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Interview With Portugal's Finance Minister; U.S.: China Must Do More for Sake of Global Economy

Aired January 12, 2011 - 14:00:00   ET


MAX FOSTER, HOST, QUEST MEANS BUSINESS: A successful bond mission. Portugal's finance minister tells me there will be no bailout.

The U.S. says China must do more for the sake of global economy.

And joining the jet set, IndiGo Airlines records a record breaking deal.

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

Hello to you.

Portugal is edging back from the brink, for now. This time yesterday all the talk was of an eminent bailout. That was before Portugal put itself at the mercy of the bond markets and came back with plenty of cash. And at much better rates actually than many had expected. Portugal raised the maximum amount it was looking for, more than $1.6 billion. It issued both three-year and 10-year bonds. Demand was very strong with a 10-year paper attracting three times as many bids as there were bonds. The rate on the 10-year bond fell slightly from the previous auction to 6.7 percent. And the three-year bond rates rose slightly to 5.4 percent. Today's sale won't quell bailout talk, though, it does seem to be taking some of the immediate pressure off Portugal.

The Portuguese Finance Minister Fernando Santos joined me on the line earlier, on the line from Lisbon. I asked him how it felt to have proved all the naysayers from yesterday wrong.


FERNANDO TEIXEIRA DOS SANTOS, FINANCE MINISTER, PORTUGAL: I am glad that the operation today was a success. We had a very high demand. The interest rate underlying the operation is clearly below, and significantly below, the secondary market rate. And also a large share of the placement is outside countries, from foreign investors.

FOSTER: How many were bought by the Chinese?

DOS SANTOS: I can't tell. I have not that information. The only thing I can know, on a short time is the market participants and the financial intermediaries. And mostly the primary dealers that are engaged in our operations. And 80 percent of the placement was to foreign, primary dealers.

FOSTER: But was it one or two foreign-well, dealers in one or two countries or in many countries?

DOS SANTOS: Yes, in several countries, yes.

FOSTER: Because obviously China has thrown its support behind the euro and people are wondering it is largely that support that is propping up these bond auctions, rather than anything else.

DOS SANTOS: Yes that might be the case, but I am not able to tell. If they were present in this operation, and by how much.

FOSTER: We were speaking the other day to one of the world's leading economists, Ken Rogoff, who said it is almost inevitable that Portugal will have to go for a bailout and lots of analysts still saying that despite what happened today. Do you think, uh, you've-uh, uhm, moved completely away from a bailout as an option?

DOS SANTOS: Uh, the success of today's operation is clearly a sign that we are able to go to the market. And we have all of our financing in the market. And we are committed to keep on that way. And it was important that we were able to make this operation today.

FOSTER: You're not saying there will be no bailout? There may well be?

DOS SANTOS: I don't see reasons to talk about the bailout. We have been able to be present in the market and we are committed to keep on that way. And we do not intend to ask for any kind of external or rescue package, because it is important for us to be present in the market and also we are willing and committed to deliver the appropriate results in terms of the fiscal policy and also in terms of the structural reforms.


FOSTER: Portugal has the funds but the rates it is paying are still pretty punitive. Ireland and Greece before it were forced to seek help when borrowing costs notched above 7 percent. Mohamed El-Erian is the chief executive and co-chief investment officer at PIMCO. That is the world's largest bond trading house. He joins me now from Newport Beach, California.

Thank you so much for joining us.

Did you buy any of these bonds?

MOHAMED EL-ERIAN, CHIEF EXECUTIVE, CO-CHIEF INVESTMENT OFFICER, PIMCO: We did not. We think it was a successful auction. The minister is absolutely right. It was a successful auction but we have to remember three things.

First, we shouldn't be worrying about a government auction in a European country. It should be automatic, which speaks to the issue that this is not about a one-off auction. This is about an underlying problem. Second, a tremendous amount of effort went into preparing for the auction. The ECB stepped up it's buying of Portuguese bonds. The EU started talking about giving more money for the peripheral countries. And China, Japan, the U.S. made a lot of supportive statements. So, you can't do this every single time. Thirdly, Portugal, like Greece, like Ireland has a debt problem. And piling new debt on top of old debt doesn't solve your debt problem. So I would be qualified, and because of these reasons, we did not buy today's auction.

FOSTER: You know how the bond markets work. Is it your understanding the Chinese were heavily involved in this an the effectively propped up the auction.

EL-ERIAN: We do not have underlying data so I don't know. But what I know for sure, because it has been announced, is that a lot of buying came ahead of the auction, in order to prepare the market for the auction.

FOSTER: Yes, and that is what kept the rates below 7 percent, isn't it?

EL-ERIAN: Correct. But even at 6.7, as you cited for the 10-year, that is not a good rate for a European economy. European economies are not wired to operate at such a high level of interest rates.

FOSTER: OK, the finance minister, though, was very pleased with today's auction, obviously. And he said it should reassure the markets. You, in large part, represent those markets. Are you in any way reassured by today's auction, and does it meant a bailout is less likely?

