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QUEST MEANS BUSINESS
U.S. Dollar Wobbles; Interview With American Airlines President
Aired July 26, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST: As U.S. lawmakers squabble, the U.S. dollar wobbles.
American Airlines, tonight, the airline president explains his strategy.
And one year on, BP back in the black. The CEO Bob Dudley tells me his strategy from here on in.
I'm Richard Quest. We have an hour together. And, yes, I mean business.
We are seven days away from the U.S. hitting the debt ceiling. And American lawmakers have until August 2nd to attempt to reach a deal, or risk provoking what President Obama is calling an economic crisis.
Politicians are playing high stakes game of chicken with the U.S. and global economy, and we are already starting to see the tell tale signs of distress in the marketplace. Come with me. I'll show you what I mean.
The cost of insuring American debt is now rising at a 17-month high. If the U.S. did default, the issuers of insurance face a pay out of nearly $5 billion. That is the CDS payouts. And it is no one is certain when, and if, and who, would actually pay, because of something known as counter party risk. So the complexity of paying out those CDSs would make Lehman look like a tea party.
The U.S. dollar, needless to say, is bearing the brunt of this at the moment. It is at a sort of multi-year low against the Swiss franc, which is very high. The euro is looking strong and the Japanese yen-well, there was rumors of Japanese government intervention in the market. Unconfirmed, but you can see the rate of 78 to the yen.
As for stocks? Amazingly, they are holding their own at the moment. The Dow Jones industrials is down just 50 points, half a percentage point. You could expect to see a lot more volatility there, in the days ahead, if nothing is done to reach agreement.
Even if lawmakers do reach an 11th hour deal on the debt ceiling things could go rather badly wrong for the U.S. economy. America risks loosing its much vaunted Triple A credit rating. Mohamed El-Erian is the chief exec of PIMCO, the world's biggest bond trader. Always welcome having him on the program. So I asked him did he think default-did he think that they would do a deal?
MOHAMED EL-ERIAN, CEO, PIMCO: In terms of what will happen, Richard, we expect that they will find a way to raise the debt ceiling, to avert a default, but it is not clear that they'll find a way to avoid a downgrading of the Triple A. So, that is the question mark for us. Not whether the U.S. defaults. We do not expect the U.S. to default, but whether the U.S. does enough to avoid a downgrade of its Triple A rating.
QUEST: Isn't it a fact that bearing in mind what has taken place so far, it would be quite justifiable to downgrade the U.S. from the gold- plated Triple A.
EL-ERIAN: In fact-more than a fact-in the sense that one of the rating agencies, S&P, put out a very clear set of conditions. And put the U.S. on what is called a negative watch. A negative watch, Richard, means that the presumption is you will downgrade unless you get compensating factors. And so far, S&P has not received the compensating factors. So if S&P sticks to what it said, the U.S. will be downgraded in the next few days.
QUEST: Would a downgrade be that serious. We all know-I mean, I saw one quote today-look, investors know they are going to get paid eventually, or maybe a bit late, or whatever, but they will get paid. So, a downgrade adds what, to U.S. borrowing costs, do you think?
EL-ERIAN: We think it adds about 25 to 50 basis points. The good news, as you say, this is not about a fundamental default. This is not about the U.S. running out of money. This is much more a technical default, and much more a technical downgrade. So, what we are looking at is a technical issue. The problem, Richard, and it is a big problem, is that the U.S. system, and the global system, are constructed and they operate on the assumption of a Triple A, in the middle, at its core. And no one knows for sure what happens if that Triple A becomes a Double A. So there is an element of uncertainty and therefore one has to be humble and recognize that we don't quite know. We know that U.S. interest rates will go up. We know that the dollar will suffer. We know that growth will go down, and unemployment will go higher. But we don't know the consequences for a system that is built on the assumption that the U.S. safeguards the Triple A.
QUEST: And one final point, on a more philosophical level. The-what is taking place-and I have read your article, that you have just published. But I-I-this is symptomatic, is it not, of as you describe it the "bickering and distressingly failing miserably to communicate by the politicians, and of the disease of what is ailing America."
EL-ERIAN: Absolutely. The U.S. needs what we call here a Sputnik moment. It needs to realize that it is standing is slipping, that its economy is slipping, and it needs a sense of unity and common purpose. And the politicians need to step up to the plate. That is what is meant by a Sputnik moment. Instead, what the U.S. is getting is endless bickering, lots of politicians playing the blame game and in the meantime the structural headwinds are getting stronger.
QUEST: Now the U.S. debt market for Treasuries are amongst the most liquid, deep in the world, $9 trillion worth of U.S. bonds, major bonds, are out there at the moment. The safe haven? Are they still?
Nina Dos Santos joins me to talk about what this effect would be, technical default or otherwise, if there was on the dollar?
