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European Commission VP Oli Rehn Discusses Crucial Weekend for Europe; Firewall Feud Between France and Germany; EFSF Chief Klaus Regling Says Firewall is Strong; Fitch Downgrades Five Eurozone Nations; ECB Optimistic; Former ECB President Jean-Claude Trichet; IMF Head Christine Lagarde's Concerns About Eurozone Crisis; Wall Street Down

Aired January 27, 2012 - 14:00   ET


RICHARD QUEST, HOST: Tonight, Oli Rehn tells me this is a crucial weekend for Europe.


OLI REHN, VICE PRESIDENT, EUROPEAN COMMISSION: I expect that in the coming days, we should have a deal between the Greek government and the private creditor community.


QUEST: Also on the program, the IMF's Christine Lagarde, the head of the ESFS, Jean-Claude Trichet, CitiGroup's Vikram Pandit.

As you can see, I'm Richard Quest, and clearly, live in Davos, I mean business.

Good evening. Live from the World Economic Forum in Davos, entering a critical moment in the long and torturous life of the eurozone crisis. A deal between Greece and its creditors appears to be imminent. A summit of European leaders on Monday is expected to deliver a firm fiscal compact. And alongside all that, leaders are still locked in debate over whether to add fuel to the firewall.

Tonight, on this program, of course, we bring you the views of those who will be crafting the decisions in the coming days, and we find out for certain whether we are ahead or behind the curve.

European Commissioner for Economics Oli Rehn says the next three days will be crucial in shaping the three years ahead in Europe. The vice president of the Commission is confident a deal in Athens is imminent. Relieving Greece of its debt is just one of three mountains to be scaled, along with recap the banks and building a firewall.

The man who said last month there were ten days to save the eurozone now says Europe faces another pivotal weekend.


REHN: I expect that in the coming days, we should have a deal between the Greek government and private creditor community on private sector involvement. And then, next Monday at the summit, we should have a new fiscal compact and decisions related to the financial firewalls that will be called a permanent European stability mechanism.

QUEST: How compete is that -- the fiscal compact negotiations?

REHN: It concerns how to ensure fiscal discipline in Europe, and I think it's one of the lessons learned, that you cannot beat sustainable growth without having sustainable public finances. And that's why, while not sufficing, it is a necessary condition of returning to recovery and to growth.

QUEST: Where do you expect on Monday the difficulty to come in terms of the -- the member countries signing up to it. Because obviously, I had to Trichet here today saying what he's looking for and different countries are looking for things. So there will be difficulties on Monday.

REHN: There will be some issues that will have to be ironed out. On the other hand --

QUEST: Which ones, would you think?

REHN: Well, I don't want to paint the differences of the world. I think we can solve all the remaining issues. I see that, in fact, Monday's a stepping stone to launch further discussion on even -- let's say at least equally important issues, that is growth, investment, job creation.

And that's going to be the name of the game over the coming weeks, followed by the summit in the early part of March, which should take decisions on how we can boost growth through reforms and through investment.

QUEST: Just about everybody to a person, yourself included, does believe that the eurozone will have a short, sharp, mild recession in 2012. That's fair enough, isn't it?

REHN: I think it is likely that -- well, it is a fact that we are currently experiencing a light recession. On the condition that we can take the necessary and bold decisions shortly, we can keep it short and we can return to recovery in the second half of this year.

QUEST: But the risk of not taking that and prolonging or deepening is very real.

REHN: It is a real risk, but on the other hand, I trust that the leaders of the eurozone will be able to take such bold and decisive decisions that will ensure that we can avoid a prolonged recession and we can return to recovery and growth in the second half of this year.

QUEST: Join me over here.


QUEST: Where are we on the curve of recovery in terms of policy makers dealing with the crisis?

REHN: In terms of policy makers dealing with the crisis, we are somewhere around here, but we are moving towards here and we are getting this -- we are getting a grip on this crisis now.

QUEST: We're getting a grip on this crisis?

REHN: Yes.

QUEST: You really believe that?

REHN: I do believe that.


