US Allies Exasperated, Creditors Court Burnham, Finland’s Public Debt Spiral | Bloomberg...

[00:00:00][music] Bloomberg Audio Studios podcasts radio news.

[00:00:10]This is the Bloomberg day podcast. Good morning. It's Wednesday the 22nd of July. I'm Caroline Hepka in London >> and I'm Steven Carroll in Brussels.

[00:00:18]Coming up today, America's Gulf allies become exasperated as the Iran war escalates across the region. Bond markets give Andy Bernham a bruising welcome as the prospect of nationalized UK public services puts creditors on notice. Plus, out in the cold, the European Union threatens action as Finland's youth pay the price for years of weak growth and spiraling debts.

[00:00:42]>> Let's start with a roundup of our top stories.

[00:00:44]>> The widening conflict between the United States and Iran is leaving America's Gulf Arab allies increasingly anxious about the threat to their security and economies. Sources tell us that officials in the region are now divided over how President Donald Trump should proceed. Some are urging tougher military action, while others want an immediate return to diplomacy. The growing split comes as Trump sought to play down prospects of immediate talks with Iran.

[00:01:09]>> They want to meet desperately to try and end it because they're getting decimated. Uh I will tell you, they want to desperately meet and until they're ready to meet in a meaningful way, we have no interest. Despite Trump's comments, mediators are continuing efforts to restart negotiations as Houthy militants in Yemen threatened shipping in the Red Sea, helping to push Brent crude oil higher for a fourth straight day. In Washington, Defense Secretary Pete Hgsth asked lawmakers for another $87 billion to replenish Pentagon stocks depleted by the war with Iran. During a Senate Appropriations Committee hearing, Democrat Dick Durban asked HEGF how much the conflict has cost so far. Do you have a new estimate about what the war has cost us so far in this the fifth month of the first year of this war in Iran? Uh >> Senator, the estimate we have as of today is 37.5 billion.

[00:02:03]>> Hex has faced criticism from a number of Democrats at the hearing over the growing costs of the unpopular conflict that is now once again raising energy prices in the United States.

[00:02:14]UK Prime Minister Andy Bernham has approved the continued use of British military bases for what the government here describes as defensive US strikes against Iran. The decision maintains the policy of his predecessor K star allowing American aircraft to operate from sites including Diego Garcia and RAF Fairford. And as Britain seeks to avoid an immediate rift with Washington, the new defense secretary where streeting has signaled the government is preparing to accelerate defense spending and invest more in Britain's domestic defense industry.

[00:02:47]>> My focus is on maximizing our deterrence and ensuring that should deterrence fail, we're ready to fight and win alongside allies. That means reindustrialization and building back up our production capacity so we can give our armed forces the kit they need as well as building and buying British so that we deliver good jobs in communities in every part of our country.

[00:03:12]>> West treating added that the prime minister's commitment to national defense would become even clearer in the coming months fueling expectations that military spending could rise to 3% of GDP by 2030. UK government borrowing costs are lingering around two-month highs as oil prices and fiscal jitters keep the markets on edge. Both Britain's new prime minister and its new chancellor are stressing their commitments to fiscal discipline. Here is Chancellor John Healey speaking to Treasury staff yesterday. I'm still burning with a passion about this institution as a force for stability, for security, for growth, a force for a successful Britain. But despite Healey's words, some in the bond markets wonder how the new administration intends to fund some of its big pledges. This morning, the government has announced it's lowering the national cap on all bus fairs in England outside London from three pounds to two pounds. To the latest earnings now, Spanish lender Santander has reported profits that beat estimates in the second quarter of just over3.5 billion. Net interest income at the bank also came in ahead of expectations at almost 11.7 billion.

[00:04:27]Santandere says that it's on track to meet its 2026 targets. We're also uh looking at the profit beat from Norwegian energy company Ecued adjusted operating income after tax of $3.44 billion for the 3 months to the end of June. The oil and gas firm and the industry uh at large have been lifted in recent months by higher crude oil prices. Ukraine's Vladimir Zalinski has dismissed one of his top commanders after nationwide protests calling for his removal. Alexander Sirski, the commander-in-chief of the armed forces, will be replaced by the more reform-minded Myo Draatai. Here's Zilinski speaking through a translator.

