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Movement on Debt Ceiling; Global Economic Debate

Aired October 10, 2013 - 16:00   ET



RICHARD QUEST, HOST: Stocks are soaring, the bell is ringing, a little movement in Washington goes a long way on Wall Street. It is Thursday, the 10th of October.

The market is closed, and we've just had a debate at the IMF, a global debate, where we've been talking what's happening in the global economy.


CHRISTINE LAGARDE, MANAGING DIRECTOR, IMF: It will have financial consequences that will apply not just to this country, but across the globe.


QUEST: Live from Washington, I'm Richard Quest. I mean business.


QUEST: Good evening to you. We are live at George Washington University here in Washington, DC, where leading policy-makers from around the world say that a US debt calamity can and must be avoided.

And they're pinning their hopes on talks that'll take place in just an hour or so at the White House, when House Republicans will go to the White House and where they have offered a six-week delay on the debt ceiling in return for the president to agree negotiations on the budget deficit. This is how it was put earlier today.


REP. JOHN BOEHNER (R), SPEAKER OF THE HOUSE: What we want to do is offer to the president today the ability to move a temporary increase in the debt ceiling in agreement to go to conference on the budget, for his willingness to sit down discuss with us a way forward to reopen the government and to start to deal with America's pressing problems.


QUEST: That's John Boehner as he put it to us earlier. Now, if you take a look at the markets, just that little bit of information went an enormous way. Stock markets rose very sharply. The Dow Jones Industrials in New York closed up more than 300 points on the back of that promise or that prospect of a deal that was to be done.

European markets also rallied extremely sharply. If you take a look at the numbers on the screen, you'll see that they, too, are looking forward to a deal being done.

The question of course is, whether or not the deal can be done, and if it is not done, how quickly those market gains would evaporate.

So, to tonight's debate. The CNN global debate at the IMF as part of the annual meeting. Leading policy-makers from around the world are here, and tonight, you're going to hear from Christine Lagarde, the managing director of the IMF; Raghuram Rajan, the head of India's central bank.

You're also going to hear from the Spanish economy minister, Luis de Guindos; Yi Gang is the deputy governor of the People's Bank of China; and Jason Furman, the chairman of the US government's Council of Economic Advisors, President Obama's principal adviser.

So, the top issue: even though the agenda is wide and deep, the top issue is the budget deficit, the budget shutdown, and the debt ceiling. And that was an issue that we talked first of all in the debate with the managing director, Christine Lagarde.


LAGARDE: It will have financial consequences that will apply not just to this country, but across the globe, given the strong inter-connectedness between the various economies, not to mention the very basic practicalities of how to deal with technical default, impaired/non-impaired securities, given the very, very deep penetration of the treasury bonds from the United States in all portfolios around the globe.

QUEST: Jason Furman, you don't believe that there will be a default, do you?

JASON FURMAN, CHAIRMAN, US COUNCIL OF ECONOMIC ADVISORS: I don't believe that there's any reason. I think cooler heads -- you're already starting to see that today, the cooler heads coming out, putting ideas on the table, both sides agreeing that default would have all of the consequences that Christine just described.

QUEST: But if we get, as it's reported, a six-week reprieve -- I'm going to use the horrible analogy -- we've just kicked the can further down the road, haven't we?

FURMAN: I think there's no question that you want to move the debt limit as far out into the future as possible to have as much certainty as you want to have -- as you can have. But back in January, the debt limit was raised, actually, with no drama at all, no global discussion, no negotiations, it was just raised.

This time, there's obviously been a certain amount of drama, but if it was raised without a negotiation, you're starting to establish a new paradigm that you're not negotiating, you're not discussing, you're not taking ransom. You're raising it so you can go on to all the other important things we need to do in our economy.

QUEST: The IMF, obviously, would welcome a six-week reprieve from this sword over the global markets and the global economy, but it won't be enough, though, Christine?

LAGARDE: The longer it is the better, because the more uncertainty there is, the more trepidation there will be in the markets, and the more uncertain people will be. So as much as six to eight weeks is very welcome for the global economy, much longer would be a lot better.

QUEST: Mr. Yi, Deputy Governor, you've got nearly $2 trillion worth of his bonds.


QUEST: Are you worried?


QUEST: And if you're not, maybe you should be.

YI GANG, DEPUTY GOVERNOR, PEOPLE'S BANK OF CHINA: The market doesn't like uncertainty, and we watch this drama very closely. I hope what Jason said is true.


