, albeit a little bit slowly -- Max.

FOSTER: OK, Alison, thank you so much for that.

Well, gold and oil prices are taking a tumble this session. The dollar is a bit stronger, which makes assets traded in dollars look relatively more expensive. Right now, gold is down around $38, at $1,396 an ounce. Oil is hovering below $89 a barrel, down almost $3 on yesterday.

Let's see if this is the start of a trend, though, or just a blip.

CNNMoney's Poppy Harlow joins me now -- we're getting a real sense, Poppy, aren't we, about how the markets are moving this year?

POPPY HARLOW, ANCHOR, CNNMONEY.COM: Yes, I mean this is an interesting move today, when you look at commodities from gold to oil, Max. We've seen, over the past few months, a huge run-up, especially in oil prices, that has sort of largely been ignored. And now people are really focusing on it because of what it's doing to gas prices here in the United States.

But most oil traders that you talk to in this new year are -- are bullish and they're saying we're going to see $100 crude, no question about it, possibly by this spring, definitely by the summer.

But again, a big sell-off in crude just today. So we'll see what happens.

The -- the demand picture is what's driving this, according to the traders that I've talked to. It is all about growing demand in the U.S., as we see somewhat of an economic recovery, but also a big demand picture in China, India and other emerging markets. That's been the story for quite a while.

But I wanted you to take a listen to part of my conversation with Ira Epstein. He trades oil at the Chicago Mercantile Exchange.

He's very bullish on the commodity.


HARLOW: The China demand, that's a huge -- a huge part of this, with a rising middle class in China. At least the boom we're seeing now, we haven't seen a -- a burst, if there is a bubble in China, yet.

How much does the China demand picture play in here, Ira?

IRA EPSTEIN, OIL TRADER, CME GROUP: Well, I think you have to look at this as the decade, not a year -- as the decade where China grows up. China began last year, became a powerhouse. But if you go to China and you go into the countryside, you do see how rural it is and how the infrastructure needs to be built up.

I mean we see their high speed trains going through the country, but then you'll go into certain villages and you'd swear you're back 100 years.

So things are changing now and they're going to continue to change. So I think you have to have the broad outlook of how many people are there, what the powers of their demand on the market and as automobiles are built that are cheap to afford, it will support much higher gasoline, much higher energy costs.

HARLOW: What about a side of China outside of the US?

You know, we could talk about Brazil, but Brazil is mainly self- sufficient when it comes to fueling their vehicles. They -- they've done just a superb job when it comes to (INAUDIBLE), ethanol, sugar-cane based.

So outside of Brazil, where you do have booming economies, where should we be looking that will drive the price of -- of crude on the global mark -- market higher?

EPSTEIN: What about India?

Why are we forgetting India?

Remember the word Tata, that little car that they built to take advantage of everything?

Well, this is all running. Remember, Tata owns Jaguar, if I'm correct, in the United States. So this is another area where it's going to go.

I wish I could tell you Africa was going to have that type of growth. That's not here yet. So we're still forced to look to the Asian economies, parts of, obviously, Europe for that. But Europe is like the U.S., most of it's getting tapped. So now it's the new Asian economies and the lifestyle we're going to change there.

HARLOW: And -- and, finally, Ira, you say we're going to cross that $100 a barrel mark this year.


In the next month, three months, six months?

EPSTEIN: I would think spring. I think that's a very logical time, assuming everything is normal. Now, if you have a world flare-up of something, should North and South Korea starting going at each other, should Iran decide to put its foot down and really start a problem with its nuclear event, it -- I mean those are the unknowns.

But given the regular way that we're going, you'll get your changeover to the gasoline demand in many of the hemispheres starting late March, May, April. And I'm guessing, if we're going to make the run to the $100, that's going to be the time frame.


HARLOW: Now, so we'll see how it all plays out, Max.

One point that he did emphasize in the rest of our interview is if -- if QE2, if the Fed's quantitative easing policy here in the United States really works in the way it's intended to, there's going to be a big driver of demand of crude prices here in the United States.