[00:05:12]>> Alexander Syski.

[00:05:13]>> Alexander Syski delivered results for Ukraine in the defense of Keev, the Kkefe offensive, and the Kursk operation. We have come a long way.

[00:05:24]Ukraine's defense continues and every warrior must be treated with dignity.

[00:05:30]>> By removing Sirki, Zilinski yielded to a key demand expressed by thousands of Ukrainians who took to the streets on Thursday in cities across the country.

[00:05:38]The rallies were triggered by Zilinski's ouster last week of Defense Minister Mail Federov, who'd been locked in a power struggle with the military chief.

[00:05:47]China's car brands took more than a third of hybrid EV sales in Europe last month as companies try to get ahead of potential tariffs. Data from analysts data force show firms like BYD are ramping up sales on the continent, taking 34% of market share. It's the latest in a trend of Chinese exports ramping up to Europe, including an unlikely food. Bloomberg's James Wilco has more. Duck is on the menu at the EU anti-dumping department. As governments around the world ponder what might be the next so-called China shock, agriculture is emerging alongside green tech as a key fault line. China's global trade heft and shrinking population mean food production is rising, but local demand can't keep up. Take duck meat.

[00:06:35]Overseas sales in the first 5 months of this year are near the entirety of 2025's exports. That's got Brussels' attention. And although the duck market is a niche one, it could be a sign of more accusations of foul play to come.

[00:06:51]In London, James Walcock, Bloomberg Radio. OpenAI says two of its most advanced models escaped a controlled testing environment and hacked into another artificial intelligence company in what the Chachi GPT maker describes as an unprecedented cyber incident. The models breached the systems of AI developer Hugging Face during internal safety testing. The disclosure is likely to accelerate concerns over the ability of advanced AI models to carry out cyber attacks as lawmakers demand mandatory safety safety testing and the disclosure of security incidents. Meanwhile, France has passed legislation to restrict the use of social media for children under 15 years of age. It's the first major European country to do so in a move that may strain relations with US tech firms and President Trump. According to the text, under 15s won't be able to create new accounts from September before a full ban comes into effect in January for all existing profiles in France.

[00:07:54]Meta's platforms as well as Elon Musk's X, Google's YouTube, and China's Tik Tok will likely be the most affected. So, those are a few of our top stories for you this morning. Let's look at the markets where Asian stocks are climbing, held by rebound in chipmakers. MCEI Asia-Pacific index this morning is up by half of 1% this after Tuesday's biggest one-day gain in a month. The Cosby is up by more than 4%. European stock futures nudging higher barely about a tenth of 1% higher this morning. Brain crude is uh back to gains with real pessimism about what is happening in the Middle East. Braided futures at $9226 are up by 1.4%.

[00:08:33]Gold also at 1.2% the highest level in two years. Treasury hold treasuries uh holding on to Tuesday's losses. You've got 10 and 30-year yields at around the highest levels in about 2 months. So those are the markets.

[00:08:47]>> In a moment, we'll bring you details of a key decision facing Andy Burnham over the future of Temp's Water. Plus, the debate in Finland over how to fix its public finances. But another story that caught our eye this morning after that news we just brought you around open AI and what its models have been up to.

[00:09:02]What about job hunting in the age of AI?

[00:09:06]Our latest Bloomberg opinion newsletter ties together some of the recent work from our columnists including the rise of backdoor references where employers are contacting current and former colleagues who haven't been vetted by applicants. Steven Mims has been writing about this. He says this used to be confined to highle jobs. It's now being used for entry-level jobs as well. And apparently it's AI motivating employers to do this more. They're concerned that applicants are using AI to polish their CVs and coach them through job interviews. So they want essentially personal views on how good this person or well suited this person might be uh for a job. It's a a crisis of confidence in hiring although not it has to be said an entirely new practice. I think this has probably been going on for a while >> really. I mean gosh this is like 360 degree feedback um you know on hyperdrive. I mean does it give you an unvarnished view to ask sort of former colleagues maybe who aren't prepared for that phone call or does it mean you end up with kind of gossip about people? I don't know, that's a little bit tricky.

