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Stocks Soar as Germany Agrees to New Deal to Bail Out Europe Banks

Aired June 29, 2012 - 16:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FIONNUALA SWEENEY, CNN HOST: Some Friday cheer for investors on Wall Street, stocks soaring on both sides of the Atlantic after Germany's chancellor backs down and agreed to a new deal to bail out Europe banks.

ANNOUNCER: Live from CNN Center, this is CONNECT THE WORLD.

Well, Angela Merkel hails the agreement as a compromise. Germany's media is calling it a defeat. Tonight, a government insider tells me why he believes German taxpayers have been sacrificed to save the Eurozone.

Also this hour, what chocolate companies can do to make the lives of their workers as sweet as their treats.

And after Rafael Nadal crashed out, is Roger Federer about to follow him out of Wimbledon?

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SWEENEY: Wall Street's surge followed a big jump across European stock markets. Just take a look at these numbers. Spanish and Italian stocks up over 5 percent and the euro rose sharply, too. The deal throws a lifeline to the Eurozone's struggling banks, and it's being described as bold and a breakthrough.

Two words we're definitely not used to hearing. But it also marks the dramatic shift in Europe's political dynamic. As Matthew Chance reports, the powerhouse of Europe has been firmly backed into a corner.

All right. We're having a problem there with the track as you can hear there at the beginning of Matthew's package. We'll get to that in a moment. But let's go straightaway to CNN's Richard Quest. He joins me now from London.

Briefly, if you can summarize what actually took place and what has been the fallout or, indeed, the positive reaction so far.

RICHARD QUEST, CNN HOST: There were several issues -- excuse me -- that had to be primarily dealt with. The first -- excuse me -- was the immediate issue of what to do about Spain and Italy. And there they agreed that money could be given to Spain, but it would (inaudible) Spanish banks, but it would go direct to the banks and not end up on the books, the debt books of the Spanish government.

That was a big move forward. But it won't happen immediately. That won't happen until banking union has been agreed. As for Italy, the so-called bailout from the EFSF and the European -- the ESM, they will both now be allowed to buy much of what to invest into Italian bonds. The effect of which, Fionnuala, has been to already bring down the rate of yield on Spanish and Italian debt.

Now highly technical stuff, what does it all mean? What it means is that for the first time the Europeans, the Eurozone seem to be coming up with practical, credible, long-term and short-term solutions that might give the markets confidence. People who are talking about it being groundbreaking and breakthrough, I think more likely it was simply realistic.

SWEENEY: Perhaps realistic, Richard, but it certainly marks a change in the winds. I mean, we're hearing from the European newspapers, the German newspapers in particular, the criticism that Angela Merkel has somehow been defeated in all this. Does this mark a major shift?

QUEST: No. No, I don't believe for one moment. Ms. Merkel is way too canny and far too bright to have allowed herself to have got into a situation where, quote, "she's been defeated." And in fact, Francois Hollande said it's wrong to talk about victories and defeat.

What happened was, look, the price Ms. Merkel got for agreeing to allow for this -- these deals with Spain and Italy was the road map towards banking union and fiscal union. The European -- the Eurozone agreed -- here's the document.

The Eurozone has agreed to now work forward towards a road map so that by the end of this year, in December 2012, they'll be real concrete proposals to actually having banking union and fiscal union. Now Angela Merkel would say it, I suspect, that was a -- that was a prize worth getting for the minor move towards the middle that she made.

SWEENEY: Richard Quest in London, thank you for that.

Just bear with us, though, because Matthew Chance reports on the reaction then, the goings-on that took place in Brussels overnight and this morning.

MATTHEW CHANCE, CNN CORRESPONDENT (voice-over): You expected the German chancellor to make such a u-turn, Frau Nein, as she's been dubbed, went into this crucial E.U. summit, demanding more austerity. She left 13 hours later, browbeaten by her counterparts from southern Europe, agreeing to demands from leaders like Mario Monti of Italy, for financial assistance.

ANGELA MERKEL, CHANCELLOR OF GERMANY (through translator): Yes, so there I at least 10 times I have met with Mr. Monti, (inaudible) went in a special room and talked together. And but we talk together all the time about special formation and then talked a bit about football.

CHANCE (voice-over): Afterwards, the Italian premier, whose country thrashed Germany in the Euro 2012 soccer championships the day before couldn't resist a jibe at Berlin's expense. The E.U. Summit deal, coupled with the 2-1 result was, he said, "a double satisfaction" for Italy.

The French president, at least, was less gloating.