At the same time, I asked him about electric vehicles and the big push for electrics and hybrids in this country and around the globe. But he said at this point, that's not affecting the crude picture. These are novelty vehicles. They're not sold en masse. They're expensive, tough to sell in a down economy. So those, at this point, he views it as a novelty and not affecting demand for crude, especially when it comes to automobiles.

But an interesting analysis from him. You can see a lot more of it. We've got it right here on -- back to you, Max.

FOSTER: Good stuff.

Poppy, thank you very much, indeed.

We were talking earlier about the good results for those automakers. Let's have a look at some of the other companies doing well today in terms of share prices.

First of all, BP. Shares up 5.87 percent. The speculation of an opt -- opportunistic take over by the rival, Shell, that's what's driving this. And reports that all of the $20 billion compensation fund won't be needed in relation to what's going on over there in the United States, all those legal proceedings, of course.

Banking shares have been rising across this continent. Dexia, Barclays, RBS -- they're all up more than 4 percent. So some good figures coming out, as you can see.

And easyJet is an interesting one in London. It was up more than 4 percent, because it's expanding as a budget carrier here in Europe, of course, and it's ordered 15 new Airbus A320S planes -- planes which basically means it expects a very strong few years ahead.

Now, is the U.S. property market poised for a rebound?

Well, we'll tell you why an overwhelming number of foreign investors say they are ready to put their money back into bricks and mortar.


FOSTER: Well, as Europe continues to grapple with the sovereign debt crisis, there are some signs that the U.S. economy is improving. Still, many states are facing tough spending choices in the new year, as they try to balance their books.

Mary Snow has that story.


GOV. ANDREW M. CUOMO (D), NEW YORK: I, Andrew M. Cuomo...

MARY SNOW, CNN CORRESPONDENT: (voice-over): Faced with looming financial crisis, New York's new governor, Andrew Cuomo, is taking a 5 percent pay cut and his top aides will do the same. It comes as "The New York Times" reports he'll order a one year pay freeze for state workers on Wednesday, as part of an emergency financial plan.

CUOMO: The state government has grown too large. We can't afford it. The number of local governments have grown too large. And that, we're going to have to reduce and consolidate.

SNOW: In California...

GOV. JERRY BROWN (D), CALIFORNIA: The year ahead will demand courage and sacrifice.

SNOW: California's new governor, Jerry Brown, faces a $28 billion deficit over 18 months. And Illinois is among the hardest hit states. It's being closely watched to see how it handles its massive budget shortfall.

PETER MORICI, UNIVERSITY OF MARYLAND: What's going on in Europe is just a precursor of what's going to happen in Illinois, New York, California.

SNOW: Economist Peter Morici says like European countries strapped with debt, U.S. governors must rein in spending and renegotiate pensions.

MORICI: The governments at the state and municipal levels employ to many people to do few things ineffectively and that simply has to change.

SNOW: It's estimated that budget shortfalls for all states combined amounts to roughly $140 billion this year. Compounding the problem, federal stimulus money that helped states create jobs expires this spring.

SCOTT PATTISON, U.S. ASSOCIATION OF STATE BUDGET OFFICERS: I think the best analogy is a person who was unemployed, got a job back, but they actually make less than they did before the recession. And that's -- that's really what states look like.

SNOW: Scott Pattison is executive director of the National Association of State Budget Officers. He says municipal bankruptcies are rare and doesn't expect them. But...

PATTISON: There's only so much money to go around. So the interest will be paid on the debt, the bondholders will be paid. But there will be budget cuts and perhaps tax increases in other areas that will cause pain, that, frankly, citizens are going to notice.

SNOW (on camera): But the options are limited. Several new governors have pledged not to raise taxes, which leaves them with the unpopular choice of program cuts.

Mary Snow, CNN, New York.


FOSTER: Well, the cut in the U.S. property market is often cited as one of the main reasons for the global credit crisis. But despite subprime mortgages, defaults and foreclosures, there have been some signs that we're close to the bottom. Today, AFIRE, which is the Association of Foreign Investors in Real Estate, says foreign investors ranked the U.S. commercial real estate market as their number one choice this year. The U.S. got four times as many votes as second place Britain.