QUEST: Oh! Oli Rehn, there. Like others, having two goes, two bites at the cherry, but there we are, his -- we'll see at the end of the program how the Curve has fared.

The failure to sort out Greece has revealed a top level disagreement over Europe's financial firewall. Today, France and Germany, the two biggest contributors, showed they disagree over its importance.

Wolfgang Schauble said the firewall alone wouldn't solve the debt crisis and that bigger problems, like Greece, should be sorted out first.


WOLFGANG SCHAUBLE, GERMAN FINANCE MINISTER: Greece has not only to commit itself, Greece has to deliver, because Greece has committed itself two years ago, and not all of the commitments have been delivered and fulfilled, and that is one of the critical issues to regain confidence.

And that's what has to be done in Greece, and we must not give the wrong incentives. No firewall. You can make any firewall any figure, it will not work if the real problems will not be solved.


QUEST: Meanwhile, Schauble's French counterpart, Francois Baroin, says the firewall should be as large as possible.


FRANCOIS BAROIN, FRENCH FINANCE MINISTER (through translator): We consider, and France defends this position, that the higher the firewall, the less it will have to be used. I mean, that's the deterrent effect.


QUEST: So, let's talk about the firewall to the man who hosts the biggest part of it, Klaus Regling, the chief executive of the ESFS. He insists the bailout fund, which is the majority of the firewall, frankly, does have the necessary firepower despite the recent downgrade by Standard and Poor's. I asked him exactly how big Europe's firewall, will it be enough?


KLAUS REGLING, CEO, EFSF: The EFSF has the firepower of 440 billion euro. We have only committed 43 of that for Ireland and Portugal over the next two years, so 90 percent of that firepower is left.

QUEST: Is it enough?

REGLING: That depends on the circumstances. At the moment, it's enough because there's no request from another country for financial assistance. To some, it's the euro summit in December last year said they would review the firepower of the ESFS. Today, from July it will be the ESM, the permanent mechanism.

So, they will review in March whether that's enough. We will see how the world looks like then.

QUEST: Are you comfortable at 440 billion?

REGLING: At the moment, that's fine because it's not only that we have 90 percent uncommitted. We are also working on leveraging these resources by providing insurance-type solutions, first loss trenches so other international investors are buying into this.

I have preliminary commitments, the first wave of commitments, of 60 billion euro from other investors. So, we are leveraging up so we will get to high amounts.

QUEST: You think it's just too much pessimism?

REGLING: Yes, absolutely. Because the market, the media -- that's you -- focus on short-term, and they always ask how much is the ECB doing? Does the ESFS have enough firepower? And what is ignored largely is all the positive positions that have been taken in Europe over the last 18 months that will ensure that momentary union functions better after this crisis than before.

QUEST: And the loss of Triple-A rating, how serious has that been in your ability to raise funds, if needed?

REGLING: There was no impact.


REGLING: No impact, so far, of course. And we have not lost the Triple-A. One of the rating agencies reduced us from Triple-A to Double-A- Plus. The other two rating agencies have not done anything.

We have also made clear Fitch that they would not downgrade France, for instance, this year, and we depend on the rating of our guarantors.

QUEST: Are the rating agencies a nuisance? I mean, at the end of the day, are they just a nuisance?

REGLING: No. If we think today that they have too much power, and that's probably true, this is not because they grabbed this power. It was given to them by our rules and laws and regulations, so -- QUEST: Should we grab it back?

REGLING: We are in the process of doing it. The financial stability port has a mandate from the G20 summit to do exactly that, to analyze how some of this power can be taken back again. It's not easy, but it's good to look at it.

QUEST: Come over here with me, sir, if you would. Since you are helping to move the Curve, are we behind the curve in dealing with the crisis or ahead of it yet?

REGLING: I think we are much further ahead than public perception. But that's probably not what you want --

QUEST: We have no views on the subject. It's your view.

REGLING: Ahead of the problem side? Put us -- I would put us here.


QUEST: And tonight, a fresh reminder of the volatile relationship between Europe and the ratings agencies, the agencies we were talking about there, when Fitch downgraded Italy, Spain, and three other eurozone countries.