FRANCOIS HOLLANDE, PRESIDENT OF FRANCE (through translator): And I think if I give you my personal opinion, nobody has won or lost. It was Europe. It was Europe who won and it is the Eurozone in particular that comforted and strengthened, reinforced. That was the only objective.

CHANCE (voice-over): What's been agreed marks a significant change in Europe's handling of its debt crisis. Struggling banks can now be injected with cash from Europe's bailout fund. The debt will essentially be shared by Eurozone states.

UNIDENTIFIED MALE: We agreed on something new, which is a breakthrough that the banks can be recapitalized directly in certain circumstances and the biggest or the most important condition is that we have to put in place a single supervisory mechanism.

CHANCE (voice-over): That mechanism, a European body to make sure Europe's banks all follow the same rules is one of the few concessions Chancellor Merkel extracted as Europe's emphasis shifts from austerity to easing the economic pain. Analysts say it may offer some of the control for which Germany's leader is so adamantly called -- Matthew Chance, CNN, London.

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SWEENEY: Well, let's see what some of the German newspapers have been saying about all of this.

There's this headline on "Der Spiegel's" English language website: "How Italy and Spain Defeated Merkel at E.U. Summit," it says. "Monti emerged from the late-night negotiations as a clear victor, having broken Chancellor Angela Merkel's resistance just as Italian striker Mario Balotelli cracked the German defense on the pitch in Warsaw earlier in the evening."

The "Frankfurter Allgemeine Zeitung" has this headline on its site, "The Debt Approaches the Union." The article says, "Angela Merkel, once 'Madame No,' paves the way further into debt union."

And finally, from Berlin's "Tagesspiegel," "Merkel Bends Under Pressure from Spain and Italy."

Well, joining me now from Hamburg is Hans-Werner Sinn, an adviser to the German Economic Ministry and professor of economics at the University of Munich.

Thank you for joining us. How much was this concession on the part of Angela Merkel? How much was it compromise? And how much of an overall solution?

HANS-WERNER SINN, ADVISER, GERMAN ECONOMY MINISTRY: Well, it was a compromise. It will be very expensive for Germany. It will be expensive for Europe because socialization schemes are never really stabilizing economies.

They stabilize in the short run, but they involve large dangers in the long run. Think of the American savings and loan crisis that came out of the socialization of deposits. So it is very tempting and dangerous. And the losses on the southern European banks could be large after all. The bank debt is three times as large as the government debt in these crisis countries.

SWEENEY: So what do you -- you feel clearly that it should not be the taxpayers that have to foot the bill here, but more the creditors. But what do you feel about the solution that came out overnight? Do you think that there is now a process in place that provides a clearer path for this? Or do you think that we're still very much in the woods?

SINN: The process isn't in place, but it is unclear whether it is still legal (ph), definitely all these activities violate the March 3 (ph) treaty and the question in the end for us in Germany is what the German Supreme Court will say about it. I'm not so sure that the decisions of the government will go through.

SWEENEY: Right. And what about the sense in Germany that perhaps business confidence might be shaken there and that, in fact, Germany itself might begin to feel the effects of what has been taking place, particularly as 60 percent of its exports goes to Eurozone countries? Do you feel that Germany may be about to falter in terms of its economic output?

SINN: Well, the output and the export is one thing; the other thing is the capital market. The capital market, it has shifted much of Germany's savings in the period before the financial crisis to other European countries, two-thirds activity, nourishing an inflationary boom there while Germany went into a strong stagnation.

It went down after the announcement of the euro from third place in terms of GDP per capita to 11th place. And now after the crisis, things have been corrected to some extent. But now that we organize collective protection for savings still leaving the country, this is not ultimately good for Germany. It is not good for domestic investment and it may slow down growth.

We see already that the insurance against a default of the German state, the premia have been increased. So gradually, one solid state of Europe after the other is being torn into the difficulties. That's what we are afraid of.

SWEENEY: Right. And you yourself, I gather, don't see any problem with -- and you fact -- and think it may be inevitable that some countries, such as Greece, will drop out of the Eurozone, and that may not be, in your view, a bad thing?

SINN: No, that's not a bad thing. We urgently need a realignment. The euro brought very cheap credit to southern Europe so there was an inflationary boom, a bubble. And this bubble brought the asset and goods prices and the price of labor way above the equilibrium. And now we would need a currency realignment in the Eurozone to make some countries competitive again.

But we can't, because we have the euro. My conclusion is that for those countries which are too far away from the equilibrium, they -- it would be better to exit for a while, return to the old currency, depreciate and then return later at another exchange rate to the Eurozone. We need a sort of hospital for countries so that they can recover.