Jim Fetgatter is chief executive of AFIRE, the organization that's come out with this latest, very upbeat report, it has to be said.

To discuss his findings, we are joined by him live from Washington.

Thank you so much for joining us.


FOSTER: What's one of the places which is doing very well, interestingly, isn't it?

FETGATTER: It's an interesting statistic and result. It actually surprised us that the U.S. had scored so highly in this survey.

FOSTER: OK, so what types of properties...


FOSTER: -- are we talking about here?

FETGATTER: Well, there's another interesting fact. We are not actually talking about office buildings this time. They are talking about multi-family housing, apartment blocks. That's their favorite product type.

FOSTER: As in the investment in building apartment blocks, not the apartment holders buying those blocks just yet?

FETGATTER: No, no, no. These are commercial real estate investors that -- that are buying en -- entire apartment complexes or are -- are portfolios, along with some other, you know, retail and offices there, as well. But that -- they perceive the multi-family housing, at least at this point, to be the -- the best prospect for appreciation.

FOSTER: And I presume there's not much interest in offices, because there's not much prospect for jobs growth in the U.S. right now.

FETGATTER: I think that's probably the assumption that you have to draw. Offices were very popular about three years ago, before the downturn. And they've dropped in popularity, although there have been some purchases by foreign investors.

But I think until the unemployment rate starts moving down, I think they're going to be slightly skittish, unless it's a fully leased building.

FOSTER: OK. So obviously the U.S. was number one.

But how did the -- the next countries play out there?

Have there been any interesting developments about what comes after America in interest?

FETGATTER: The most interesting development probably is the U.K., which, in last year's survey, was -- scored fairly highly. And we saw a significant drop in the -- in the attitude about U.K. property increases. And it's probably -- you could -- probably could draw the inferences because the U.K. was the first market, really, to come out of the -- out of the recession. And there was a lot of activity, as you probably know, for the last couple of years.

So now that interest seems to have moved to the U.S.

FOSTER: And in terms of the developed countries, I noticed Brazil is a very popular choice right now.

Is that just a reflection of the fact that everyone is really looking at Brazil right now as an emerging market?

FETGATTER: Well, yes, it is. I mean they -- they have increased their interest in a -- in a wide variety of -- of countries. But if you look at the -- at the -- at the top countries that have -- that have gotten their interests, there is the commonly called BRIC countries -- Brazil, Russia, India and China. Now we sort of have the BIC countries, as the pen in your hand, perhaps. Russia seems to have dropped out of those top four. But we have Brazil, India and China still as the most interesting emerging countries for them.

FOSTER: OK. Jim Fetgatter of AFIRE.

Thank you very much, indeed, for joining us with your insight on that story.

Now, retailers here in Britain are bracing themselves for a tough year. While the property market is looking good, the -- the British Retailing Consortium says two thirds of its members believe 2011 is going to be worse than 2010. And four out of five believe the sales tax, which came into effect today, will hurt revenues.

Jim Boulden has been out and about on the streets of London, finding out where consumers have been hit hardest.


JIM BOULDEN, CNN CORRESPONDENT (voice-over): The January sales are a tradition here along Oxford Street. But starting Tuesday, many goods cost a bit more, as the country's consumption tax is raised as part of the government's four year austerity plan to cut its budget deficit.

Some customers hit the shops over the weekend to avoid the rise and take advantage of the post-Christmas deep discounts.

UNIDENTIFIED FEMALE: We were hoping purchase this TV in a couple of weeks times. But obviously, due to the VAT rise, you know, we decided well now is the time to sort of take it as another tax, really, and just get on with it and buy as you need, I think.

BOULDEN: The value-added tax, or VAT, was raised to 20 percent from 17.5 percent.

(on camera): The government says the rise in VAT will add some $20 billion a year as it tries to cut the budget deficit. The opposition Labour Party says it will increase unemployment, slow retail sales and cause inflation.

(voice-over): But with 2011 looking to be a tough year for retailers, with job cuts and welfare cuts hitting wallets, shopkeepers have to decide whether to pass this VAT rise onto consumers.

RICHARD DODD, BRITISH RETAIL CONSORTIUM: I think initially, retailers will be absorbing the VAT increase and it will actually be lost, hidden from customers among those discounts that are going on.