EL-ERIAN: I think it is inevitable, and here I agree with Ken Rogoff. It is inevitable that Portugal is going to need money from the official sector. And that is because you can not simply pile new debt on old debt, and assume that the markets will continue to cooperate. The markets understand that there are two distinct issues, a debt overhang, and a growth issue. So it is inevitable in our eyes that, at some point, Portugal is going to need help. And the question is will that help the euros (ph) deal with the underlying problem, or will it be like Greece and Ireland, where simply postpones dealing with the underlying problem?

FOSTER: When do you predict a bailout is likely to come?

EL-ERIAN: I suspect that within the next four to eight weeks-within the next four to eight weeks we are going to hear about more funding being made available, first from the EU, and then perhaps from the IMF. In the meantime, you should expect the European Central Bank to be buying even more, in terms of Portuguese bonds.

FOSTER: And we should expect Portuguese ministers to say they are not going for a bailout, until it is agreed?

EL-ERIAN: Correct.


EL-ERIAN: Yes, you always-you know, that is the old rules, you always say you don't need it until you need it.

FOSTER: We (UNINTELLIGIBLE) didn't we? Thank you very much, Mohamed El-Erian. Thank you so much for joining us again, from PIMCO.

Now imagine being able to walk out of a U.S. bank with a fist full of Chinese notes. Well, when we come back, we'll show you how steps have gone towards making the yuan go global.


FOSTER: China is making moves to boost the international profile of its currency. One of its largest lenders, Bank of China, is allowing customers to trade the yuan at its U.S. branches. People will be able to change as much as $4,000 a day. And open your own dominated, denominated accounts. But a maximum amount, per year, of $20,000 has been set on that.

And the value of the yuan is a major bone of contention, of course, between Washington and Beijing. U.S. Treasury Secretary Timothy Geithner has been calling on China to life what he calls the substantially undervalue yuan. And he says it is putting other countries at a competitive disadvantage. Jamie Metzl, of the Asia Society, joins us from CNN New York.

Thank you so much for joining us Jamie. What did you make about this move with the U.S. branches, I was talking about there?

JAMIE METZL, EXEC. V.P., ASIA SOCIETY: Yes, I think there are two things at play here. First, is as we all know President Wu is coming here to the United States next week and China is trying to throw some bones in the direction of the United States to say that we are on a process towards making the Renminbi more convertible. Because that will be a big issue when President Wu is here.

Secondly, in the longer term, China does foresee a time when the Renminbi, the yuan, will be convertible. And so somewhere in Beijing, there is a plan for how the Renminbi, at that time, can move towards becoming a, or the, global reserve currency. And this can be seen as one small in that direction.

FOSTER: Is it just a sign, or is it something real? Is this going to be a growing trend, or is it just an indicator about what they plan, a sort of a signal, as they say?

METZL: Yes, it is a small signal. My guess is these rates, the amount that can be converted at these branches, will increase in small ways over the coming years. There is nothing going to-nothing is going to happen overnight. But I do see this as the beginning of a longer process.

FOSTER: OK, I just want to go to Timothy Geithner's comments, because they are not surprising. We have heard similar things before, basically, saying that the yuan is causing problems for U.S. trade and other-global trade, in fact. But when he starts saying that actually China will benefit from more freedom of its currency, because it will deal with its own inflation.

METZL: Right.

FOSTER: Isn't he just sort of getting over involved in the Chinese economy. Shouldn't he stay out of that and stop patronizing them?

METZL: It is not patronizing at all. It is a big issue, not just for the United States, but for the rest of the world. With the Chinese currency somewhere around 20 to 30 percent undervalued. It creates an enormous benefit for Chinese exports. And it puts other countries at a huge disadvantage, not just the United States. The United States, Japan, Germany, are relatively better off. But go to countries like the Philippines, even like Brazil, and those countries are getting clobbered. It is impossible to compete on mid-to low level exports, with China. And so, yes, it is in China's interests to increase the value of their currency as a way of addressing inflation, having greater balance in their economy and in the world economy. But there is also an enormous harm to others. So, I think it is entirely appropriate for U.S. leaders and others to speak very, very loudly about this issue. And I hope they-and I know that they will, when President Wu is here next week.

FOSTER: OK, thank you very much indeed for that, Jamie Metzl. We'll follow the trip with interest to see what other economic news comes out of it. There will be some, of course.

The latest report into the U.S. economy has just been released by the Federal Reserve, meanwhile, and investors will be casting a keen eye on whether the central bank is on the right track. One man who has been critical of its monetary policy is Dallas Fed President Richard Fisher. He sat down with CNN's Felicia Taylor to give us his inside view.


FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT (voice over): As Chairman of the Federal Reserve Ben Bernanke oversees policy at the world's most powerful central bank. But he rules by committee, made up of bankers from around the United States. Dallas Fed President Richard Fisher is a sometimes vocal opponent of policy decisions. And this year he regained the right to vote on contentious issues, as part of a rotating system.

(On camera): A lot has happened since last time we saw each other; QE2 has been implemented. What has actually been achieved in these few months?

RICHARD FISHER, PRESIDENT, DALLAS FEDERAL RESERVE: It's not clear yet, because there is a lag, from the time we make a decision, and this decision was made in November; and it works its way through the system. We do know some things have occurred. The economy's economic data is stronger than it was before. That is not because of QE2. But undoubtedly has to do with the programs we undertook previous to this.

