[Richard Quest:] The clarion call: build up the firewall, and Germany drops its resistance. The other call: tell us your password to Facebook or you won't get the job. Tonight I ask you, what would you tell the company? And flying on a budget. Low-cost airlines are battling for our business. The start of a new week. I'm Richard Quest and, of course, I mean business. Good evening. She can stand the heat no longer. Chancellor Angela Merkel has given into pressure and agreed to help build Europe's firewall higher than ever before. It happens as Spain struggles to keep a lid on its own debt crisis. And now, Germany's wunder chancellor finally admits the two bailout funds must be combined to stop things escalating further.
[Quest:] If you join me at the super screen, you'll see how the flames are licking around the crisis that simply won't go way. And I don't mean it's warm after winter. The new permanent ESM, European Stability Mechanism, comes into force in July. Now, the total for the ESM is some 500 billion euros. It's a permanent fund, and it's designed to put prevent contagion and fire. However, many say it's not high enough and more money needs to be put in there. Chancellor Merkel accepts that, now, and she has said that the EU could temporarily use the bailout money from the existing EFSF, the money left over. That would create a firewall of some 740 billion euros. The firewall, some would say, would now be big enough. Others believe it still wouldn't be enough. Some say a trillion euros is needed to build a true, effective firewall if you're going to douse those flames. It's a serious political gamble for Chancellor Merkel to agree to add the extra money. Her colleagues in Brussels want something very different from her domestic political rivals, who threaten this sort of war. Fred Pleitgen is our Senior Correspondent, who is in Berlin.
[Fred Pleitgen, Cnn International Correspondent:] This is quite a big step for Germany. As you know, the Germans have always been very much opposed to increasing the size of the permanent European Stability Mechanism, the bailout fund, essentially, for eurozone countries that get into trouble. Now, what the Germans are suggesting is to keep the actual fund as it is, but to also keep the temporary fund that's already in place for a little bit longer, have the two run parallel, in order to increase the firepower of both of them. Now, what we're talking about is a firewall in the magnitude of about 700 billion, possibly all the way to almost a trillion euros in size. And the way Angela Merkel wants to do that she explained a a press conference earlier today.
[Angela Merkel, Chancellor Of Germany:] We can imagine that these 200 billion euros could run parallel to the 500 billion euros of the ESM until they have been paid back by the countries. That will take several years, and then the ESM will stand alone with the 500 billion.
[Pleitgen:] Now, Germany's seeming softening of its stance is, of course, good news not just to faltering eurozone economies, but also to other countries. As you know, Germany has been under a lot of pressure from the United States, also from countries in Asia to soften its position and to create a firewall that many believe will actually do the trick. Because there are a lot of experts who believe that the firewall of $500 billion for the ESM was simply not big enough to protect a lot of those eurozone economies. This also comes as Angela Merkel received a mixed bag of political as well as economic news here in Germany. On the one hand, business confidence has risen for the fifth month in a row. This according to the Ifo business confidence index. It's a sign, people believe, that Germany is in a very stable position and could see some economic growth in 2012. On the other hand, there were regional elections here in Germany that actually weakened Angela Merkel's position on a federal level. Her own party fared quite well, however, her coalition partner, the Liberal Democrats, did very, very poorly, are out of that state parliament. And also, if elections were held here in Germany, federal elections, tomorrow or next weekend, they would probably also be out of the German federal parliament, as well. That's something that could hurt Angela Merkel's leadership role here in Germany, which of course would also have an effect on her ability to maneuver and be strong in Europe. Fred Pleitgen, CNN, Berlin.