NINA DOS SANTOS, CNN INTERNATIONAL CORRESPONDENT: Yes, the ramifications of all of this is pretty significant, Richard. What we do know is that it is huge news for everybody. Now the U.S. is a major trading partner for many nations around the world. The dollar is, of course, the world's major trading and reserve currency. The U.S. also consumes the most oil in the world as well, so everything could be affected. Let's look at trade in particular.
As an economic bloc, the EU, the European union is actually the largest trading partner for the United States, trade between those two amounts, is at $560 billion just last year. And that makes the wrangling in Washington a real worry for those people who are currently tasked with managing the world's economy.
(BEGIN VIDEO CLIP)
CHRISTINE LAGARDE, MANAGING DIRECTOR, IMF: I'm not going to comment on one plan or the other. It is not for me to say, but there has to be sufficient plans in order to address the issue of sovereign debt, of the debt ceiling. Because, frankly, to have a default, or to have a significant downgrading of the United States signature, would be a very, very, very serious event. Not for the United States alone, but for the global economy at large, because the consequences would be far reaching.
(END VIDEO CLIP)
DOS SANTOS: Far reaching, indeed. We do have some surprisingly bright spots though, in the markets. In particular, as you would expect, gold the ultimate safe haven. Now reaching another record of $1,600 an ounce and counting. A lot of traders telling me that that is already perhaps a little bit expensive and that is one of the reasons why people are searching to put their money into currencies. We have had the Swiss franc hitting a record against the U.S. dollar. But even the Swedish kroner, the Kiwi dollar, the Aussie dollar, even the South African rand, all rising as of course the dollar slips.
Now the yen is traditionally a very strong currency. It has been soaring even more. That is bad news for Japanese exporters, like for instance Nissan and Toyota, because it means they make less money on their sales abroad. We shouldn't forget though that some of these countries around the world, in particular Japan hold some pretty large swaths of debt that is U.S. debt. Take a look at that. Japan is holding no less than $900 billion.
(BEGIN VIDEO CLIP)
KAORU YOSANO, JAPANESE MINISTER OF ECONOMIC & FISCAL POLICY: I don't believe a default will happen. But if it does it could have similar side effects to the Lehman shock, including the shrinkage of available credit, the shrinkage of inner bank trading, and the distrust of worldwide national bond markets. I would like the U.S. to clean this up properly.
(END VIDEO CLIP)
DOS SANTOS: Let's take a look at who has most at stake, it is not Japan. It is nearby though. It is actually China. As you can see, China has the largest foreign holdings of U.S. debt. And they amount to no less than $1.2 trillion, for just the month of May. For the Chinese and the Americans, Richard, have long been at odds, of course, about the weakness of the Chinese currency, and now the boot is firmly fixed on the other foot, as you can see, because we have the yuan strengthening against the U.S. dollar.
QUEST: Hang on, hang on, hang on. Are you saying that all of this gets very much more serious if it is a technical default? I mean, they know they are going to get their money back?
DOS SANTOS: Well, this is the thing, isn't it? And also, we should bear in mind Richard, that if they do manage to raise the U.S. debt ceiling, and issue more sovereigns, well, question is, are people like China, are people like Japan going to carry on buying them? We'll see.
QUEST: Many thanks, Nina.
Investors around the world have been reacting. There is one person who has gained particular attention. He is Sean Egan, the head of the ratings agency Egan Jones. It is not one of the big three. It is not Moody's, Fitch, or Standards & Poor's. But Egan Jones and his agency have already downgraded U.S. debt. It is downgraded from Triple A to double A plus. Maggie Lake spoke to him earlier.
MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: So, Sean, you already lowered the rating on U.S. debt, why?
SEAN EGAN, EGAN JONES: Egan Jones did because of our concern about the relatively high level of debt to GDP. It is a primary measure for the credit quality of countries.
LAKE: So, it doesn't matter whether they get a deal on the debt ceiling?
EGAN: That is almost secondary, that is secondary, it is akin to your forgetting to pay the mortgage payment before you go on vacation. It doesn't affect your ability to pay. The more important thing is whether you can continue to have a job, continue to have the resources. The issue of a slight delinquency is far less important to us than the overall ability. Now, granted, the U.S.'s reserve currency still has a huge number of resources. But in our view it doesn't quite rise to the Triple A level.
LAKE: Is this a solvency issue for the U.S.? Or is this a political will problem?
EGAN: I don't-no, it is not approaching the level of solvency. I mean, we cut it from Triple A to Double A, plus. That is still a very strong rating.
LAKE: So the economy can, if the right choices are made. The economy can handle this?
EGAN: Absolutely. And if there is a focus on the stewardship of the country going forward.
LAKE: Lowering, even a notch, the rating of the U.S. is a controversial thing to do. Our politicians are not happy with that type of action. Have you had any response from the fact that you have done it already?
EGAN: Yes, we have. It hasn't risen to the level of our other cuts. In the case of GM and Ford, we had a number of death threats.