[00:10:07]>> It's a different kind of bias, right?

[00:10:08]Like, do you trust the AI more? Do you trust more of the people you're going to to phone and call? Obviously, a personal connection is great, but what if, you know, you're phoning someone that maybe they'd had a falling out, they'd used their mug in the kitchen one time, and, you know, as a result, they never really forgiven them even though they were very good at their job. All sorts of things can come up in these conversations.

[00:10:26]>> Yeah, absolutely. Um, but it does show, you know, how difficult it is in terms of of hiring. Um I mean here in the UK actually I think what's really interesting is that the official data shows how many more temporary staff are being used. There's quite a switch because of so much uncertainty towards temp staff rather than permanent uh recruitment. So yeah I think that's the bigger picture.

[00:10:47]>> Yeah really interesting selection of reading around that. We'll put a link to the Bloomberg opinion newsletter in our podcast show notes.

[00:10:54]Well let's turn back to the UK now. One of the items high on the agenda for the new prime minister is what to do about temp's water. Its creditors are trying to avoid the troubled utility being taken into public ownership. Our reporter Jess Shankerman joins us now for more. Jess, you've been following the issues of Tens Water for years.

[00:11:11]We've talked about them many times, but just remind us what state the utilities finances are in right now.

[00:11:17]>> So, Tens is mostly debt. It shareholders walked away from the business more than two years ago now, declaring it uninvestable.

[00:11:27]and last year it had to draw down, raise another emergency loan. So it's it's around 18 to19 million of debt at the moment and it's gearing the the debt to equity ratio is is 86%. So it's just it's just mainly debt.

[00:11:45]>> Yes. I mean, troubled is just the beginning really of the description for this utility that does have 16 million customers in the UK and there's just been a hose pipe ban announced for 10 million of them. What are the creditors offering this new government? You know, is there any possibility of turning over a new leaf?

[00:12:04]>> Yeah. So, the creditors have been in talks with the regulator. They're called offwa. Critics has been in talks with them for for a few months and they're trying to agree a rescue deal which would see them actually take ownership of T's water. Last year KKR was looking at becoming the major shareholder of Tame's. They walked away after um negotiations with the government fell through last month. The then Secretary of State, we've got a new environment secretary now, Angela Eagle. But Emma Reynolds, who was the Secretary of State, stood up in parliament publicly said that she did not think that deal was good for consumers or the environment, which we understand blindsided the creditors who thought that the negotiations were were going going quite well off what is waiting to hear what the new administration thinks about the future of Temp's Water before making any decision. Yesterday, the creditors kind of jumped the gun a [laughter] bit, tried to put their stall in and said they would offer the government a golden share in temp's water if they did not put it into special administration to because Andy Burnham has said that he wants more public control over utilities. So they're saying okay well rather than uh fully nationalize the company how about you have a seat on the board and you have more say in in all the decisions that are taken.

[00:13:28]>> So I suppose what what are the options open to Andy Burnernham then kind of given the difficulties the temp's water has and and the indications that we have about what we might do. So the immediate question is whether to put temps into special admin administration which is a form of temporary nationalization and the previous governments have held off from doing that because you you really need to have a watertight case to make to the courts that they're that they can go into SAR and their concern is it that if they apply to the courts for SAR and fail you they then put TMS into administration by default in the process of doing that and open themselves up to legal challenges.

[00:14:09][gasps] Um Andy Burnham we understand wants to take that step and we have been expecting an announcement this week although it hasn't come yet. Uh then there are larger questions about what happens to Temp's water in that process.