And we also know that rates have changed. We have had a back up in the 10-year rate for example, which is a key rate, the rate on 10-year U.S. Treasuries. Not because of QE2, but in interesting simultaneous timing we have actually seen a lifting of the tide of the boats of the economy. That is the good news. The bad news for Americans is that those boats are still tied to the dock in terms of employing people, which is the purpose of the program we have undertaken. At least, as far as I'm concerned, I think the Fed has done, if not enough, we are certainly close and it is up to the fiscal authorities now.

The regulatory authorities, they have to give business men and women, who actually create private sector jobs, that is what works in this country, they have to give them incentives. And they have to clear air. And that is the real issue. No one is complaining about the cost of money, the availability of capital. There is lots of liquidity out there.

TAYLOR: There's plenty of liquidity out there.

FISHER: So, our job, I think has been done.

TAYLOR: Why isn't there job creation?

FISHER: And I don't think-well, Jean-Claude Trichet, who is the head of the European Central Bank, said it very well on Friday. Responsible monetary policy cannot offset irresponsible government. And we have a Congress, and we have an executive, not just this president, not just this last Congress, but for too long, Republicans and Democrats that have been disincenting business. Sending signals through tax policies, spending policy, regulatory policy, it just doesn't encourage people to take risks.

TAYLOR: Mr. Bernanke has to defend his choice to go ahead with QE2, because there is a certain amount of divisiveness about this.

FISHER: Right.

TAYLOR: And he has said that, "It bears emphasizing that the Federal Reserve has all the tools it needs to ensure that it will be able to smoothly and effectively exit from this program, at the appropriate time, hinting possibly that this could end sooner than its full completion through June. Do you think that is going to happen?

FISHER: The way that the decision was made, I was-by the way, I argue against it. Just full disclosure there. Mr. Honnick (ph) was a formal voter, voted against it. I would have voted against it. The decision was made. The statement, however, and the decision was, we will do this, unless economic conditions change significantly to raise the question, so should it be continued? Personally, I expect that the committee will want to continue the program.

TAYLOR: Even though we have seen pockets of inflation with commodity prices, a stronger dollar, which at some point is going to hurt exports, maybe not immediately.

FISHER: Yes, that is a very interesting question.

TAYLOR: There is clearly some concerns out there that possibly enough has been done.

FISHER: Whether you were for this program, or whether you not for this program, the team, and we are part of a team, are monitoring the situation. As far as commodity prices are concerned, you are absolutely right, across the board from copper to soybeans to corn to cotton, to coffee, etc cetera. It affects the pocketbook-and, by the way, gasoline at the pump. The real issue here is these commodity prices, in terms of the cost push, influence they have on inflation, is there enough demand, in the United States, on the demand pull side? When it pulls out of a company, as opposed to when it goes in to producing something, but the processing of the food, or whatever it may be. How much ability is there for someone who sells that good or a service in the marketplace, to price it aggressively? I'm not hearing from businesses yet that they have the capacity of pricing power.

TAYLOR: Now as a voting member of the FOMC, will you actively oppose Ben Bernanke in any of these divisions.

FISHER: Well, you ask me a direct question, so I'll give you a direct answer. I don't know.

TAYLOR: That is not a direct answer, my friend.


That is as vague as it gets.

FISHER: It depends. My job is not to oppose Ben Bernanke. Charles' job is not to-

TAYLOR: To express your opinions openly.

FISHER: I always express my opinions openly. By the way Ben Bernanke, who is an incredibly fair-minded, thoughtful listener, a very good chairman of the Fed, very good chairman of the meetings, the way they are operated, takes everybody's account to view. He does not make the decision. He is the chairman. He is premier enterpares (ph), but it is a committee decision. And we listen to each other very carefully and then the majority of the committee, rules.

TAYLOR: I'll take your cuff links as a sign that things are going to get better.

FISHER: I am-ah, I wear these dollar cuff links out of pride. And by the way, I also wear them because they only cost me $25.


FOSTER: Now, elsewhere, it is a sale so big they are saying it is never been seen before. Airbus has landed a record-breaking order. We'll be speaking to the airline buying up their planes, in just a minute.


FOSTER: IndiGo, the Indian budget airline, has placed what has been described as the largest, ever order in aviation history. It is buying 180 A320 passenger jets from Airbus, with a list price of $15.6 billion. Jim Boulden joins us with the details.

I guess they are not actually going to end up paying that amount? But it is still huge.

JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT: It is huge. Even, you know, Airbus came out and said you cannot underestimate how important this deal is to Airbus. But we never know the list price. We never know the real price these airlines pay. You might find out, but what is important here is for the airline itself, you know, we're talking about India. So, it is a domestic airline, but we're not talking Belgium, are we? We're talking about a country of a billion people.

And what is so interesting about buying just one plane, one kind of plane, one family, is that it keeps your cost down for maintenance and training. So they have-this airline will completely be A320s. Now the largest order before this was the Chinese government buying, we think, 150 planes. And then those would have gone to various Chinese airlines. But that would have been Airbus and Boeing. You know, usually airlines do a mixture. So I find it very interesting that this is just one plane, and one part of a plane. And some of these are going to be these new fuel efficient planes that come out from Airbus in 2016. They have little wing- tips on the end and are more fuel efficient engines. And so, IndiGo will also be saving money by bringing this new generation of plane-lift off, because they will be one of the first airlines to have it.