Not yet, we have had a number of calls. But no death threats that I am aware of, yet. And hopefully it doesn't rise to that. It is crossing the Rubicon. We were the first rating firm to do that. (UNINTELLIGIBLE) rating firm to do that. And we felt as though we had no choice. Basically it is a reflection, as I said, of the dramatic rise of debt to GDP. And hopefully some steps will be taken to ameliorate the problem.
LAKE: Are you hopeful?
EGAN: I am very hopeful. I think this is a fantastic country. I don't think there is any place on the face of the Earth like this. I think that if anybody has the resources, we should be able to do it. If we don't do it, it will be looked upon as a-and this is really an inflection point. This has never happened in the history of the country. If we don't do it, it will be a real shame.
QUEST: There we have the debt question and the debt crisis in the United States. As lawmakers continue to squabble over spending cuts, one airline, American Airlines, is on a spending spree; buying planes, never mind the dozen, by the hundreds. The company's president is with us. We'll talk to him next about why he bought so many of them, next.
QUEST: American Airlines has placed the largest aircraft order of all times, starting in 2013 it will take delivery of 460 aircraft at the list price of around $40 billion. I'm smiling as I say that number.
American Airlines' President Tom Horton joins us now.
I'm smiling because no one has ever paid list price for that number of planes and we don't really know how much you are paying for them. And you are not going to tell me, are you?
TOM HORTON, PRESIDENT, AMERICAN AIRLINES: No, I'm not. Let's just say we made a pretty good deal.
QUEST: You made a good deal. All right. What was the significance of the deal?
HORTON: Well, this transformative for American Airlines. This is about making our company more profitable and competitive for the long term.
QUEST: Because you didn't go into bankruptcy, during the recession or the slowdown. So you have got a cost face, that is considerably higher than your competitors, Delta and United?
HORTON: We do that is right. Because we didn't go through bankruptcy, but it makes it all the more urgent for us to go out and address the challenges that we can address.
QUEST: On this particular deal. You effectively bounced Boeing into re-engine the 737. Come on, we can be honest about this.
HORTON: Yes, I would prefer to say that we helped them make a decision to re-engine the Boeing 737, alongside our order for Airbus airplanes, which will also have a re-engine, next generation airplane in the order.
QUEST: Why did you decide to split the order? Because at the end of the day, we have always been told the greatest synergies and cost savings come from fleet uniformity.
HORTON: Yes, what we are trying to do here was so big, and we wanted to do it so quickly that it really couldn't be done by one single manufacturer. So we needed both of them to support us in this. What we are talking about doing here is taking our fleet to the youngest in the U.S. industry within five years. That is a pretty monumental undertaking. And it really took both manufacturers to help us do it.
QUEST: Well, you've got that part of the strategy in place. But I want to show you these numbers, which you just saw a moment ago. We can talk a bit more about them. If we look at the numbers of passengers and the size of the airline; when you took over TWA, in the `90s, you were the biggest.
HORTON: That's right.
QUEST: You were the largest in the world. Now, Delta Northwest, is bigger, United Continental, is bigger. You are number three.
QUEST: Do you have to have a strategy to grow bigger?
HORTON: Well, over the past 20 years, we have been the biggest, at times. And there are times when we haven't been the biggest. So I think what is important is being big in the most important markets. And that is really what our strategy is about, you know. If you look at where American is big in the United States we have hubs in New York, Chicago, Los Angeles, Dallas Fort Worth, and Miami. Those are the biggest markets for business in the U.S.
QUEST: So you are not, you are not looking to consolidate? I think we should be clear on this.
HORTON: I don't think we need to consolidate. There may be opportunities for us to do that down the road. But I don't think that is something we need to do. Because in addition to that North American network we have we are buttressed with the best alliance partners around the world, British Airways, Cathay, Qantas.
QUEST: Of course, the JAL partnership we know about. You ended up having to basically bailout your JAL partner with other One World things. But if we just talk about BA and the trans-Atlantic, when do you think that BA One World, the B A American deal gets to fruition, in terms of the benefits to be seen by the public.
HORTON: We think our full benefits will be in place by later this year, for the public. And we think the benefits to the company will be full out by 2012.
QUEST: Cheaper airline tickets across the Atlantic?
HORTON: Not if I don't have to.
QUEST: I always admire an honest, and honest chief. Many thanks, indeed for coming in and talking to us.
And just a note on this point, on Friday, when IAG, that is the parent company of British Airways, when they announce they results, we hope to be talking to Willie Walsh on this program.
We are switching from buying planes to selling in just a moment. "The Boss" is next, where the business leaders we are following, make a push to get their products out.
(DESK BELL CHIMES)
QUEST MEANS BUSINESS in a moment.