But, of course, that's not something that retailers can afford to do forever.

BOULDEN: During a year of unrest from Greece to Ireland, other European countries already raised their consumption tax to cut gaping budget holes. An increase in the university tuition fees in Britain led to three violent protests in London. The value-added tax is unlikely to have the same impact. But tax protests are growing here.

SIMON CHOUFFOT, ROBIN HOOD TAX CAMPAIGN: So while VAT goes up on ordinary people and ordinary businesses, the bankers are getting away scot- free. Incredibly, the financial sector is VAT-exempt.

BOULDEN: While the January sales continue, it's unlikely most shoppers in the U.K. will notice the small increase. But then the hangover from Christmas shopping might hit.



ROBERT CLARK, RETAIL WEEK KNOWLEDGE BANK: I think sales will be pretty dampened down. And I think consumer confidence will be low. So quite a lot of them will possibly be panicking and increasing the offers and absorbing the VAT rise. So I think it's going to be very tough, particularly over the first three or four months of the year.

BOULDEN: And some wonder whether a few stores will take advantage of this tax rise and pad prices a bit more to make up for what is expected to be an austere year in Britain.

Jim Boulden, CNN, London.


FOSTER: Well, China's vice premier is doing the rounds in Europe this week. We'll tell you why the Eurozone's most cash hungry nations are more than happy to see him.


FOSTER: Spain's economy has received a vote of confidence, as China says it plans to buy more Spanish bonds. In an editorial published on Monday in the Spanish newspaper, "El Pais," China's vice premier, Li Keqiang, said China is a long-term investor in the European financial market, particularly in Spain, and will continue investing in its public debt. Li begins three days of trade and investment talks with leaders in Spain on Tuesday, before heading to Britain and Germany for similar meetings.

Eurozone governments are still under pressure to reduce massive budget deficits. But lately, they've been getting support from outside Europe. The number of Spanish bondholders in Africa and Asia, excluding Japan, has more than doubled in the past four years.

China has been one of the most avid buyers of European sovereign debt. Beijing has said it also plans to continue buying Greek and Portuguese debt.

CNN's Al Goodman in Madrid explained to me why China's spending spree is such good news for Spain.


AL GOODMAN, CNN MADRID BUREAU CHIEF: Well, this is good news for Spain. The Chinese vice premier, Li, has written an editorial in Spain's largest circulation general newspaper, basically saying that China is going to stay involved in the European Union in terms of helping out with the debt problems across the European Union and particularly with Spain.

Now, that is really good news for Spain at this time. Spain has been able, Max, to sell its sovereign debt, but it has been because investors see this as a risky place. They've been demanding higher and higher interest rates, which, in the long-term, is going to cost Spain more and more money to pay back the -- the debt that -- that they're selling.

So this is good that China is staying in. China already holds a chunk of Spanish debt and is saying, as the minister arrives, that this will continue.

So that's good news for Spain -- China.

FOSTER: Why do you think China's doing this?

Is it a political move or an economic move?

GOODMAN: Well, it's certainly an economic move. The European Union is China's biggest export market. And so China wants to make sure that things stay relatively stable here so that the Europeans will keep buying Chinese goods. They don't want to see the euro -- the euro get into a lot of trouble. They don't want to see the -- the major countries, which are having a lot of difficulty, Spain among them, getting into any further trouble. And so they're coming here to sign some deals with Spain. And they'll be going off to Germany later this week and to Britain, presumably to do more of the same.

If the -- so, clearly, there's a strong economic angle here for China, as it looks at the European Union as a whole and at some of the particular key countries in the European Union -- Max.

FOSTER: And this could be the savior of the Spanish economy, in a way, couldn't it, because China has certainly got enough power, enough cash to prop up the Spanish economy. And it's saying it's going to do that, effectively.

GOODMAN: Well, it's saying particularly that it's going to continue staying very closely involved with Spain. It already is. There is about 20 billion some odd dollars worth of trade both ways in the first eight months of last year, the trade balance very much in China's favor. But 600 Spanish businesses have -- have offices over in China. And so there's a lot of action going both ways.