FOSTER: What an incredible story, a domestic airline, running extremely cheap flights, but making a lot of money, from a market it knows really well. And it has exploded onto the international arena, even though it only operates in one country.

BOULDEN: Well, you know, all of these companies, we have been talking about this for a generation, haven't we? Is that if you can do a deal in India, if you can do a deal in China, think of how important it could be. And here is a fantastic example with Airbus, doing the deal. And possibly actually overtaking Boeing for 2010, which was hinted at today. So they might have sold more planes in 2010, than Boeing. You know there is this wonderful rivalry between the two. And Boeing had some problems, of course, with its 787. It hasn't been, you know, put into the market yet. And so that battle, also, you can see this, you add this in the beginning of this year for Airbus, it is phenomenal.

FOSTER: Jim, thank you very much.

Let's talk to the man, then, who is. Creating aviation history. Aditya Ghosh is the chairman of IndiGo, and he joins me on the phone from Charles de Gaulle airport in Paris, where I understand he is just minutes from boarding a plane. Won't take up too much of your time.

But an incredible story. Can I just as you, in terms of buying these planes, how are you going to pay for it? Did you iron that out yet?

ADITYA GHOSH, CHAIRMAN, INDIGO AIRLINE: Well, you know, the good thing is that these things come only in 26 king size, so we had six years to think about that.



GHOSH: A lot of work for my people to do, but on a more serious note, we ordered $100 planes back in 2005. And we kind of consumed 40 percent of that feat (ph) already. So, you know, no change in package of funding in that sense. The same way that we are completing up the first 100, we will go through the next 180, I think.

FOSTER: And Boeing just didn't offer the same deal, right?

GHOSH: Can you say that again, please?

FOSTER: Boeing didn't off as good a deal, I presume?

GHOSH: Well, you know, Boeing, they make great airplanes, no doubt. But the fact that, you know, we are currently operating a full A320 fleet, you know, the launches that they gave us, it was a perfect combination of being able to maintain the commonality of fleet going forward for the next 10 or 15 years. Along with this massive fuel (ph) run (ph) reduction on the Neal (ph)-with the new engine option, are up to a 15 percent reduction in fuel burn in our business is a game changer. So we are excited to be their lone customer on the Neal (ph).

FOSTER: And the way you have managed to get ahead in your country is because you have managed to keep costs, very, very low. This is all part of that. And you basically offer very low budget tickets, don't you? And you are competing with train services. Just explain how you have managed to grow the way you have, in one country.

GHOSH: So, you know, Max, India is a country of 1.1 billion people, who with an aircraft penetration per capita, which is extremely low, one of the lowest in the world. For a country of a billion people we have only 400 commercial planes, all put together. So, you know, where train travel is long and arduous. And it was-this is a highly undersold market, so if we can come in with low fares, and you know give great quality of service, you are talking about converting people who are taking a 16 hour train journey between Delhi and Mumbai, the equivalent of say, New York, Washington kind of a distance; you know, people are taking a 16-hour train journey, which is an hour's flight on us. And yes, we can offer, kind of the similar prices, but as you said, the trick lies in keeping the coats low, because anyone can grow, but the idea is to grow profitably.

FOSTER: And that is story around the world, isn't it? But you are expecting business, clearly, to boom in India, based on the number of planes that you are buying. What sort of growth are you expecting and what does that say about the Indian economy right now?

GHOSH: You know, passenger traffic has been growing at least 15 to 20 percent every year for the past six years. And that is the way we see it going forward. We carried-the country carried 18 million people in an-on airlines back in 2004. That is more tripled in size, in six year's time. At 15 to 20 percent growth, and a 400 commercial airplanes based, you are looking at 40 to 60 new planes coming into the country just to maintain current load factors. Which is not happening.

FOSTER: But that sounds as if-

GHOSH: What is happening is-

FOSTER: I'm sorry I'm interrupting, but we haven't go much more time. The implication is you are not going to use all the planes for India. Does that mean you are going to be going international, now?

GHOSH: Most of it in India and partly in the region, Southeast Asia, Middle East, South Asia, but they are most of it in India, because that is where the market is.

FOSTER: All right. Aditya Ghosh, thank you very much indeed from joining us from IndiGo, an incredible corporate story, there.

Now Spain breathed a sight of relief. Their next door neighbors, Portugal, will pull through in the bond markets, now it is their turn, though. We'll get the mood from Madrid, in jus a moment, stay with us.


FOSTER: Welcome back.

I'm Max Foster.

You're watching FOSTER MEANS BUSINESS and these are the headlines.

Brisbane, Australia is bracing for more flooding. Authorities predict that up to 20,000 homes could soon be completely flooded. They're urging people to get out of town and fast. Much of the city has no electricity. Emergency shelters are packed. The disaster has killed 12 people this week. Sixty-seven others are missing.