QUEST: "The Boss" is in New York and Macao this week, and for both out bosses it is all about selling, for Steve Hindy and for Francis Lui. Despite being the boss, Steve, most certainly isn't afraid of getting his hands dirty, when it comes to drumming up business. And as for Francis, well, in Macao he's got a chance to show off Galaxy's new resort, "The Boss".
UNIDENTIFIED MALE: Previously on "The Boss": Checks and balances, Francis Lui pays his butlers visit at the countdown to the big launch begins.
FRANCIS LUI, VICE CHAIRMAN, GALAXY ENTERTAINMENT GROUP: I believe that I will be the rah-rah person to make sure that all our staff is pumped up.
UNIDENTIFIED MALE: And in Brooklyn, New York, Steve Hindy turns to a famous designer to gain an edge.
STEVE HINDY, FOUNDER, CEO, BROOKLYN BREWERY: People immediately said, what a minute, how did you get Milton Glazer involved in this?
UNIDENTIFIED MALE: It is a hot summer's day in Williamsburg, Brooklyn. Outside temperatures are soaring. But that is not stopping our boss, Steve Hindy. He is hitting the streets on an important sales call.
UNIDENTIFIED MALE: Hey, Steve.
HINDY: How you doing?
UNIDENTIFIED MALE: OK, nice to see you.
UNIDENTIFIED MALE: Steve is visiting a popular hang out in the area, called, Diner. His goal here today is simple, to persuade owner Andrew Tarlow (ph) to carry more of his beer.
HINDY: How can we do business?
UNIDENTIFIED MALE: Steve sees himself as more than just a president of Brooklyn Brewery. In his eyes, he is the consummate salesman, and aggressive negotiator for his brand.
HINDY: So much of beer business is selling. And I'm a good salesman. And I think if I retreat to my office and never get out and talk to people, I think that is a big loss to my company.
UNIDENTIFIED MALE: Diner already stocks many of Brooklyn Brewery's beers. But in an ever growing market, Steve doesn't want to loose out to the competition.
UNIDENTIFIED MALE: Happy to have more of your beer on tap.
HINDY: Do you think you would be interested in the Brew Master's Reserve?
UNIDENTIFIED MALE: For Steve these sales calls are crucial. They allow him to keep in touch with his customers.
HINDY: When I go into a place like this, and our beer isn't here, I get very upset. And I talk to our sales people and they said, oh, you know, he has a problem with the distributor. He has a-he feels like we have gotten too big. And, you know, I decided I have got to get out there and find out for myself what the problem is. And honestly, I don't think there is a problem. I think we just have to work harder and be more persistent.
UNIDENTIFIED MALE: The face time also gives Steve the opportunity to see how his products are being received. And to find out whether he is missing a trick.
HINDY: Another thing I'm thinking about is doing a Brooklyn only beer. A beer that we would only sell-a draft beer-that we would only sell in Brooklyn. Something special.
UNIDENTIFIED MALE: That would be great.
HINDY: Sales people are always going to have excuses. Why they are not selling certain accounts. And the only way you can counter that is to get out there and try it yourself. And you know, then they can't BS you about what's happening in the market.
UNIDENTIFIED MALE: Steve has been pounding the pavement for years. He says he'll continue doing so as long as he's the boss.
HINDY: I don't think I could sell something that I wasn't really in love with. And, you know, it is important to be able to convey the passion you have for your product, to the customer, directly.
UNIDENTIFIED MALE: It is less than 24 hours and the media are closing in on our boss, Francis Lui. The vice chairman of Galaxy Entertainment Group is working every angle of this press conference.
Five years of hard work is about to come to fruition. The opening of his casino resort, the Galaxy Macao. But before it does he needs to get the message out. Sell it and get people excited.
LUI: By answering more questions, hopefully that-they would learn about the man behind the property, what I was thinking at the time, what was the vision at the time?
UNIDENTIFIED MALE: Today he's briefing the press. Three hundred of them who have been invited for an overnight preview from Hong Kong, China, and the beyond. He's answering any questions they have. And, of course, he is showing them who is at the forefront of this new venture.
LUI: I don't want them to say, who is actually running the show?
No, I want to spend more time because it is my passion, too. I have built something which I think is very special, wonderful. And I want to share it with the friends who wanted to know.
UNIDENTIFIED MALE: Throughout the media sessions that follow, Francis stays on message. Playing up his casino resort.
LUI: How do you actually make such a big, huge property, look small?
UNIDENTIFIED MALE: Its authenticity-
LUI: We have actually recruited 12 beautiful, graceful Japanese ladies to come and dress up in Kimonos for us.
UNIDENTIFIED MALE: And it's Asian experience.
LUI: How do you service a customer where, a glass of hot tea will be served to you without even asking.
UNIDENTIFIED MALE: Francis has been here before. He is used to speaking to the press, but nothing has quite prepared him for this.
LUI: I think I have been doing more press in the last two years than I have been doing for the 20 years.