QUEST: A ringing endorsement if ever I heard it. What does China want from this crisis, besides it being over?

YI: I think this is about the entire financial market of the world. The US market is the major market. Right now, you see -- we see some recovery of developed economies and also emerging markets facing some difficulty.

Adding this budget and debt limit uncertainty would be a hurdle for the recovery and for the future development of the economy. So that I think they should have the wisdom to solve this problem as soon as possible.

QUEST: You should have the wisdom, Jason.

FURMAN: Richard -- I mean, this country saw the growth rate strengthening in the first half of this year relative to last year, the fiscal contraction largely over, there's a lot of good things. Just need to get this one piece of business done. It's one of the easier economic policies that any of our countries faces is just to do this no-brainer, and I think we will.

QUEST: Governor, you have already seen the effects of what happened. You had to raise interest rates because of what was happening in your country and the way your currency was being hit, didn't you?

RAGHURAM RAJAN, GOVERNOR, RESERVE BANK OF INDIA: Absolutely. No, I think the old dictum the US sneezes, everybody else gets pneumonia is right.

QUEST: Even today?

RAJAN: Even today. So, to the extent that there is a disruption in US financial markets, to the extent that US collateral is no longer good, it could feed in ways that we don't fully understand. And that's why I think it's better that we not have to face that.

Now, it may be that it doesn't really matter very much. Everybody looks through the technical default, there's some securities which are impaired, many which are not. But if the financial markets are fragile in a state which is difficult and you have this layer of uncertainty, that's what I think the managing director is talking about, we don't need it.

QUEST: If you are being -- your country was attacked in the financial markets recently, and you're having a slowdown, Minister, you're just on the edge of recovery.


QUEST: If the US causes dislocation, you are in trouble again.

DE GUINDOS: Well, I think that the last thing we need is further volatility, further uncertainty in markets, so it's not news. But I'm sure that we will be able to reach and that the US will reach an agreement on debt. That will be good news for the outlook of the economy for sure. All over.

QUEST: Why -- why are you all so sure?


QUEST: Managing director?

LAGARDE: Well, first because we have faith in human beings and in their sagacity in view of the potential risks that would result from the materialization of this accident.

And really, if we are in the realm of accidents and nobody wants to face it, neither the Spanish economy that is on its way to recovery that has taken a lot of hardship where people have made huge sacrifices, nor those who hold treasury bonds and who would rather navigate with them and trade them as smoothly as possible. So, we do have faith, and I hope we won't be let down.

FURMAN: I think the other reason I have faith, Richard, is there's actually a lot, once you get past the reopen the government, get past the debt limit, there's actually a lot to discuss and a lot of gains to be had from both sides.

I think both sides agree on things like replacing the sequester with more sensible ways to reduce the deficit. Both sides would like to reform our tax code to make investment infrastructure. So, I think once you can unlock this and have that conversation, I have every reason to believe you could have a good conversation.

QUEST: I don't want to get into the weeds of Republicans say this and Democrats say that, House versus Senate versus White House, but I do want to ask you, Chairman, the -- as "The Economist" has on its front page, "this is no way to run a country."

The sequester, if in doubt just slash and burn. If in doubt, close down the government, if in doubt, drive the thing to the edge of the cliff of a precipice of a default. I don't notice anything like that happening with the other countries.

FURMAN: Oh, it's indefensible. And there's something about the structure of our political system that gives one faction and one chamber the ability to do this. But again, I think ultimately, my hope is that you see cooler heads prevail, because there are these substantial opportunities where you really could get agreement on something that would be better from everyone's perspective.

QUEST: OK, we're going to move off that. I did promise you we were not going to -- and I want to talk about the world economic outlook. But before we do, how many people in this room -- hands up! -- how many people in this room have faith that this will be sorted out before calamity.


QUEST: Hang on. How many don't?

The optimists have it. Let's sort --



QUEST: And to our little audience here -- young audience here, how many of you -- hands up! -- are optimistic that the budget problems and the debt ceiling crisis will be solved. Hands up.

How many think it won't?

Pessimists are at the back.


QUEST: When we come back, we will put the deficit to one side, and we'll talk about the Indian economy and how it was attacked by speculators earlier this year. You'll hear from the governor. This is QUEST MEANS BUSINESS, we're live tonight from George Washington University in DC.