More deadly violence amid the tense political stand-off in Ivory Coast. At least 10 people were killed in clashes on Tuesday and we're now getting word that three U.N. peacekeepers were injured by crossfire whilst returning from patrol. Tuesday's clashes occurred one day after the U.N. Security Council condemned the violence that's plagued Ivory Coast since the disputed presidential runoff in late November.

Lebanon's unity government has collapsed. Hezbollah minister and their political allies pulled out when Liberian prime minister, Saad Hariri, refused to disavow a U.N. investigation into the assassination of his further, former prime minister, Rafik Hariri. U.S. Secretary of State Hillary Clinton calls Hezbollah's move an effort to subvert justice and says it will not work.

It's been a year since a massive earthquake shook Haiti, killing 230,000 people. The grief is still raw and the country is still struggling to rebuild. Plus, it's contending with political instability and a deadly cholera outbreak. Many gathered near a ruined cathedral for a memorial earlier and a moment of silence is planned for the moment the quake hit, at 21:53 G.M.T.

Let's return to our top story, Portugal's successful bond sales seems to have gone down well with its next door neighbors in Spain. The Spanish ibex closed up by more than 500 points. And that's a gain of nearly 5.5 percent. It was banks that did best of all. Banco Bilbao Vizcaya Argentaria, Santander and Bankinter all pushing near 10 percent gains, possibly a sense of relief that the risk of contagion from Portugal went down with that bond sale.

Well, earlier, I spoke to our Madrid bureau chief, Al Goodman.

And I asked him what the reaction in Spain has been to Portugal's progress.


AL GOODMAN, CNN MADRID BUREAU CHIEF: Right. It's the neighbor right next door, Portugal. So a sigh of relief in Madrid at the results of the Portuguese bond auction this day. A senior Spanish government official, on background with reporters just yesterday telling -- telling reporters that Spain believes that Portugal will not need a bailout, is -- is fully on board, so that Portugal does not need a bailout and is confident in Portugal.

All of that is a message basically saying keep the neighbor healthy, right next door, because if the neighbor gets sick, it's going to be bad for Spain -- Max.

FOSTER: And Spain has its own bond auctions tomorrow. So I guess this bodes well for Spain. It is a stronger economy, after all.

GOODMAN: It is and it's a much larger economy than Portugal, Greece and Ireland put together -- twice the size of those threes other -- three other countries.

Now, Spain has a number of auctions this month, the first one on Thursday, for five-year bonds. Now, Moody's, in December, says that Spain -- the Spanish government is going to need to raise 170 billion euros from the markets. That's about $220 billion.

What they'll be going for on Thursday is two to three billion euros. So they're just starting to get in there.

Now, Spain has been selling well at its auctions in December and in -- during the autumn. They've been subscribe, even over subscribed. The problem is that the yield, the rate Spain has to pay to get the -- the investors in -- is going up and up and up. The ten-year yield right now at about 5.5 percent, which is too high for comfort zone -- Max.

FOSTER: Those yields suggesting that the long-term prospects for Spain aren't that great, even if the short-term ones are?

GOODMAN: That is the bet of investors looking in. Now, Spain is waving around. Look, the -- the vice premier of China was just here a few days ago saying that China believes in the Spanish economy, has bought Spanish Treasury bonds and will continue to buy Spanish Treasury bonds, according to the Chinese official. So Spain is trying to saying -- say, look, China is looking at us and they are certainly a big player. They are interested. We are doing our homework. That's what the Spanish government is saying. We've got the austerity plan in place. We're doing further financial and labor market reforms. And the -- the Spanish government is also searing -- selling transparency. They're saying that the -- the banks and the government and all the accounts at the national and the regional level, where there's also a lot of debt, those are going to be very transparent so investors can see what they're getting.

But, clearly, that's all a reaction to the nervousness of the markets, that have been pressuring and pressuring Spain in recent months -- Max.

FOSTER: Well, relief is written all over the main European markets today. It's not all about Portuguese debt, though. Investors are also speculating that the European Union is about to beef up its bailout fund and basically do more to defend the euro. Banks were the standout performers in Portugal, Greece and Italy, as well as Spain.

In London, the FTSE 100 is at its highest level since June, 2008. Banks performed strongly once again, especially in -- in Paris, as, where Societe Generale's shares added 7 percent. Mining companies also gained plenty of ground.

And we were going to look at the Dow, but I think we'll grab that a bit later.

Now, crisis -- what crisis?

German GDP numbers are defying the problems of their European neighbors. Take a look at this. The European or the German economy grew 3.6 percent in 2010. That's the strongest annual growth since the reunification, thanks to the -- the robust export sector there. It's even more impressive considering how much GDP shrank the year before, when it saw the worst results since the Second World War.

With strong numbers like that, are the Eurozone countries all on the same page?

CNN's Fred Pleitgen put that question to Thomas Mayer.


Question to Thomas Mayer.

He is the chief economist at Deutsche Bank.


THOMAS MAYER, CHIEF ECONOMIST, DEUTSCHE BANK: I think it's a question of political commitment to make it last. Clearly, the economic tensions are economic centrifugal forces that are enormous.

But at the same time, you have cohesive political forces that keep everything together. And now, you may ask, can that work at all?