What we currently have in the Eurozone, despite all the debt relief, is a messy (ph) labor market. Half of the young people in Greece and Spain are unemployed. This is a catastrophe and we will not solve that by just solving a banking crisis. It is a much deeper problem. And this problem will not easily go away for the next years.

SWEENEY: Thank you very much indeed for joining us on Skype there from Hamburg, Hans-Werner Sinn, for your analysis on CONNECT THE WORLD.

SINN: You're welcome.

SWEENEY: And still to come tonight, 36,000 people flee their homes, thousands more may have to do the same as they're forced to escape the Colorado wildfire.

With no end to the bloodshed in sight (inaudible) diplomatic (inaudible) to resolve the crisis in Syria.

And where politics fails, basketball succeeds. We'll take a look at the American (inaudible) in North Korea.

All that and much more when CONNECT THE WORLD continues.

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SWEENEY: You're watching CNN and this CONNECT THE WORLD with me, Fionnuala Sweeney, welcome back. Egypt's President-Elect Mohammed Morsi has told crowds in Cairo that there is no power greater than people power.

Thousands gathered to hear their future leader speak after Friday prayers in Tahrir Square. Mr. Morsi also took a symbolic oath of office. He will be officially sworn in tomorrow.

Well, Dan Rivers was watching this afternoon. He joins me now from Cairo.

Now that the dust has settled on his election, what are people saying about his future abilities to lead the country, and were there any clues in that speech today?

DAN RIVERS, CNN CORRESPONDENT: Not many, Fionnuala, no. I mean, there were all the kind of rabble-rousing rhetoric that you would expect on an occasion like this in front of a crowd like this, and they were laughing it up. There was talk about, you know, the blood that had been spilled in Tahrir Square, the masses that have fallen.

He talked about the kind of struggle over previous decades to get to this point, when they had their first freely elected president. He saluted the whole nation and specifically mentioning Christians and women as well, as if trying to allay fears that he would follow an only Islamist agenda. Let's hear a little flavor of the kind of message he was trying to get across.

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MOHAMMED MORSI, PRESIDENT-ELECT OF EGYPT (through translator): I can see that the people of Dr. Abdel-Rahman, the family of Dr. Abdel-Rahman. And I see also banners about those that who have been sentenced by the state courts, security state courts, from the start of the revolution until now.

Those will be -- all those will be -- their rights will be on my shoulders and I will spare no effort and I will do everything, whatever it takes from tomorrow until all those are set free. One of them -- one of them is Sheikh Omar Abdel-Rahman.

RIVERS: Sheikh Rahman is a highly controversial figure. He was convicted in the U.S. for conspiracy to cause sort of urban warfare through several acts of terrorism, including plots to blow up the U.N., two bridges in Manhattan and two road tunnels as well, as well as an alleged plot to try and assassinate Hosni Mubarak.

So having him in this speech, saying that he wants to free all political prisoners, including Sheikh Rahman, is incredibly controversial. Afterwards, his people are sort of rowing back, saying they just want him extradited back here to serve out his life sentence.

They're not calling for him necessarily to be free. But it's going to irritate and worry people in power in the U.S. who are concerned about the real allegiances of the Muslim Brotherhood, where they're going to take this country and what they really believe.

SWEENEY: Dan Rivers, thank you very much, on the eve of the swearing-in of the new president-elect.

So who is calling the shots in Egypt? Well, the Supreme Council of the Armed Forces or SCAF les, as we heard by Field Marshal Tantawi, controls the budgets, foreign policy and all matters of defense and national security. After dissolving Egypt's parliament, SCAF also has legislative power and can also veto articles of the new constitution.

So what does that leave for the president-elect? Well, Mr. Morsi has control of the day-to-day administration of government. He also has the power to appointment government officials, name ambassadors to foreign countries and grant pardons.

Well, here's a look now at some of the other stories, connecting our world tonight.

The massive wildfire in Colorado in the U.S. took a deadly turn Friday. Authorities found one body in a burned house in Colorado Springs. Another person is missing. President Obama has been touring the area. Jim Spellman is in Colorado Springs. He has our update.

Is President Obama still there, and what does he have to say?

JIM SPELLMAN, CNN CORRESPONDENT: Fionnuala, the president, if he hasn't left, he'll be leaving very shortly. He got a tour of the area with the mayor of Colorado Springs and the governor of the state of Colorado as well. What he saw was a scene of just utter devastation, 346 homes we know are lost.