They're expected to sign maybe a dozen agreements on this trip in telecommunications, energy and other sectors. And so all of this is a good boost not just for what cash and deals can be made with China, but for the message this sends. Look, China, the big player, is staying involved in Spain and you, the other investor, should stay involved, too. That's clearly a message that Spain will be selling -- Max.


FOSTER: Fascinating stuff, isn't it?

Al Goodman there speaking to me from Spain.

Let's find out what the weather forecast is looking out, looking -- looking like, because there's a cold chill gripping parts of Europe again - - Guillermo.

GUILLERMO ARDUINO, CNN METEOROLOGIST: Yes. I was checking out Madrid, in fact. The city is reporting rain as we speak, some of the citizens in Spain. I'll tell you in a second.

Now, when we look at Great Britain, you see most of the rain -- very, very few instances of sleet or mixed precipitation in the extreme northern sections of Scotland. But mostly from Northern Ireland into Scotland or Northern England is where we see the rain and into the extreme south, in Plymouth, also.

And the Isles of Philly is where we see, also, some rain, as we speak.

Let me check out some other spots.

Glasgow reporting rain. Bristol, Plymouth and the Hebrides here, all the way up to the north.

Now, Spain, Madrid is reporting some rain. But here in the north, actually, right near the border at San Sebastian -- a beautiful town -- it's reporting rain. Also, Santiago de Campostela is reporting rain. Vivo here in Galicia and Lyon is reporting some rain showers as we speak.

Vias in the southern parts of France is reporting rain.

Now, I have to tell you, Thursday may be a better day for London. Come the weekend, we'll see the rain. It is cooling down. It's going to - - it's not that bad right now in terms of temps. You see tomorrow, eight degrees, the high for London.

Then, the temps go down. In the east, things are going to change very soon, because we see all the negative figures there. We see all the snow. I was actually checking in Romania. These pics come from an iReporter. And in Baia-mare, we still see some snow. But things are getting much better, because the weather is changing. Bucharest is not reporting any more snow as we speak.

We are going to see some winds picking up in Amsterdam. Dublin, mixed precipitation. All the other airports appear to be fine. We'd the expect some bad weather.

Copenhagen is reporting snow right now, and Helsinki, as well.

But, see, the area of cold weather is shrinking, even parts of Romania are going to get better. Parts of Russia, the interior sections of Russia are going to see the cold -- a more emphasized cold.

But you see the jet that is defining the cold conditions. It's shrinking. So toward the end of the week, we get moderating effects.

I was checking out that we see -- we still see snow in Vestaland, in Schleswig-Holstein and the northern sections of Germany. And Spangdahlem, Rhineland Falls, it's near Luxembourg, that's where we see the snow. But that area is going to improve also a great deal.

The cold remains in China, especially in South Korea. You see the temperature for Thursday in Seoul really, really cold. So our viewers over there need to get ready for that -- Max.

FOSTER: Guillermo, thank you very much, indeed.

ARDUINO: Thank you.

FOSTER: We're going to check on the markets, meanwhile, after this short break.


FOSTER: Let's have a look at the Dow on the day that the Fed minutes came out. It didn't show much, but that was the -- the point really, that there was no major change in policy for the Federal Reserve and the market is only up very slightly.

Automakers doing pretty well today, because they had some very strong sales figures. But that was really the main highlight.

Japan's main stock market reopened with a bang on Tuesday. A ceremony at the Tokyo Stock Exchange rang in the new year. A big crowd turned out to mark the first session of 2011 and the positive mood in Tokyo has spilled into the markets, as well. The Nikkei gained more than 1.6 percent.

Natural resource stocks led the way on hopes for continuing economic growth. Investors have seen strong manufacturing data from the U.S., the Eurozone and parts of Asia in the past day. The upbeat mood throws shares of exporters higher in Hong Kong markets and Shanghai. And Sydney rallied as traders returned from the new year break. Coal mining and metal companies were the biggest gainers in Shanghai, on expectations of rising oil and metal prices.


I'm Max Foster in London.

Stay tuned.

"WORLD ONE" starts right now.