QUEST: Welcome back to Washington. We've talked about the US debt ceiling crisis in our debate on the global economy. Now we turn our attention to the emerging markets and how they were badly affected earlier this year. Also, the slowdown in global economic growth. A question and an assessment from the managing director of the IMF, Christine Lagarde.


LAGARDE: What we're seeing is a changing pattern. A few months back, we had the emerging market economies driving the show, being the main engine for growth. And as Jason has just alluded, some of the advanced economies are now turning the corner, are getting some strength out of the recovery.

The US is moving on, the forces of the US economy are showing it, the housing market is getting better. When you look at Japan, there is a massive shift in the Japanese economy, which is now moving into positive territory. And Europe, the euro area, to which Luis belongs, is also turning positive next year.

So, you have the advanced economies doing a bit better and being also able to shoulder their burden, and the emerging market economies slowing down a bit, discovering, in a way, or disclosing some of their vulnerabilities, and for some others, suffering from the hinted tapering that took place a few months back. That's the situation we're in.

QUEST: Hint of tapering. She's talking about you.


RAJAN: I need help.

QUEST: Come on, the WEO has downgraded your growth by more than 1 percent this year.


QUEST: You're in trouble.

RAJAN: We have our own private discussions with the Fund about whether those estimates are right, but let's put that aside.

QUEST: Oh, so you don't agree?


QUEST: So, you don't agree with the WEO's assessment of your 2013 growth numbers?

RAJAN: I think we'll be a little stronger than the WEO suggests. I also think our current account deficit will be a little smaller than they suggest. In fact, significantly smaller.

But I want to take up on what the managing director said. I do think that the slowing of advanced countries has forced emerging markets to look for a different model of growth. China is making major advances there.

In India, we are looking to move from a more consumption-led process to a more investment-led process. So, these changes are happening now, and changes do entail some slowing as you start pushing on a different engine.

So, in India, for example, investment will pick up more strongly, but it's taking time for the changeover to take place, and that's part of the reason for the slowdown.

QUEST: Deputy Governor, the -- everybody's talking about the slowdown in China. Can you assure us that such slowdown as it is will be soft landing and will not accelerate?

YI: For the first half of this year, a lot of people worry about slowdown of China, and some people even worry about a hard landing situation. In the third quarter's data, I think China's economy already picked up. I think for this year, we are going to have -- or certainly above 7.5 growth rate, maybe 7.6, something like that.

For the foreseeable future, I think China's growth will be around 7, but it is true that if people think that China will always grow at double digits, like that last decade, and now we changed from a very high-speed of growth to a medium-to-high-speed of growth, which is maybe around 7 percent. But I think by world standard, it is still a very rapid growth rate.

QUEST: But it's coming on the back of a potential property bubble, it's coming on the back of a deep liquidity issue for the banks, it's coming on the back of bank -- of a potential banking problem.

YI: I think it is under control. They have this so-called settle banking problem and local government finance legal problem under control. I think that if you look at the property price, it is a little bit high, but I think the trend is converging. Together with the correct monetary policy and fiscal policy, I would say that it would be a converging process.

QUEST: After six quarters of negative growth, hallelujah! The eurozone is finally growing again. But we shouldn't put the bunting out just yet, should we, Minister?

DE GUINDOS: Well, I think that there is an important modification of the perception about the situation of the eurozone.

As Christine has said, one year ago, the sick man of the world economy was Europe and the eurozone, and the main source of trepidation about the future and the potential implications for the world economy came from Europe. And I think that this has been modified, and I think that it's an important element to take into consideration.

QUEST: But talking about Spain, now, and if we look at Spain, you're out of recession. Can you confirm you're out of recession?

DE GUINDOS: Yes, I can confirm. From the technical recession, not from the crisis. Because a country with 25 unemployment rate -- 25 percent unemployment rate is not out of the crisis. But, well, technically, we have left the recession behind us.

QUEST: And does the Spanish government now have in a position to shift marginally away from austerity, do you feel that you can now move to some more pro-growth strategies?

DE GUINDOS: Well, I think that this approach of trying to put at odds fiscal consolidation with growth is a little bit misleading, if you'll allow me to say. I think that Spain -- a country like Spain has to reduce the public deficit. There is no alternative. But it has to be done at a proper and correct pace.

And we are doing that. For this year, we'll have a reduction of the public deficit, because we need to put our public finances in order.

QUEST: Yes, but that's -- you've got 25 percent unemployment and a youth unemployment rate of -- what? -- 50, 60 percent. So, you've got a very high youth unemployment rate as well.