Well, I would here -- give you, as an example, Italy. Italy has a hugely divergent economy. They have a very dynamic north around Milan, which is quite similar to Switzerland, Austria or Southern Germany.

They have a very sluggish south, which is -- you know, it looks more like, you know, the weaker parts of Greece or Portugal. And they have a center around Rome, in the middle, which is neither here nor there.

And, you know, and they have held together for a long time.

And in a way, when I look at Enu (ph), I think at least for the coming years, Enu (ph) will look a little bit like a big Italy. It will have a strong center, which is Germany and neighbors. It would have a very weak periphery, which is Greece, Ireland and, potentially, Portugal. And it will have a center which is sort of in -- a middle which is in between, which is France and a few other countries.

But the political will is there to stick together and if we can stick together -- and I think we will stick together.


FOSTER: A big name there in German banking.

Let's have a look at the U.S. markets, though, because all of this European news is having an effect over there, the successful bond sale of Portuguese debt, most notably, also, some banks in the U.S. have been upgraded, their credit ratings, at least. And as you can see, it's had a positive effect on the Dow, up .8 percent. We're back at levels last seen in August, 2008.

One country facing economic turmoil is Tunisia, a capital under curfew. As deadly violence hits Tunis, we'll ask where the country goes from here?


FOSTER: Floodwaters in Queensland are continuing to rise. People in Australia's third largest city, Brisbane, are expected to see the waters peak early on Thursday. Coal prices have reached their highest point in two years, as floods disrupt production. And they could rise further. Many mining companies declared force majeure, exempting them from any liability for failure to make agreed deliveries.

The Australian dollar continues to weaken. Two weeks ago, it was buying more than $1.02 U.S. It's dropped back now to less than $0.99.

At least 12 people have been killed, 51 others are missing, as an area larger than France and Germany combined remains underwater. Australian officials say it will take two years and billions of dollars to repair the damage. Queensland's capital, Brisland -- Brisbane, home to around two million people, is feeling the brunt of it right now. An estimate suggests almost 20,000 homes will be completely flooded. More than 100,000 households and businesses are without power. But the worst is yet to come.

The river rose to a height of four-and-a-half (ph) meters late on Wednesday afternoon.

But as Patrick Condren reports for CNN's affiliate, the Seven Network, it's expected to rise about another meter by early on Thursday.


PATRICK CONDREN, NEWS SEVEN CORRESPONDENT: As morning dawned, evacuations continued. For some residents, it was all too late. Emergency crews unable to reach this building in Indrapili (ph) as a fire tore through the structure. Authorities concerned scenes like these will soon become the norm, as floodwaters continue to rise.

The simple message to residents...

UNIDENTIFIED MALE: Do not wait. Act now. Evacuate.

CONDREN: Fairfield, Ginderly (ph), Graceville (ph) and Oxley (ph) among those already succumbing to the flood, with parts of the CBD beginning to submerge. The official forecast expects Brisbane River to peak at 5.5 meters in the early hours of Thursday, eclipsing the 1974 levels.

The latest figures, more than 40,000 houses are expected to flood, with up to 100,000 homes without power. Over 2,000 Brisbane streets will sink below the murky waters while around 3,000 businesses are facing financial ruin.

UNIDENTIFIED FEMALE: It's horrible. It's -- that's my whole life. But we're alive. I've got my kids.

CONDREN: Along the river, the normally peaceful waters have become a torrent of mud and debris. Waterfront restaurants now adrift, as waters rush by.

UNIDENTIFIED MALE: It's heartbreaking just to stand here and watch it just all go.

CONDREN: Evidence of destruction further down river now firmly stacked against bridge pylons. The Goodwill Bridge on the verge of collapsing into the surging waters. Salvage missions now have begun to prevent further scenes like this one. Luxury boats headed out to sea, as jetties (ph) and pontoons give way to the water's power.

ANNA BLIGH, QUEENSLAND PREMIER: We have salvage operations occurring to ensure that we don't see further damage caused by those floating objects running into businesses and homes.

CONDREN: Major infrastructure is also under threat, including the city's port.

BLIGH: The port of Brisbane will be closed -- is now closed and will only be open for emergency supplies and police and harbor authorities escort.

CONDREN: Well, Suncorp Stadium is beginning to sink below the water line, its basement already underwater.

Right across the city, evacuation centers are bracing for an influx of residents, as more people leave their homes, desperate for dry ground.

(on camera): For people who do come to the evacuation centers, at least they'll have somewhere dry to sleep and be able to get some warm food. But most importantly, they'll have somewhere safe for their families to stay. And this could be their homes for the next few days, at least.

(voice-over): But while authorities call for unity, there are reports of looting. As residents prepare the best they can, the city's biggest dam continues to fill. Wivanhoe (ph) currently sits around 190 percent capacity. But for now, it's stable -- a piece of good news on a very bad day.

But despite the inevitable crisis, the message from both levels of government remains loud and clear.

JULIA GILLARD, AUSTRALIAN PRIME MINISTER: I know, in my bones, that Queenslanders are up to this and that we can take it. Queensland has already faced some dark days. And there are dark days still ahead. And we will be there shoulder to shoulder, not only for the days ahead, but for the many months of recovery and rebuilding to come.