The ratings of Italy and Spain have both been cut by two notches. Italy is now A Minus, Spain is at A. Belgium, Cyprus, and Slovenia and other countries are to be cut, each of those by one notch each.

One of the reasons for Spain's ratings cut, unemployment, which is oddly, the numbers. The jobless rate stands at 22.9 percent, the first time the number of unemployed people has risen to more than five million. It means almost one in three unemployed people in the euro zone is in Spain at the moment.

When we come back after the break, a Davos favorite. The views of Jean-Claude Trichet, the former head of the ECB, who joins me. We'll be back with former president Trichet in just a moment.


QUEST: The European Central Bank is hopeful Monday's summit will go some way towards unraveling the Gordian Knot. Mario Draghi, who's been overseeing an expansion of low-cost loans to banks, offered Europe something it hasn't heard in a while: praise.


MARIO DRAGHI, PRESIDENT, ECB: The amount of progress is outstanding. When we look at the progress that countries have made in your area in fiscal retrenchment and in undertaking structure reforms is amazing. If you compare today with even five months ago, I think the euro area is another world.

There is a lot of done things and there is a lot of determination to do more things that will have to be delivered, of course.


QUEST: Now, President Draghi's predecessor, President Jean-Claude Trichet is with me now. Good evening to you.


QUEST: Good to have you with us. First question I do need to ask is would you, in the -- did you or were you already planning on doing the three year, 36 month, LTRO that people are now crediting with having got rid of the credit crunch that was building up in the eurozone system?

TRICHET: I would say that concept of unlimited supply of liquidity at fixed rate was starting a very long time ago. The 9th August '07 we started that, and of course we did that for six months and one year basis.

And I have to say, the decision that has been taken by the governing council chaired by Mario seems to me very appropriate, exactly in line with the intensification of the crisis of the banks that we had in those last months.

So, it's a very good decision. It's a concept that we had already experienced.

QUEST: A lot of money was taken, then, wasn't there? Half a trillion, and they expect 200 to 300 billion will go out in the February LTRO.

TRICHET: Yes. We will see what happens. We have to be cautious, but the idea was to clearly demonstrate that those who were thinking that the banks -- all the banks in liquid could be in liquid were totally out of touch.

QUEST: Now, I don't expect you for one moment to have changed your views on the ECB's role in the crisis, but from the perspective now of not being the president, do you believe there is more that the bank can and should do towards the firewall, towards Greece, towards repurchase of bonds?

TRICHET: I think that the bank is really doing what it should, namely to have a sense of direction to maintain and preserve stability and confidence in the medium-term, which is essential in the crisis. And on the other hand, to embark in the non-standard measures that we started at the very beginning of the crisis four years and a half ago.

QUEST: So, if you look at the crisis, and we have only a brief time, but if you look at the crisis, it's origins, the way it has developed, nothing really happened in 2011 except it got worse.

TRICHET: No, I wouldn't say that. A lot has been done, obviously.

QUEST: But not enough.

TRICHET: Yes, not -- I mean, again, it's always a question. The time of the democracy and the time of the market are not the same time, and you have to understand that as far as the epicenter of the crisis is in Europe on the sovereign risk, but it's a global crisis. It's a global crisis.

It would be an immense mistake to take the present situation as the European crisis --

QUEST: All right.

TRICHET: -- it would be the same mistake to take Lehman Brothers as the American crisis only. It's a global crisis, and the time of the democracy is, of course, a little bit longer than the time of the market.

QUEST: Right. Join me over here, sir.


QUEST: Here is our Curve. We'll take the money off you later. We'll take some -- we'll take some euros off you later for marking this Curve. What color pen would you like? You can have your choice here. It's a green pen.

Where are policy makers in dealing with the crisis now? Are they still behind the curve, or are they ahead of it?

TRICHET: They were behind the curve. I would say that now they are exactly there, and a lot of hard work has been done in order to get from there to there. And again, I'm speaking of the governments.

As far as the ECB's concerned, I take it that we were ahead of the crisis. We were the first Central Bank --

QUEST: Right.

TRICHET: -- the first Central Bank to react to the crisis as soon as 9 August '07.