DE GUINDOS: Yes. But there is one point. I think it's a good example that not always fiscal stimulus gives rise to an improvement in the labor market. For instance, in Spain in 2008 --

QUEST: Right.

DE GUINDOS: -- we started with an unemployment rate of 8 percent, and we had a surplus of fiscal policy in the public finances. We had a very important and profound fiscal stimulus, and we were at a deficit of 11 -- more than 11 percent of GDP. And simultaneously, the unemployment rate went from 8 to 21.

So, I think that to create this kind of correlation between fiscal policy and unemployment, I think that it's a little bit misleading.

QUEST: I want to talk about tapering and Jason Furman, that's one for you, isn't it? The Fed decided not to -- I know you're going to say the administration doesn't comment on tapering -- but the Fed decided not to taper, but tapering is coming sooner rather than later.

FURMAN: Yes, Richard, it has been one of the strengths of American economic policy that you don't have that type of dissonance and disharmony between the administration saying one thing and the Fed saying the other, so we really do respect the independence of the Fed and think that helps make our overall policy more successful.

There's no question that when it comes to a broader set of policy issues, coordinating discussion forum, like the IMF, the G20, all of that is very, very important.

QUEST: Managing Director, you've warned about tapering, not just tapering, but the exit from non-traditional methods and non-traditional, haven't you? You're worried about the exit strategy has to be as crucially important.

LAGARDE: Yes. We warn for two reasons. One is because this unconventional monetary policy is precisely unconventional, so there is no real record or analogy that we can use to advise about the exit, because it's the first time that this is as heavy-loaded in terms of unconventional monetary policies.

And in all advanced economies. It's not just the Fed. It's the Fed, it's the ECB, it's the Bank of England, it's the Bank of Japan, so --


QUEST: What do you fear might happen?

LAGARDE: -- all of them are doing it. Hm?

QUEST: What do you fear might happen?

LAGARDE: Well, what we fear is an abrupt exit, something that would not be gradual, something that would be hard to anticipate for other markets, something that would be communicated in an obscure or confusing way so that markets would be at a loss as to what to expect, and there would as a result be probably some volatility.

And why do we recommend gradual, well-communicated, and a dialogue between the authorities is precisely to avoid what we call the spillover effect, what would likely happen, and that we have seen a little bit in India, in Brazil, in Russia, and in various other emerging markets, Korea, Turkey and so on and so forth, which have been the recipient of a lot of those capitals when --

QUEST: Right.

LAGARDE: -- the Fed and others went into unconventional monetary policies. What will -- what has gone in will have to come out, at least some of it, and it should be anticipated and gradual.

QUEST: A quarter point on your interest rates, Governor, is not going to protect you sufficiently when tapering really gets underway, is it?

RAJAN: No. I actually think -- the real question is, was there a full warning, or is what we've seen a full warning or the event? I think we may have seen some of the event itself in the sense that we have $35 billion in external foreign institutional investment debt. $10 billion has gone. We expect the remaining $25 billion to go, and that's more longer- term money and may not go.

So, in that sense, what had to go may have -- we've seen a lot of it already leave. It's not going to come back at this point until tapering is over and we see a more stable global environment. So, I'm not too worried about a fresh wave, and we have plenty of reserves to deal with it if, in fact, it happens.

So, when I raise interest rates, it's not so much keeping us in mind the need to keep foreign institutional investors in, it's more that from our own domestic needs inflation has been too high, we need to combat it.

QUEST: But it was a surprise. Nobody expected you to do it.

RAJAN: Because I wanted to move away from worrying every day about the external side and talking about it to saying, look, the external side is going to take care of itself. Let's get our house in order. That's the best way we can raise confidence about our economy.

QUEST: But you took a risk with the growth -- with growth at the same time. Where growth is already fragile, you took a risk by raising rates. Do you accept that?

RAJAN: No, absolutely. But let's not dismiss the effect of stabilizing inflation expectations about sustainable growth. Yes, in the short run, higher interest rates do potentially affect growth. But to the extent you can bring down inflation, to the extent that you can reduce the volatility of inflation, people have more incentive to invest, people have more incentive to go out and buy goods.

So, I don't think we should dismiss that effect. As people have confidence you're fighting inflation, it does over time help growth.

QUEST: Would you raise rates again? Will you raise rates again if you have to?

RAJAN: I think we'll look at the data and then make a decision when the time comes.