UNIDENTIFIED MALE: Francis has made the Galaxy Macao his priority. Working through the resorts' design, construction and staffing. Now, the real test begins.
LUI: I am never a person who believes in a quick fix. All of these preparations are by the minute, by the day, by the month, by the year, that you work through, just so you will be able to get ready. You are not going to get ready just because you have a crash course.
UNIDENTIFIED MALE: Next week, on "The Boss": Years of planning and preparation come down to this moment. As our boss Francis Lui opens his casino resort, the Galaxy Macao.
QUEST: Fascinating stuff. The Boss doing business in Macau and in New York.
He saw it through the spill, he rode out the Rosneft fiasco.
So where will Bob Dudley take BP next?
The chief executive after the break.
QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.
This is CNN. And on this network, the news always comes first.
Police in Norway have released the first four names of victims from the terror attacks. Three were killed in the bombing in Oslo, the fourth was a 23 -year-old man who died in the shooting at Utoya Island. The police say they will add to the list every day at 6:00 p.m. Oslo time until all 76 victims have been identified.
It's only for the mass murder suspect, Anders Behring Breivik, says his client might be insane. But the lawyer says it's too early to say if he will use insanity as the defense. He also says Breivik expected to be killed during the attacks or in the court afterward.
Family and close friends of Amy Winehouse mourned in private today at a small funeral in London. There were big names in the entertainment world who were there and that included Kelly Osbourne and the music producer, Mark Ronson. Amy Winehouse's father says the 27 -year-old singer was not depressed. Mitch Winehouse says his daughter passed away happy.
A Moroccan military pee has crushed in Southern Morocco. Three people on board survived. Seventy-eight were killed. The pee was trying to land at a military airport when it hit a mountain. Local sources said bad weather caused the crash.
BP turned a $5.3 billion profit in the second quarter of this year, a year after making losses more than three times that amount.
It didn't seem to be enough to please investors. It was actually short of analysts' expectations. And that meant BP's shares fell almost 3 percent on the London Stock Exchange. And the 11 percent fall in production was largely to blame. And much of that due to restrictions on drilling in the Gulf of Mexico, the scene of, of course, the Macondo disaster.
Even so, it marks a $22.5 billion turnaround for BP from a year on from the disaster.
Now, getting the share price back up is one of Bob Dudley's biggest priorities. The company's chief executive has dealt with an amazing raft of challenges since he took over from Tony Hayward.
Earlier today, I met him and asked him when it comes to bottom line, though, BP is perhaps behind the rest of the class.
(BEGIN VIDEO TAPE)
BOB DUDLEY, CEO, BP: It was only a year ago just that oil was still flowing into the Gulf. Think about the year where we've restabilized the company, restrengthened the balance sheet. We've announced many divestments of assets, so we're a little bit smaller. We've closed those. We've announced new exploration deals across the globe.
Our credit ratings have increased. We're back heading in the directions that we need to. We've done many turnarounds of our operations in the -- this last quarter, the second quarter. We have more to do in the third quarter. 2011 is a year of consolidation for BP. I'm very clear that the momentum coming out of 2011 and 2012 is on top of things and we'll be very much improving.
QUEST: What is the strategic direction of the company?
DUDLEY: It is to improve our assets. Our three main priorities right now is to bring safety and risk management back into the heart of the company. You would expect that from us. The second is rebuilding trust, primarily in the United States, but around the world, as well. And this third point about rebuilding value for the shareholders.
QUEST: Obviously, the Gulf of Mexico is still very -- an influence on the company and the way it's performing.
When do you expect to return to the Gulf of Mexico?
DUDLEY: Well, we have a very large operation in the Gulf of Mexico. It has slowed down broadly. As the largest producer there, we are affected more by anyone. We have permits now to go out. We have a big rig out there now working to plug in a bend in the well. There's the first one. I believe we will steadily get back to work. We'll work with the regulators. We'll absolutely cooperate with them on everything. And they have said they won't hold us to a different standard than anyone else.
We've announced new, voluntary standards for drilling in the Gulf of Mexico. They've been received well by the regulators. Step by step, I'm optimistic. We're working hard to do that. We will be very clear before we take on new operations. And we've got thousands of people working on this.
QUEST: Let's talk about Rosneft and the -- the Russia deal. You came out of the Gulf of Mexico crisis and immediately the company went into another one over the tie-up with Rosneft.
Choosing my words respectfully, what were you and the company thinking?
DUDLEY: The reality is it was three exploration blocks. We've signed 31 around the world in the last year. It was three exploration blocks, a long, long term program with Rosneft fell short. It -- it evolved into something, potentially, BP and Rosneft buying out our partners and TNK-BP - - not something we really wanted to happen, but it evolved that way. It didn't work out. It was a business deal. Sometimes things don't work out. It was worth pursuing, not at any cost. And we moved on.