CONDREN: Words of comfort, as Brisbane faces one of its toughest challenges ever.

In Brisbane, Patrick Condren, Seven News.


FOSTER: Well, the water has yet to peak.

And Guillermo Arduino is at the Weather Center monitoring all of those Queensland situations for us.

What can you tell us -- Guillermo?

GUILLERMO ARDUINO, CNN METEOROLOGIST: The peak was expected to be two hours ago. So that said, we need to understand how -- how the dynamics of the peak works.

We have high tide, right, that is coming from here?

So that water is going -- it's pushing this way. So the water is pushing into the rivers, into Australia. So the water is trying to come from the rivers outward.

That collision acts as a clog. That's why it is so important to understand that. We have a lot of water in those rivers inland and the water can't go out because the peak is going -- the -- the tide is going up.

But that was two hours ago.

Now, it's the beginning of a better condition on both ends. The tide is going to start gradually going down and then, with all the rain that we saw, this low is going to weaken and a high pressure center is going to take over.

So we are not going to see 200 millimeters anymore in these areas, being Brisbane, the one at the highest risk. But we will see only one millimeters in -- one millimeter in two days.

So weather-wise, we have very good news. While Rockhampton here, that has not been in the news lately, is getting a little bit more rain because it's associated with rain that is in the north. So that's very important to understand in this.

The water is going to take a long time to recede, but at least we're not getting more rain. The rain is moving down into Victoria now, where the situation is totally different. And we are drying out in the southeastern part of Queensland, though, La Nina is promising more rain throughout January, February and March. So we are going to see more rain, but at least right -- right now, at a critical time, things are transitioning into a much better situation.

The floods are going to take a long time. Brisbane is not what Brisbane was in 1974. In 1974, the city was smaller, so probably the flood back then was in the areas that are not -- were not populated, but it is populated right now.

So more on CNN coming up.

We have flood concerns in Europe, though, because temperatures are going back a little bit to the warm side. So all that snow that fell in Britain and in Germany and in -- in central parts of Europe is now melting away, with those temps going up. And we have evidence of that in Germany.

But for our international viewers and travelers, I have to advise all of you that we are going to see winds into Brit -- into Britain and also into the northern parts of Europe. Gradually temps are going up a little bit. But we will see bad weather ahead.

Stay tuned -- Max.

FOSTER: Guillermo, thank you very much, indeed.

ARDUINO: Thank you.

FOSTER: Now, we're not even two weeks into the new year, but you never know what's around the corner. One report is already guessing the risks that could be in (ph) your 2011. We'll be asking what you need to look out for in just a moment.


FOSTER: A nighttime curfew is in effect around the Tunisian capital, as the deadly violence reaches Tunis for the first time.

The army is being called in to deal with protesters in the city center. They're demonstrating against high unemployment and alleged government corruption. At least 23 people have been killed so far. The government ordered the curfew a few hours ago.

Meanwhile, the country's interior minister has been sacked. Firebombs have also been thrown at the Tunisian embassy in Bern in Switzerland.

Our reporter on the ground, Rima Maktabi, joins us now on the line from Tunis.

What have you found out today?

RIMA MAKTABI, CNN CORRESPONDENT: Well, the curfew has been declared by the government and it already started 50 minutes ago, 8:00 p.m. local time. And it's supposed to remain until tomorrow morning, 6:00 a.m..

The capital, Tunis, today witnessed some clashes in the center of the city, where the Tunisian Union for Workers building is. There, there were demonstrations and clashes between the forces -- the Tunisian forces and the young people demonstrating there and workers.

According to union sources, there were three injured in those clashes.

Also, there were other clashes that erupted in other parts of Tunisia, especially in towns in the south of Tunisia. And according to union sources all -- also, there were eight people killed so far.

The government is still sticking to an official figure of 21 people dead in the past few days. But opposition and union forces are saying -- union sources are saying that the toll has reached 50 people and more that since the demonstrations erupted -- Max.

FOSTER: OK, Rima, thank you very much, indeed, for joining us from Tunis.

Back with you as you get more details on that.

Now, ahead of its annual meeting in the Swiss ski resort of Davos in two week's time, the World Economic Forum has issued its latest global risks report. And it makes for some grim reading, actually. Getting a lot of attention is the fragile state of the world economy. Today's report says the weak state of many countries' finances could trigger yet another sovereign debt crisis and it claims that the huge debts wracked up in the aftermath of the credit crunch has drained the world of its ability to deal with further shocks.

The WEF says a growing disparity between growth in the emerging markets and that in the developed world is another possible threat. And it's warning that could lead to protectionism or a currency war.

Another risk to watch out for is greater pressure on basic resources. The WEF says rising populations and increased consumption may trigger shortages in food, water, and, indeed, energy.

Well, Robert Greenhill is the managing director and chief business officer at the World Economic Forum and he joins me now to discuss the report's findings.

Thank you so much for joining us.


FOSTER: The headline I got from it is the fact that the world economy has been battered so much that it's in a very fragile state and it couldn't withstand another battering.

Is that...

GREENHILL: That's absolutely right.