QUEST: Dammit! Some day I'll get --


QUEST: Some day I'll get an answer to that question!



QUEST: Some day I'll get an answer on that question from a central bank governor. When we come back after the break, talking of governors, the deputy governor of China's central bank tells me what he needs from the US to ensure rising middle class in China.

And here's a fact for you: do you know this lot are paying roughly $60,000 a year to attend George Washington University? Now, that's real money. QUEST MEANS BUSINESS, we're live in DC.



QUEST: Hello, I'm Richard Quest. There's more of the global debate on QUEST MEANS BUSINESS in just a moment. This is CNN, and on this network, the news always comes first.

And top US Republicans are due to sit down with President Barack Obama to try and break the impasse over the debt ceiling. House speaker John Boehner says he'll propose a short-term deal to extend the deadline in return for more substantial talks with the White House.

The Libyan prime minister Ali Zeidan has called for calm after he was kidnapped and then released shortly after. There have been international condemnation of his abduction.

In a special CNN debate with the IMF, Christine Lagarde, the managing director of the Fund, says more work needs to be done to stabilize the global economic system. She singled out the financial sector, saying it still has a mission to be accomplished.

Pakistani activist Malala Yousafzai has won the European Parliament's Sakharov Prize for Freedom of Thought. The 16-year-old is also among the nominees for the Nobel Peace Prize which is due to be announced on Friday - - that's tomorrow.

Good evening tonight from George Washington University in Washington, D.C. where we continue our global debate. This time Yi Gang the deputy governor of the Bank of China, and I asked him what China needed to ensure the middle class grew and thrived.


YI: They certainly need a very stable global economy. If we see developed market recovery, U.S. economy is robust next year, that's certainly good news. As you know that China as a emerging market will be very closely related to other emerging market if you look at the raw material and trade. And if China's economy grow also that they will benefit other emerging markets. So what we need is an orderly, well- communicated tapering. That's probably good news. And what we need is that we resolve the difficulty in some countries(inaudible) difficulties, and also more importantly, China need free trade and investment. We really think that protectionism is bad for the global growth and core.

QUEST: You say good communication on tapering?

YI: Yes. Yes.

QUEST: Good communication on tapering.

FURMAN: Mr. Gang.

YI: Yes.

FURMAN: Go back to the best communication on that topic comes from the Federal Reserve which is not here on the stage today.

QUEST: You can't blame me for trying to have a second bite at it. As we look to 2013 and 2014 for the U.S. economy, and putting it into context of your colleagues here on the panel here, Jason, what's your biggest concern? And what should the U.S. be most concerned about? China slowing down, India taking a tumble or Europe not getting their act together?

FURMAN: Are those my only choices?

QUEST: Well, unless the managing director wants to join in.

FURMAN: You know I certainly think for the past year, the international side has been one of the challenges for the United States. In the first three years of our economic recovery, exports were the fastest growing components of our GDP and the last year they are pretty much the slowest growing. Well, federal spending was even less. And so recovery in the rest of the world is very much in the interests of the United States so that we can get back to those rapidly-rising exports which were a big part of getting out of a crisis, especially a crisis that a lot of the normal tools to get out of it aren't available to you.

QUEST: Talk about now how far we are, Managing Director, coming out of this crisis, because you've talked about epic change that's taking place -- transition, transformational, it's been going on for years since the crisis (inaudible). How far and how much more do you think we have to do?

LAGARDE: There is more work to be done and I would say one two critical fronts. The first one is the financial sector. I don't think that we have yet gone to the bottom of what needs to be fixed, what needs to be exposed, how much due diligence there should be, how much assets of (inaudible) there should be and so on and so forth. The financial sector is still 'mission-to-be-accomplished'. OK, so that we have more security, more transparency, so that the shadow banking is supervised where needed. So that the derivatives are traded in as transparent a way as possible. So that banks are solid and those that are not solid, can be resolved, including cross country. So that's number one.

Number two, I think critical is adequate cooperation between the policy-makers. What we're seeing at the IMF is that each and every country has its fundamentals, its characteristics, its demography, and there has to be a set of domestic policies. But we're also seeing at the same time massive spillover effects, where one country is going to an impact on the others, and you have to measure how it works and how it backfires eventually. So I would say, financial sector sorted out. Number two, massive cooperation and collective will and political courage to actually do that. Taking into account what's happening elsewhere.

QUEST The danger is (inaudible) -- the danger is that as recovery picks up, any form of impetus to make those changes gets put on the backburner.