It got a lot of attention as, obviously, a lot of things that happened that -- that were not publicized, much discussion. In the end, we reached agreements with all the parties and it didn't -- it didn't come together. But that's OK.
QUEST: ConocoPhillips has just announced it's going to split the company. And now people are saying you should look at doing something similar, you could dramatically increase the value of BP if you split it apart.
DUDLEY: If life were only that easy, Richard. I've been in the industry now for 30 years. I think about how much it has changed in 30 years. So there can be many, many things happen in the oil and gas industry. And we'll watch that carefully.
We have a -- have a great downstream set of businesses and a great upstream set of businesses. There are synergies between the two. But portfolio-wise, you'll see we've divested $25 billion in the last year. We are smaller today. We're a different kind of company than Conoco. Our asset mix is different. But we look at all kinds of things, Richard.
(END VIDEO TAPE)
QUEST: Looking at all kinds of things. Bob Dudley, the chief executive of BP.
There are plenty of earnings numbers to look out for in Europe today. And if you'll join me in the library, you'll see some of them.
Now, if we take a look, you'll see that at UBS, the profits plummeted and there was a 49 percent year-over-year fall so far. And that's UBS. The -- around $1.25 billion in Q2. And it admits it will miss long-term and profit targets.
Stronger Swiss banks partly to blame, UBS over here.
Another one that missed, Deutsche Bank, blaming an adverse environment in Q2. It blamed -- it says $1.25 billion that it says was during the debt crisis. So banks are starting to feel the effects.
But if you look overall, you get an idea of virtually nothing happening in terms of London and Frankfurt, Paris and Zurich both down. Two up and two down is the way to go.
So on the U.K. front, there was numbers on the U.K. economy which showed the economy was strengthening, effectively. GDP growth of just .2 of 1 percent comes on a .5 a percentage point. So -- of the previous quarter. Some people suggesting that, frankly, the U.K., it doesn't matter whether it's up .2 or down .2, it feels like a recession. One reason for those poor numbers, a longer bank holiday -- several of them, in fact, because of the royal wedding.
U.S. stocks are lower at this hour, not hugely, as investors are wading through corporate earnings and the debt deal.
Allan Chernoff is monitoring for us at the New York Stock Exchange -- Allan, come on, I've got to -- I've got to understand, the debt crisis is upon us. It's nearly the eleventh hour of the eleventh minute or whatever that phrase is and stocks aren't falling out of bed.
ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT: It's stunning. Frankly, it's stunning to a lot of analysts here, Richard, no question about it. I've been talking to economists, market strategists, traders. A lot of them do say, hey, you know, things should be a lot worse. Particularly noteworthy, Richard, is the bond market because that's where we'd expect to see the most immediate impact.
Would you believe that U.S. bond prices are actually higher today?
One veteran market investor said to me, this is a real nail-biter. In the stock market right now, we're off only 46 pointed on the Dow. It's about .3 of 1 percent. The losses have been trimmed.
CHERNOFF: It seems that Wall Street basically believes that we are going to get a deal out of Washington.
The larger risk, I believe -- and other analysts have been saying this -- is that the rating agencies may go on and cut the debt rating of the United States. And that certainly could be catastrophic for the financial markets. That's the real nail-biter here -- Richard.
QUEST: OK. Now we're still in the middle of the quarterly reporting season. Of all the numbers we had, Ford, which looked -- I mean they got a beat over year, but the actual quarter wasn't that brilliant. Ups wasn't that brilliant.
So from the results that you've got today, not a particularly stellar performance.
CHERNOFF: That's right. We had some pretty good earnings numbers from some of these companies. For example, UPS, they came out with profits that beat expectations. Profits were up 26 percent. And UPS is a very important company because it gives an indication of the overall economy. Companies in every sector are customers of this shipping firm. The stock right now is off about 3 percent.
3M you mentioned before, the stock is off a little more than 5 percent right now. It had good earnings. They were right in line. The problem, Wall Street said, well, those operating expenses were up a little more than they wanted. So the stock is getting hit.
But nonetheless, Richard, you know, the numbers have been pretty good on the earnings front.
QUEST: Right, Allan Chernoff at the New York Stock Exchange.
And you and I, Allan, no doubt, will talk in the days ahead on the question of the debt and potential downgrades.
We'll talk more about that.
Europe is out. The U.S. is in. And when it comes to foreign investment, risk might be back on the table.
Where does the United Nations believe UNCTAD the money goes next, after the break.
QUEST: Talk of debt and default notwithstanding, investors apparently are moving back and regaining an appetite for risk. They may be shunning Europe. Instead, they're choosing to put their money into developed markets and the United States. And some of those markets, well, the numbers are from the United Nations Conference on Trade and Development, UNCTAD. It says global foreign direct investment went up 5 percent in 2010. Now, that is still some 37 percent down from the peak in '07.