[00:14:28]So would it be sold on to another private investor following SAR? We understand that he's also really interested in a in a mutualization proposal >> which would see it become a nonprofit and and have that kind of greater public control. We're kind of waiting to hear what what the long-term options could be. There's also also implications on this I think for Southeast Water which is a much much smaller company but locally within the UK they've [clears throat] had they've been in the news a lot. They've been they've had a number of outages that people living in in Kent in Tumbridge, Wales have had no water for weeks for part of of this year and last year, which is it's you know, it's one thing to be in debt, but for people to not even have access to water, that's that's really serious.

[00:15:18]>> Yeah, absolutely. And it and it um also, as you say, and I know you Jessie reported on this um in depth, it also still leaves the question of investment.

[00:15:28]you know there still has to be investment in terms of the water infrastructure in in the UK doesn't it so it's a really very significant issue thank you for bringing it to us and just giving us the latest on what this new government in the UK might do still a lot of anticipation around it isn't it around what happens with temp's water that's our reporter Jess shankman thank you stay with us more from Bloomberg daybake cur coming up after this >> well Finland is facing difficult choices over its public finances. The country's economy has barely grown since the financial crisis, and it's been running budget deficits for 17 years. Now, the EU has set a deadline to rein in spending. Our Nordic's managing editor, Katy Pipalo, joins us now for more.

[00:16:13]Katy, how bad is the economic situation in Finland and what's the cause of it?

[00:16:17]>> Well, it is actually really bad. Like you say, the economy hasn't truly seen growth in more than a decade. Um the unemployment rate is now at the highest in the European Union at more than 10%.

[00:16:28]And actually 1 in four young people are without a job at the moment. But the it's not just like an instant economic crisis. It has far longer roots. The workforce has been shrinking since about 2010 and the country hasn't made up for it with immigration. So you're getting less input from workers into the economy. And in previous sort of downturns, domestic consumption always sort of held up um and supported the economy. But since the pandemic, we've seen um the energy crisis winter of 2022 23. Um we saw um rate hikes from the European Central Bank. Those really hit consumer wallets um in Finland and that hasn't really bounced back yet. And underlying all of this, there's structural change as well in the economy. So, you'll remember Nokia making those indestructible mobile phones. It was Europe's biggest company in around 2000. Um, when people actually started using iPhones and iPads, that erased a big leg off like Finland's economy, these Nokia mobile phones. But it also took another leg, which was paper making. Um, at that time it was about 20% of Finland's exports. And when people no longer read newspapers, um, that really hurt the country. And so that's all led to massive deterioration in public finances.

[00:17:50]>> Wow. Okay. So the situation very very difficult. Well, the EU has told Helsinki that it needs to fix the public finances by 2028. So what measures are actually being discussed? How are they going to do that?

[00:18:04]>> Um really all budget lines are at risk here. Um except maybe defense since Finland sits right next to Russia. Um but we've already seen cuts to welfare benefits. Um we've seen deep cuts u to health care. There's, you know, emergency rooms in in uh rural areas have closed, you know, causing people to have to drive long distances to get health care. Um we've seen cuts to housing benefits which have pushed a lot of people to try and find cheaper accommodation. Um and at the same time, the government's really sort of tried to kickstart economic growth, but that's really hard when you're cutting spending. is actually leads to the spiral uh downward um and makes the job even harder.

[00:18:50]>> What about the the political debate over all of this Katy? Because of course some of these budget cuts are painful and and striking at things that people hold very dear uh voters everywhere and in Finland in particular in some of these cases.

[00:19:03]What does that mean for the politicians having to make these decisions?

[00:19:06]>> Well, yeah, the cuts are deeply deeply unpopular here. Uh we are going into a general election in April 2027 and the main parties in the four member coalition are really trailing the opposition in the polls. So they're once again sort of proving the old adage that that policy makers know what to do but they don't know how to get elected after they've done it. Um it really looks like uh the opposition social democrats will take power in the April vote.

[00:19:37]Thanks for listening to Bloomberg Daybreak Europe.

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