QUEST: How can you keep their feet to the fire?

LAGARDE: I think we have to remind countries and policy-makers that the risk is still there, and that is not because the recovery is underway, it's not because of other fiscal conciliation has taken place, it's not because employment is picking up that they are you know of the (inaudible) that no structural reforms should be considered, competitiveness should be ignored and life goes on

QUEST: Your changes taking place in India are painfully slow. Even for a country with the size and scale and difficulties, the political paralysis is extreme. Would you agree, Governor?

RAJAN: No, I'd say we've done a fair amount over the last year, year and a half, both on the real side, on the financial side. And they're you know small thing add up to a big thing. We've opened up (inaudible) for example, that company which we seem to have trouble with, Vodaphone is thinking of buying up its additional shares in India because it wants to do more business in India. There's good news about what has happened over the last year and a half, some of which is overlooked by the national press. But I want to come back to what I think is a bigger problem that we face today, which is years of easy money -- that's how the world has grown since the 1990s. First we point to the emerging markets -- they got into distress, they started building reserves, pushing the money back into industrial countries. Industrial countries got that money, got into distress and then again started with easy (monetary) policy pushing that money toward emerging markets. This is the third round where we've seen the emerging markets once again slow down. Now, what is going on with easy money is part of our problem. How do we stop this flow which creates problems again and again and again?

QUEST: Well answer the question, because bearing in mind they all need -- not all of you -- but need 'easy money,' otherwise the whole thing will come crashing down 'round everybody's ears. So have do you stop the infection of easy money to the emerging markets and the whole cycle from going on?

RAJAN: Well, I think ultimately and this is the lesson which we keep hearing which I think is a good one, which is we have to focus on fundamental sources of growth. Which means the easy money can buy us time, but it cannot substitute, and this is the point -- that the easy money tends to substitute because we think we're so good -- the money's flowing in, we're wonderful, we don't need to do the reforms that will generate more longer-term grown. From India's side you talked about it, we need reforms on the financial side, we need reforms on the real side, there's a lot that has happened. We paid attention to that, and a lot more that we need to do and we will do.

QUEST: Minister, the reforms have been dramatic in Spain -- they had to be, a) to get to -- to just survive, didn't they? Do you fear that some of the backsliding might continue on things like pension reform, labor reform, and in some of your fellow countries like Italy for example, where a new government came in expressly saying that maybe reform was not going to be fully carried out?

DE GUINDOS: Well I think that the reform is vital in order to be out of the crisis for an economy like the Spanish economy. You know that the amount of imbalances of the Spanish economy were huge. We had the property bubble, we had the credit bubble, we had problems of competitiveness, we've had problems with our public finances, so you know, the only important difference for the Spanish economy was to start implement and to pursue reforms in order to unwind and to correct all these imbalances. This isn't the only way out. However I think that's what's important is that the population it starts to perceive and to realize that despite the sufferings, despite the hardships, there is light at the end of the tunnel. And I think that we are getting closer to that.

QUEST: You really think so?

DE GUINDOS: I think so.

QUEST: Even though there's the immigration numbers from Spain are quite worrying, yet employment numbers are --

DE GUINDOS: The unemployment -- the unemployment numbers are awful, but when you look at the dynamics of the labor market, and when you look at our projections, you start to see that next year we'll have the you know growth again and that we'll have employment creation again.

QUEST: At a great cost of internal devaluation.

DE GUINDOS: Well, that -- you know in the case of internal devaluation, there is one element that perhaps we are overlooking. (Inaudible) traditionally in Spain, we used to devalue our currency. They priced (ph) an important and increasing competitiveness, but that's the worse we -- you know after two or three quarters, we had the same effects. In this time, internal devaluation -- the moderation of the performance of the Spanish unit they were costs vis-a-vis the rest of the world is something that is going to reap much more -- is going to last much longer than before.

QUEST: Do you think, Christine Lagarde, that the single biggest issue has to be the jobless -- -the young unemployment -- youth unemployment? And do you -- what more -- I mean, if I just looked down at my screen here, the most number of questions I get are about youth unemployment that people are Tweeting to me.


QUEST: What more do you want them all to do?