QUEST: -- excuse me -- there's work to be done. Cash flows to Europe and Japan dropped sharply last year.
Interestingly, the United States did register FGI at 44 percent. More than half of all investments were in developing economies. Investments in the world's poorest or least developed countries is falling.
It is a fascinating con -- confection, if you like, of what's taking place at the moment.
Joining me now, the secretary-general of UNCTAD, the United Nations Conference on Trade and Development.
Supachai, good morning to you.
Good evening to you, I should say.
SUPACHAI PANITCHPAKDI, UNCTAD SECRETARY-GENERAL: Good evening, Richard.
QUEST: So the -- the numbers show a very difficult trading environment...
QUEST: -- between -- for example, when you get the United States up sharply and you get India down sharply.
PANITCHPAKDI: Down, that's right.
QUEST: That shows the difficulty.
PANITCHPAKDI: Yes. And it's reflected in -- in the numbers. And I think the bright spot must be in Asia, because Asian economies actually have been able to attract at least more than 20 percent growth for American investment in 2010. And countries like China and Southeast Asian economies are still doing very well in terms of investment.
QUEST: Except that attracting of investment creates an unbalanced environment.
QUEST: And that is just as dangerous.
PANITCHPAKDI: Also, because they have to be watching out for the bubbles that might be...
QUEST: Well, the bubbles...
PANITCHPAKDI: -- be there...
QUEST: -- the currencies...
PANITCHPAKDI: The currencies, yes and (INAUDIBLE)...
QUEST: And we know Brazil, of course...
PANITCHPAKDI: The currency has been...
QUEST: -- believing in protectionism (INAUDIBLE)...
PANITCHPAKDI: -- the -- the problem with Brazil is, yes, because of the liquidity coming into the Brazilian market and also in the Asian markets. They have to watch out for that. They have to watch out for that.
QUEST: So what's your biggest concern at the moment, UNCTAD?
PANITCHPAKDI: The biggest concern at the moment is that what we're seeing is what we call the FDI, a foreign direct investment recession in Africa, because while the rest of the world actually is gaining in terms of more FDIS, Africa is suffering from a drop of 9 percent last year. And this is the second year of the -- of the decline of foreign investment into Africa.
QUEST: Isn't that inevitable?
PANITCHPAKDI: It's not because Africa actually, it was doing very well before 2008. In fact, because of the commodity boom, the prices of commodities going up, energy prices going up, Africa has got a larger share, a more than 10 percent share of the -- of the global -- in foreign investment.
QUEST: Now, so your previous job, of course, was head of the WTO.
QUEST: So I need to ask it, the Doha Rounds, isn't it time somebody put us all out of our misery and just brought it to a close?
PANITCHPAKDI: Well, I -- I -- I don't think so. I think there's still life in the...
PANITCHPAKDI: -- in the Round. And, you know, because the things have -- are on the table at the moment like total elimination of export subsidies on agricultural products, it's something which is going to be achievable within this round.
QUEST: Right. But the USTR, the U.S. trade representative saying -- he's speaking tonight and says -- he says, you know, it's going to be very difficult to get around. Pascal Lamy's successor says that perhaps it's -- what -- what's needed is a more limited Round.
You negotiated these people.
PANITCHPAKDI: Yes. Yes, well, I think by the end of this year, we might be seeing some -- some more life in the Round, when they try to agree on a small package, as you said, as Lamy is trying to do now. It is particularly for the least developed countries that they would have a special package for them...
PANITCHPAKDI: -- a special market excess package for the LDCs.
QUEST: Aren't you frustrated and annoyed that after all these years, reasonable men and women can't get a deal?
PANITCHPAKDI: I'm most annoyed. I'm most annoyed because this is something that people, and particularly policymakers, should understand. And everything is on the table. Lamy and I, we have achieved, I think, 80 percent of the deal. So only the last 20 percent left, which is, of course, the most difficult part. And -- and we would achieve much more impetus to -- to the global trade volume. And this something that it's needs political will, actually.
QUEST: Thanks so very much, indeed, for joining us.
PANITCHPAKDI: Thank you.
QUEST: Supachai, thank you very much, indeed.
Political will -- I'll settle for good weather.
Jenny Harrison is at the World Weather Center for us.
And, actually, I have to say -- I have to say -- and before you start berating me, Miss. Harrison, we are enjoying it at the moment.
JENNY HARRISON, CNN METEOROLOGIST: Good. So you should. You have got some pretty fine weather conditions over there, Richard, nothing to complain about.
You can't say the same all about the Northwest Pacific right now, in particular, the Philippines. We've been watching for the last couple of days these two areas here. And now there is a third which looks as if it might develop.
Right now, the (INAUDIBLE) has been warning, certainly giving us a low chance of development. But we already have now Tropical Storm Nock-ten, which was Tropical Depression Number 10, Tropical Depression Number 11.
So could this become Number 12?
