Q+A interview with Ross Westgate – CNBC

Sunday 17th July, 2011

Q+A interview with Ross Westgate – CNBC.

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be watched on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

Q+A, 9-10am Sundays on TV ONE. Repeats at 9.10pm Sundays, 10.10am and 2.10pm Mondays on TVNZ 7

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ROSS WESTGATE interviewed by PAUL HOLMES

PAUL More serious news, however, has dominated the front pages of the world’s newspapers this week, however, In Europe, Ireland’s debt was downgraded to junk status. Junk status. Greece looks set for another bail-out, if anyone will do it, and most worryingly, market jitters spread to Italy. At the same time in the United States, yet another debt-cutting argument is going on between President Obama and Republicans, and it means that unless a compromise is found by the end of this week, America’s going to run out of money to pay its bills. So it is not really a flash look all around when it comes to the money. To make sense of it all, I spoke to Ross Westgate. He’s the anchor of World Wide Exchange, which is a financial programme that screens on the global business network CNBC. And I began by asking him why this has all come to a head this past week.

ROSS WESTGATE – CNBC Anchor
Well, in some ways, it’s been coming to a head for the last two years. I think you have to go back to what happened just after the financial crisis and the collapse of Lehman Brothers. At that point, a very key decision was taken, mainly by Germany. After a process of 50 years, where the continent had been getting closer, Germany decided that the countries would be responsible for bailing out their own banking systems. And at that moment, that’s when the game changed, and it meant that countries like Greece, Portugal and Ireland would have to be responsible for assuming the debts of their failed banking systems. Those countries were too small. That’s why, with low growth as well, they had to be bailed out. And the problems we still have is that there is still no growth while those countries are implementing austerity packages. And in the case of Greece, most investors now believe they’re insolvent, so there’s gonna be a head cut on the debt. The question being, of course, is who pays? And the politicians keep dithering about what plan they’re going to come up with. And the longer they keep dithering, the more the markets are gonna punish them.

PAUL Yes, that’s right. And of course now we have, as one of the worrying countries, Italy. What’s the significance of Italy in this?

MR WESTGATE Well, Italy only... Italy is the continent’s third-biggest country. This isn’t peripheral. This is core. It also, after the United States and Japan, has the third biggest debt pile in the world. So it’s strategically very important with a large debt. What happened was at the end of last week, again, it’s politicians, uh, causing interim stress, is that the Prime Minister came out and sort of attacked his finance minister – finance minister widely regarded in international markets – as responsible for implementing a big 40 million Euro long-term austerity package to get its finances under control. And when Berlusconi attacked him, markets got nervous – ‘Hang on a sec, all of a sudden, maybe Italy is going to go off the rails with dealing with its large debt problem,’ and they started pushing up the cost, to Italy, of borrowing in the markets. Now, there comes a point with that large debt pile when the financing or the ability for it to be financed – that comes too expensive. Those were the fears that started, but because of the size of Italy and the strategic importance, it got a lot of investors very worried indeed.

PAUL That’s right – the seventh largest economy in the world, and I think the thing – am I right – the feeling about Italy is that Italy is simply too big to save – too big to rescue.

MR WESTGATE Well, yeah, it is so integral to the whole of the European economy. If you think about the moment, we’re talking about putting a rescue fund of around 450, 500 uh, billion Euros for Greece, Portugal and Ireland, uh, and other peripheral countries. Well, there have been... Uh, data suggests that if you want to save Italy and Spain, you’d have to expand that rescue fund up something like 2 trillion Euros. Now, I don’t know, but that’s an awful lot of money.

ROSS Well, exactly. What is the future of the Euro, do you think? I mean, is the Euro doomed?

MR WESTGATE It depends on a couple of factors. It depends on the will of the political elite here and the will of the electorate. That’s why I go back to what happened post-financial crisis. In the period up to that, in the previous 50 years, the story had been one of closer and closer integration. Now, if the Euro is to survive, they’ve got to go forward. They either go forward or they go back. Go forward means having a single treasury. Going forward means harmonising taxation. Going forward means getting closer to one country or maybe a federal Europe. The alternative is a break-up, and some countries, most analysts believe, of the Eurozone. So it’s down to what the politicians believe they want and what they can sell. But it is worth bearing in mind most people believe it will be more expensive, particularly for Germany, to actually have a Euro break-up than proceed forward. Because, of course, German banks are very exposed to the debts of all the other countries, and if they pulled out and had a massive devaluation, that will incur big losses on the financial books of those countries that stayed in it.

PAUL So, it’s a dangerous time. And then we can go to the United States, which I know you’ve been having a look at. Obama wants a temporary raising of the debt ceiling. The Tea Party – the Republicans – are passionately opposed to this. They control the House of Representatives. What’s going to happen there in the next few weeks?

MR WESTGATE Well, one of the best lines I’ve heard on this is that it’s a bit like children playing with the pin on a grenade, and the risk is that the pin comes out and it explodes. Um, they need to get their act together. We’ve already seem some of the ratings agencies suggest that, uh, the US is in line for a ratings downgrade, and that has big implications, of course, for the rest of the world. Bearing in mind global investors, when they’re not sure what to do with their money, they put it into the US Government bond market. Now, if the US even temporarily defaults, that will have big ramifications for the long-term recycling of the globe’s reserves and what those countries and institutions do with their money in the future. It will send shockwaves, through the long-term, of course, through the global financial markets. Um, now, not to be AAA for the US would be a major problem. They’ve obviously got the largest debt pile in the world. So I think what we’re looking at the moment is is a big game of chicken amongst different parts of the US House. Though a temporary default doesn’t mean necessarily that you’re not going to get paid back on long-term. But it will have severe ramifications for the financial players, and I think they’re desperately hoping that some kind of agreement can be arranged in the next couple of weeks.

PAUL So, just to finish, where are we at, then? I mean, we look at the troubles in the Eurozone – there’s terrible traumatic trouble in the Eurozone – and when we look at the strange crisis incoming in the United States, what are the dangers for the world economy?

MR WESTGATE Well, the outcomes are extremely uncertain. We are still working through the excesses of, uh, that we’ve built up before the financial crisis, and what we have now is the potential... Well, we have a sovereign—a country debt problem that needs to be worked through. Now, the only thing that can help that with is time, but in the meanwhile, political leaders have to show they have the will and the vision and the capability to work through it. If they don’t, then I’m afraid that we will see financial markets implode, and of course that will have an economic impact throughout the rest of the world. There is no escape for the rest of the world. If we continue to have banking and financial system problems in both the Eurozone and the US, the rest of the world will be infected by that.

PAUL That’s Ross Westgate of CNBC, which is a large business channel – worldwide business channel.

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