LAGARDE: Well first of all, have high on their agenda the issue of jobs and the issue of jobs for young people. But that's obvious when you listen to Luis and everybody who has high unemployment. Number two, have a fiscal policy that is compatible with growth development, which means, not going too fast, not contracting too much, focusing on those measures that will be conducive to growth and to job. And let's not forget that you know macroeconomic stability is also conducive to confidence to investment, to job creations. So I'll agree with you it's not mutually exclusive Growth is the best response to create jobs and growth is not mutually exclusive from fiscal discipline in a country.

QUEST: It's just very difficult to do.

LAGARDE: But it is being done. If you look at Ireland, for instance, Ireland has gone through a massive program. The Irish people have taken a huge hit. It's turning a corner. Employment -- unemployment is going down, employment numbers are on the rise, so it works. (Inaudible) economy in transformation -

QUEST: (Inaudible) you can do that with Ireland -- arguably with Ireland, it's a smaller country, and it can be done much more easily than with a country like Spain.

LAGARDE: Well, the demographics are different as well, the size is different, the sources of growth are different, but I bet you that Spain is being to turn around as well.


QUEST: Christine Lagarde ending our global debate coverage. But we are far from finished in Washington, D.C. this week on "Quest Means Business." On tomorrow night's program, the French finance minister Pierre Moscovici, the Russian finance minister Anton Siluanov, the Swedish finance minister Anders Borg and the former prime -- the former president of the World Bank, that's Rob Zoellick. That's on tomorrow night's program which comes from the IMF headquarters -- hear what they have to say. Otherwise, that's "Quest Means Business" for this Thursday night. I'm Richard Quest in D.C. Whatever you're up to in the hours ahead --

UNIDENTIFIED: We hope it's profitable.

ISA SOARES, CNN INTERNATIONAL CORRESPONDENT: From Lisbon, hello and a very warm welcome to "Marketplace Europe." I'm Isa Soares. The view from up here may be clear, but don't let this deceive you. Portugal's economic forecast is anything but Sunny. Yes, the economy did grow unexpectedly so in the second quarter, but let's not overstate the case. Unemployment's still extremely high as is government debt and foreign costs. On top of all that, there is the threat of political instability within the coalition and whispers of a second bailout. So, on this week's program, what Portugal needs to do to regain its competitiveness and retain it in the long term.

Coming up -- Portugal's economic catch. I head to Olhao in the south to see how one company is helping to pull Portugal out of recession.


UNIDENTIFIED MALE: Prices is like a big wave and you have to pay to be prepared to fight it.

SOARES: Plus the CEO of EDP says he's confident Portugal will avoid a second bailout.

ANTONIO MEXIA, CEO OF ENERGIAS DE PORTUGAL: I don't believe and I don't want to believe in the needs of a second bailout. I believe that at this stage, at the Portuguese level overall. we are doing what we need to do to avoid a second bailout.

SOARES: This small store in the center of Lisbon has for over 80 years sold one of Portugal's best-known staples -- canned fish. Well the fish industry has been one of the hooks that's really helped to lift Portugal out of recession. I traveled sound to Olhao to meet one company that really helps to sum up the problems they face in the country. In Olhao in the south of Portugal, fishermen untangle their nets after a busy night's work. They're whistling -- a sign that for today they are done. Less than a kilometer away at Conserveira do Sul, a fish canning factory, the working day is just beginning. It's a business that has changed little over the years, yet one that has faced many a crisis.

JORGE FERREIRA, CO-OWNER, CONSERVEIRA DO SUL: In the middle 70s, when the canned fish sector went into a deep crisis and many companies went down, we have been in a pre-alert crisis situation. We can consider the crisis as an opportunity. If our products are low-priced products, easy to buy, they have been the option for many people who have their wages reduced. So we have observed in last few years to an increase in the quantities sold during this crisis situation.

SOARES: This crisis it seems has brought work to its employees who clean, gut and can the various fish. Leonor (ph) here is one of 25 other ladies working at Conserveira do Sul. Together, they produce 12 tons of fish per day. Now the majority of this product is going to domestic market right here in Portugal, but there is a new market on the horizon and that is China. Now, they're not seeking this product because of austerity -- we all know China is growing, but because of food security.

FERREIRA: Right now, China is an increasing economy, and the possibilities of having a position in a market that asks for safety products, good quality, natural products, are very good for us.

SOARES: Many of these cans now bound for customers in Chinas. Just one example of Portugal's export success story. In the second quarter of this year, exports this year rose by more than five percent, helping the Portuguese economy outperform all other countries in the European Union with (inaudible) 1.1 percent. But take those exports away, and Portugal's left swallowing fine bones with high unemployment and debts. I meet Maria who has been working here since she was 13 years of age, and ask her whether she can feel the crisis. She tells me there is a crisis, but we're not facing it here. The crisis hasn't (forced) as yet she adds. Thank God she says, we always have lots of work.