GREENHILL: In fact, the vulnerability of the system is the greatest it's probably been in 50 years. Treasuries were depleted. Household incomes have been reduced. Unemployment has gone up because of just the fiscal crisis.

Dealing will these other crises is going to require a much different approach by government. In fact, the greatest risk of all will be if we wait until these risks become crises, then we're in real trouble.

The real opportunity is can we identify these in advance and actually address them before they become a full blown crisis?

FOSTER: You have identified a few...


FOSTER: -- and they're massive potential problems, aren't they? You can't -- you know, the food shortage issue, for example, is -- is something that we've brought up on this program. It's a massive problem.

GREENHILL: Well, you know, we're kind of at a crossroads, because if you can deal with these risks, you actually open the door to unparalleled prosperity, because there's a food security issue partly because there's more people consuming more than ever before.

So if you go the right way, it's an opportunity. But if you go the wrong way and wait until the food prices get out of -- out of control again, like they did in 2007, you could see a whole new wave of food riots and massive numbers of people going hungry.

FOSTER: And it's unprecedented, in a way, isn't it, because the -- the speed at which we got to this point is unparalleled.

GREENHILL: Yes. That's right. I mean the challenge today is the risks that aren't only significant, they're so interrelated and they move so quickly.

FOSTER: OK. And when we talk about the risks and the shock -- the potential shocks to the world economy, what are you most worried about?

Is there one that you're really worried about that could be imminent?

GREENHILL: Well, there's two clusters that we focus a lot on, this whole issue of the trade imbalances, fiscal challenges, currency volatility -- that nexus. And then the food, fuel and water challenges, because, in fact, declining water tables and increasing fuel prices make food production even more difficult. Those plus some of the issues we see around illicit trade and corruption and state fragility, those are three big clusters that we're concerned about.

The challenge, but also the solution, lies in improving the way in which we address these. And one of the things we'll be doing in Davos is looking at setting up a risk response network compromised not only of chief risk officers of companies, but also the equivalent, at the government level, so we can actually come together and try to address these issues, but come they become -- before they become that crisis that we've seen for the last three years (ph).

FOSTER: And are you finding Chinese -- the Chinese role in a lot of these issues is becoming more and more important. I'm thinking of currency wars, for example, today.

GREENHILL: Yes. China is a very significant player, both in terms of increased energy and other consumption, but also a great source of -- of potential stability and solutions. In everything from renewable energy to rebalancing trade, China has a huge role. And, in fact, emerging countries as a whole -- Brazil, China, India -- the new members that are seen in the G20, are critical to coming up with a new approach to dealing with these issues.

FOSTER: And when it comes to getting these people sitting down and talking, a lot of it happens at Davos, doesn't it?

Are you -- are you getting the sense that politicians, at least, are willing to get together and talk about these issues?

Because currency wars is one area where you could actually find a solution quite quickly.

GREENHILL: No, we're seeing the most engaged group coming into Davos we've ever seen. But there's -- in fact, there's been a watershed since 2007. People are coming to Davos to do a lot more active listening than in the past, because this is a whole new world. The world we're coming out of the crisis with is very different than the one we went into the crisis with -- the shift to the -- to the east and the south, the challenges of dealing simultaneously with multiple risks.

So we're actually seeing, in Davos, a real interest on the public sector side, but also corporate CEOs are engaging very much on these conversations, because they know they have to be part of the solution on this.

FOSTER: We were talking about how all this unfolded, the financial crisis, so quickly compared with other crises.


FOSTER: Are you finding the power shift is happening faster than many people imagined?

GREENHILL: It happened faster than anybody, I think, would have imagined. What would have taken decades in terms of the shift took place over 36 months. And in a sense, because it was inevitable, it's -- it's a good thing. But it means we actually have to adapt our approaches, our norms, our attitudes more quickly than they would have.

In fact, it doesn't just mean, for example, the West accepting the new power role of the South, it actually means the Indias and Chinas also taking on this new role.

FOSTER: OK. And they're involved this year in Davos?

GREENHILL: Very significantly.

FOSTER: OK. We're going to have lots of coverage from Davos.

And I hope you have a good week.


FOSTER: It's going to be very busy for you, isn't it?

GREENHILL: We look forward to having you there.

FOSTER: Thank you very much.

We will be in Davos.

And you're watching QUEST MEANS BUSINESS.

Richard will be there the whole time, of course.

After the break, we'll check the U.S. and the European stock market numbers.


FOSTER: Let's have a look at Wall Street to see what's going on there.

The financial stocks have been doing really world today because some of the main banks have been seen as a better credit risk, largely. The Dow up .75 of 1 percent. We're up at two year highs now. Things helped, also, about -- because of that Portuguese bond auction here in Europe, which went better than expected. And that made Europe better, essentially.

European markets are a uniform picture of relief today, as well. Solid gains around the region.

In London, the FTSE 100 is at its highest level since June '08. Banks performed well, as well, especially in Paris, where Societe Generale's shares added 7 percent.

Mining companies gained plenty of ground.

Portugal was the main factor this session, of course.

Traders are also hopeful the E.U. will boost its emergency bailout fund.


I'm Max Foster.

"WORLD ONE" starts right now.