[Quest:] Spain is one of the countries that may need to rely on this very firewall. The situation's precarious, now, for the government of Prime Minister Rajoy, that even electoral victories look sometimes more like defeat as the flames start to lick closer. Let's just hope the fire doesn't get to close to the library, because in Andalucia, there has been an election, and Rajoy's Popular Party did win, but it failed to get a majority, and the Socialists are expected to form a coalition. The reason it's significant is Andalucia is Spain's most popular region, and it's seen as a key test of Rajoy's austerity policies. Those austerity policies will be to the forefront on Friday with the budget. You'll be remembering, of course, Rajoy said he wasn't going to be able to cut the deficit to 5.3 percent, and there was an argument over with the European Commission, and the Commission basically said, you will cut the deficit target to where you agreed to cut it, 5.3 percent is what they're aiming for, which will be blistering in terms of the austerity that will be inflicted on the Spanish people. Not surprising, with all this happening, Spain, the IBEX was the market that fell, which of course is all the more remarkable when the other markets rise quite sharply. The Spanish banks were hard hit. Spanish bond yields fell today, as well, still more than 5 percent on the ten-year bond. You're getting an idea that the crisis that we had thought, perhaps, had abated may be starting to simmer up again. So, the stock market has raised its own questions on how to manage money during times like this. One chief investment officer, one top European bank, says it's time to put risk back on the table, or at least time to move away from the safety and security of the bonds that we all bought during the crisis. Didier Duret is the chief investment officer at ABN AMRO. This current financial crisis and the way it has shifted, we needed to understand how the rules have changed.
[Didier Duret, Chief Investment Officer, Abn Amro:] They key change is that the people are simply recognizing that the bonds yields are not enough for long-term annuities. And that's probably the thing that will create a big change over this year, meaning that people are probably overweight in terms of bonds and are underweight in terms of equities, and most of the private clients have not followed the asset allocation that were recommended by the big banks. So, there is a huge hoarding of cash from the private investor perspective.
[Quest:] Which is either in bonds or in cash itself. But the events that we've seen in the last few days, even today, with the ESM, the EFSF, Merkel, Spain, is this the right time to be putting risk on equities?
[Duret:] I think so because the we are seeing big firewalls to be built, we are seeing that since December, but do you know what we are seeing from the side from the Germans this morning is simply extended the height of the firewall, and the strength of the firewall.
[Quest:] But it's still risky. Spain's bonds are still high.
[Duret:] Yes.
[Quest:] So there is still questions and worries.
[Duret:] But you know, the Spanish bonds were 6 percent the 25th of November. Now two years, and the two-year bonds for Spanish are a little bit above 2 percent, so that's much less risky than it was.
[Quest:] So, asset allocation, out of bonds and over to equities, is that what you're suggesting?
[Duret:] That's one of the moves. And this move can be done gradually, because people come from a perspective where they are strongly underweight in bonds for some of them, so they have to go into a specific sector and in particular to have already exposure into the cyclical with a good balance also into the defense sector.
[Quest:] And ultimately, do you believe in fact, I know you believe, because you told me you believed that another bull market is about to begin?
[Duret:] I think there are many comparisons between 2012 and 1982.
[Quest:] Oh!
[Duret:] Really. It could
[Quest:] 82?
[Duret:] 82, yes.
[Quest:] I don't remember it.
[Duret:] Yes, 82 we were quite young at the time, but the thing is, we have major political change that had happened. The rule of the game of the central bankers was totally rewritten. We can find many comparisons on that, and also the industrial sector was the real sector that has suffered a lot of pain. Now, we are seeing that with the financial sector. So, there are really big changes, but what is important is that the central bankers represent a kind of a coalition of the will.
[Quest:] So, call it by me. Risk back on the table.
[Duret:] Certainly, risk back on the table, but with a lot with a close eye on diversification just to make sure that you don't go too crazy with the crowded trade, one of the crowded trade that we see is government bonds, but also the investment grade bonds have been rolling for already some years. So, it's a bit of an exhausted trade. You need to find something different.
[Quest:] The asset allocation. The markets open doing business at the moment. Have a look at this. It is the Dow Jones, which is currently up nearly 1 percent. A gain of more than 100 points, 120-odd points at 13,210. All the major markets are up very strongly. If you want to know the reason why, look no further than the chairman of the Fed. He has cast doubt in recent improvements in the labor market, but Ben Bernanke told an organization that recent falls in the jobless rate are out of sync with the rest of the economy. On overall growth, he said, was not fast enough to sustain the trend. So, the modest growth that he talks of has led to a US jobless rate falling from 9 percent to 8.3 percent, and those comments have raised investors' hopes the old hopes that long-term interest rates would remain slow for a long period of time. The chairman said, over time the Fed's current loose policy would help reduce unemployment. The Fed speaks, the market rises. When we come back in a moment, they're popping up everywhere. Qantas, China Eastern, Iberia, they've all announced new budget airlines, and we'll look into the budget business model after the break. QUEST MEANS BUSINESS.