FERREIRA: My father taught us that crisis is like a big wave and you have to pay -- to be prepared to fight it.

SOARES: A wave that for now has bought him a big economic catch.


SOARES: Welcome back to "Marketplace Europe" from Portugal, I'm Isa Soares. Lisbon's parliament building, Palacio de Sao Bento, is the country's seat of power. Inside they're treading carefully with the IMF, the ECV and the European Commission who are currently here testing the health of Portugal's economy. Good time then for me to find out whether Portugal is witnessing a recovery or a relapse.

Portugal's economic predicament has been likened to a delicate game of chance between a very fragile coalition and the Troika. Well one man has taken that idea further and has come up with a game of cards and it's called "Vem A Troika!" -- "Here Comes the Troika!" The whole purpose was to make fun of the very serious situation?

FILIPE PRETO, GRAPHIC DESIGNER OF "HERE COMES TROIKA!": The main purpose is to make people think about a serious -- a very serious period of this country by having fun with the situation and the people and all the characters which were responsible for all this.

SOARES: How has the situation changed, would you say, in the last couple of years?

RICARDO MARQUES, ECONOMIST, INFORMACAO DE MERCADOS FINANCEIROS: The worst numbers have come out show some recovery, very slight recovery. The unemployment is still very high, and we hear -- every day we hear about companies wanting to (inaudible). So, even if the real -- the numbers show a better situation in terms of economics, the people on the streets we're not (healing).

SOARES: What do you want people to take away from this gain? If there's one thing you would like them to take away from it, what should that be?

PRETO: You can win the game by balancing all the growth together and not by corrupt (for instance), your own country.

SOARES: The Portuguese government has a lot of work to do, and let's just hope they'll continue to play their cards right.


SOARES: Let me introduce you to His Excellency, the Marques de Pambol. When Lisbon suffered an earthquake back in 1755, he was the person that put it back on its feet, ordering sweeping financial and economic regulation and reform. Topics are just as relevant then as they are today. Closely watching the economic barometer is Energias De Portugal or EDP. The group is Europe's biggest energy operators and the largest industrial group in Portugal, employing over 12,000 people in eight countries.

MEXIA: I don't believe and I don't want to believe in the needs of a second bailout. I believe that at this stage, at the Portuguese level overall, we are doing what we need to do to avoid a second bailout. Sticky question and the key issue related with this is the fact that you need to reduce the volume dimensions so the public standing (inaudible) exists but also a lot because of higher taxes. So, the challenge is really to go on with the state reform and lower let's say the fixed costs of the public sector.

SOARES: Let's move along, many people are concerned in fact that Europe's high energy costs are pushing a lot of businesses across the Atlantic into the U.S. Is this something that worries you?

MEXIA: There is a huge mistake and I think that once again because of lack of leadership in this (question). The difference of cost of energy between the U.S. and Europe is mainly because of natural gas -- the shale gas. They have resources and they have a policy for shale gas. Europe has less shale gas and specially she don't have an integrated policy and you have even countries that forbidden to exploit shale gas. So the question is not energy is more expensive, it is that you don't have today the right policy -- not only at the gas level, but also in terms of long-term visibility for people to invest. So what we need today is a market redesign.

SOARES: Are you the vision that case that Europe needs a true single market for gas and electricity?

MEXIA: You know electricity today you are working in a system that are more fixed costs than ten years ago. And that you need a market redesign that includes this new reality. It's quite technical but you cannot keep the markets running and giving incentives to invest in something that is supposed to last for 40 years or 50 years with short-term market prices, where the marginal technology has negative results. So nobody will invest and you should have a rather common policy not only devising infrastructures on grids, but also on how you integrate renewals in the system, what are the right incentives for the backup facilities that you need in coal and in gas. How do you treat nuclear in terms of stability of revenues. If not, nobody would invest in nuclear. So, visibility. Visibility and credibility is the name of the game for this sector, and it is lacking.

SOARES: Antonio Mexia the CEO of EDP telling me very confidently that Portugal will not need a second bailout, but he does say in order for Portugal to regain and retain its competitiveness in the long term, it will need to cut taxes and reduce public spending. And that is it from the team in Lisbon. Thank you very much for watching. We'll see you again next week.