Now, first of all, Tropical Depression Number 11, it is looking as if it will become a tropical storm probably in about the next 24 hours. Right now, winds just below that. But you can see the general direction. It's pushing up through the islands. It should head to the north of Yap. But it's close enough. It could certainly produce some heavy amounts of rain and some strong, blustery winds.
But nothing like what has been impacting the Philippines already for the last couple of days. It is now on its way across Northern Luzon. But look at these images coming out of the Philippines, because already, at least seven peopled have died. This was actually in a landslide. And about 11 fishermen are estimated to be missing because of the very high waters, obviously, the dangerous waters off the coast. And this storm, as I say, is not done just yet. You can see the flooding, obviously. And, as I say, the danger and the worry here is that it could lead to more floods and more landslides.
The Philippines have actually issued their signal number two. I can show you that. This is obviously just warning residents for what is about. As I say, this is very soon to work its way across Northern Luzon. And then it will push out the South China Sea. And at that point, of course, it is likely to regain its strength.
Now, the rains will continue to come down. Torrential, they will be, as well, as you can see, while this storm actually passes across the island. And it's not moving too badly, at a fairly good pace. But the rains are torrential and already, since the beginning of the week, since Sunday, over half a meter of rain has fallen in some locations.
And look at the amount that's going to come down in just the next couple of days, getting on to 200 millimeters to those northern sections. And remember, of course, a very mountainous terrain. So that is why the concern is for more landslides and mudslides.
And then across into Europe, there is more rain in the forecast here. And also, you'll see those brighter areas of cloud. That is where we'd like to see more in the way of thunderstorms. That's a dividing line between the cooler air across much of the west with these showers and thunderstorms and then across the east, when you've got a high pressure in control.
And temperatures still about 10 degrees above average. But staying very unsettled out across the west. And, as I say, that's where the warnings are across those eastern regions.
And Moscow, yet again, temperatures well above average for the next few days -- Richard.
QUEST: Jenny Harrison at the World Weather Center.
We thank you, miss. Harrison, very much.
Now, in just a moment, after we come back from a short break, putting your body and soul into your job -- the Royal Ballet's Carlos Acosta next and his World At Work.
QUEST: There's an old saying, you'd better enjoy what you do for work and you'll never work another day in your life.
The world famous ballet dancer, Carlos Acosta, has certainly taken that to heart, displaying a passion for dancing with the National Ballet of Cuba, with the American Ballet Theater and the Royal Ballet here in London.
It was at the Royal that we caught up with him, because we needed to examine his World At Work.
CARLOS ACOSTA, DANCER, THE ROYAL BALLET: We work sometimes eight hours a day for that moment.
ACOSTA: My name is Carlos Acosta. I'm a ballet dancer for the Royal Ballet.
ACOSTA: I used to live in a very rundown area of the Havana, in the outskirts of Havana. And I think it was a way of getting me out from that scene.
ACOSTA: They give you an opportunity to become a person, you know, in real life. You know, I love to play a prince. I mean come on, I'm (INAUDIBLE), you know, I had no shoes. I'm playing a prince and I'm commanding everybody. That's wonderful, you know?
ACOSTA: In Presaria (ph), I'm going against all the odds. You don't listen to your body, you know, when it really hurts (INAUDIBLE). And you don't get discouraged. Don't get anything and anybody to get into your way. I think this is the hardest thing.
We really are so privileged to be able to produce in people, all the audience that come to see us dance, a way of escaping.
ACOSTA: So all this music in motion transports you to a different era, to a different period, you know?
And at the end of the day, you know that you come crying, you know, for what you just saw. You know, it -- it's something absolutely wonderful that is worth every bit of pain. You really have to love it in order to expose your body, hammering your body day in and day out all these hours, long, exhausting hours, you know.
For the applause.
ACOSTA: I live on stage, you know?
And when you are on a stage and you see the lights and you interact with the audience and you see yourself in the costume, my God. This is wonderful. It's really, really, really great.
ACOSTA: I love this job. I just -- I just love it. This is my life and this is what I'm going to die doing. You know, this is it. But that's -- I don't know any -- any -- any other way of existing.
(END VIDEO TAPE)
QUEST: I love this job, he says.
Can there be any better testament to the World At Work?
A Profitable Moment next.
QUEST: Tonight's Profitable Moment.
Mohamed El-Erian warned us tonight what's in a name. This time next week, we could be mourning the end of the United States' AAA status.
Since 1917, the U.S. has had the mark of trust, which sits at the center of the world's financial system. In the post-Lehman world, ratings are taken seriously. They mean something. It was the dressing up of subprime nonsense with AAAs that started the whole mess off in the first place.
Washington may complain about the agencies. Europe has been doing the same for months. Love them or hate them, get used to them. They're around and we'll have to follow them.
And that's QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, I do thank you and I hope it's profitable.
"WORLD ONE" is next.