QUEST: Good to see you, as always, sir.

TRICHET: Good to see you --

QUEST: Many thanks.

TRICHET: -- good to see you.

QUEST: And congratulations on joining EADS.

TRICHET: But no time for complacency, if I may add, sir. No time for complacency.

QUEST: Never. Many thanks.

TRICHET: Good-bye.

QUEST: Now, as we continue, ahead of Monday's big summit on the eurozone crisis, the IMF chief has a warning from Davos tonight.


CHRISTINE LAGARDE, MANAGING DIRECTOR, INTERNATIONAL MONETARY FUND: The Europeans have to help themselves, but the international community has to be on their side, because it's in the international community's interest and in each country's interest that the situation is remedied promptly and comprehensively.


QUEST: It's Christine Lagarde, next on QUEST MEANS BUSINESS.


QUEST: It is a very simple message: no country is safe from the eurozone crisis if lasting action isn't taken soon. That's what the IMF managing director, Christine Lagarde, told me earlier today here in Davos.


LAGARDE: The eurozone crisis is not just secluded, exclusive to the eurozone. It's coming from somewhere else in the meantime. But it's also going to have collateral damage, external effects outside of the eurozone.

There's no country in the world that I've visited in the last eight weeks -- and I've visited many -- that hasn't said, "The eurozone crisis is a problem for me, for my economy, for my country, for my growth," and therefore, everybody has an interest in trying to fix the problems of the eurozone and the problems outside the eurozone.

QUEST: I listened to Chancellor Merkel, I listened to David Cameron, I've listened to you last week in Berlin. And the message is, now is the time to do the deal. Why are you more confident that now they can do it?

LAGARDE: I believe that there is international pressure to that effect, number one. I believe that, while there has been an improvement of the situation, because Italy's done more and better, because Spain is doing more and better, but there shouldn't be complacency.

There should be an urge to continue doing what needs to be done. Otherwise, the future looks very uncertain and very dangerous.

QUEST: Dangerous. Would you agree that the onus is on them to prove they can do it? The jury is out on whether they can do it?

LAGARDE: Richard, I've said it. The Europeans have to help themselves, but the international community has to be on their side, because it's in the international community's interest and in each country's interest that the situation is remedied promptly and comprehensively.

QUEST: Greece and the whole question of 120 percent and the reduction of sustainability. We are well and truly bogged down, now, in the whole PSI negotiations.

I know the fund doesn't have a view on how you divvy it up, but do you believe -- I suppose I'm asking you to take a view, aren't I? -- that does the ECB have to take losses? Do the banks have to take losses and, ultimately, do the governments have to put more money in?

LAGARDE: I will disappoint you, Richard.


LAGARDE: Because I'm going to repeat one thing, which is, the IMF is fixated, obsessed with the debt sustainability. And for us, whatever it takes, whether it's the official sector, the private sector, that is engaged in negotiations with Greece, or whether it's the country taking very, very solid and implemented steps to adjust, doesn't matter to me in a way. But it has to return to 120 percent debt to GDP ratio by 2020.

QUEST: Come and join me over here, Madame Lagarde.

LAGARDE: I will.

QUEST: On the Curve of Recovery, as we face it today, where do you think we are in terms of policy makers grappling with the crisis?

LAGARDE: I think we are both here and there.

QUEST: Well, more than one --


LAGARDE: I think -- I think directionally and intentionally, here. Truly --

QUEST: Oh, that's sophistry of the worst sort!


QUEST: You told me -- you told me where you want to go, not where we --


LAGARDE: I say it's a matter of cracking that distance, do you see? And that's where the vicious circles need to be broken so that we can move from here to there, where people would wish they were if everybody else is doing what they had to do, and that's what I mean by cracking the nut.


QUEST: I can't explain it, but as the week went on, so the Curve got busier. European markets may have retired, but across the Atlantic, the action on Wall Street is still in full swing, where things are not so good. This is the picture at the moment. The Dow is down more than 80 points, and this despite some not bad and actually quite good GDP numbers. Down 79, QUEST MEANS BUSINESS, we're live in Davos, good evening.