And as you mentioned, at least one person has died so far. The firefighters here have taken advantage of some better weather to try to make some progress against this fire. That's allowed them to get into these homes, these damaged homes in these neighborhoods. But it's going to be a long time, really, before they can rebuild.

Tomorrow the residents who've lost their homes will get their first look on a little bus trip into the neighborhood. Firefighters here hope that if they can keep these conditions like this for another few days, they'll be able to really get a toehold and get more than the 15 percent containment on this fire that they currently have, Fionnuala.

SWEENEY: Jim Spellman in Colorado Springs, thank you for that update.

(Inaudible) Julian Assange is still in the Ecuadorian embassy in London, waiting for a decision on his asylum bid. He defied a British police order to surrender himself to authorities this Friday, and remains under the diplomatic protection of the government of Ecuador.

Now Assange is trying to avoid extradition to Sweden, where he's wanted for questioning on sexual abuse allegations. He fears that once in Sweden, he will ultimately be sent to America to face charges related to his whistleblowing website.

China's Shenzhou 9 spacecraft returned safely to Earth on Friday. The two- week mission was a success story for their space program. The crew managed a manned space docking, making China the third nation to do so. Behind the United States and Russia. It also marked the first time China has sent a woman into orbit.

Tom Cruise and his wife, Katie Holmes, have announced they'll split after nearly six years of marriage. The couple, both actors, have a daughter together, six-year-old Suri. Tom Cruise famously made headlines in 2005, when he declared his love for Holmes by jumping on a couch during an interview with Oprah Winfrey.

We're going to take a short break now. But when we come back, the chocolate company aiming to make the lives of their workers a good deal sweeter.

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SWEENEY: Well, the CNN Freedom Project is committed to ending all types of modern-day slavery, from people trafficking to forced labor. For some time now, we've been documenting the disturbing link between the chocolate you eat and child slavery in cocoa production.

Earlier this year, we brought you the documentary, "Chocolate's Child Slaves," shocking pictures of children working with machetes and hazardous chemicals. Some said they were held against their will, forced to work.

Well, Nestle is the first chocolate marker to partner with the Fair Labor Association to look into its supply chain. The FLA traveled to cocoa plantations and highlighted various concerns over labor standards, including child labor, forced labor, health and safety, discrimination as well as compensation.

Nestle's chief -- or I should executive vice president of operations spoke to CNN earlier.

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JOSE LOPEZ, EVP OPERATIONS, NESTLE: There is no way that long-term a company like ours can accept a situation like this. And so it's a matter of how fast, how well and how many people are going to have to participate in getting these sorts of problems behind us.

We are determined to make real impact and hopefully also to be used as a lighthouse to show others that it's just a matter of getting started.

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SWEENEY: Well, at least two other chocolate manufacturers are following suit. Earlier this year, Hershey's pledged $10 million over the next five years to educate West African cocoa farmers on improving their trade in combating child labor.

And Ferrero has pledged to eradicate slavery from farms where it sources its cocoa by the year 2020. The Italian company says it will publish some more detailed progress report and promises improved communications to customers.

So it seems these companies, chocolate companies are doing something. Is it enough? I'm joined now by the president of the Fair Labor Association, Auret van Heerden. Thank you for joining us.

This has to be good news.

AURET VAN HEERDEN, PRESIDENT, FAIR LABOR ASSOCIATION: It is. I think it's important, but they are the first company to step up and take individual responsibility for their supply chain.

SWEENEY: And how difficult or easy was it to persuade them and, indeed, other companies of the necessity of doing so?

VAN HEERDEN: It's been fairly difficult, actually. And that's demonstrated by the fact that so far Nestle is the only company to take this step.

SWEENEY: Right. Well, other companies are taking steps, as we've just outlined, but let me ask you in brief, can you give us a synopsis, really, of what goes on on the ground that causes child labor or forced labor and how that works its way up the food chain literally?

VAN HEERDEN: Well, the reality of farming in Ivory Coast is pretty rude. Its farmers are in the jungle. They're operating in clearings way beyond the end of the last dirt road. So you really need a four-wheel drive vehicle and quite a lot of security to get to these farms. It's an unstable situation that is still recovering from the civil war.

And in addition to the (inaudible) farmers, you've also got sharecroppers who are often migrants from Burkina Faso or Mali, who have come across the border and who are renting a patch of land from a farmer.

So they are very, very poor and most of them can't actually afford to hire labor. So they're using their own family members or they're possibly using child slaves, who have been trafficked across the border.

SWEENEY: Well, as we hear, Hershey has pledged $10 million over the next five years to eradicate West African cocoa farmers -- or educate them, rather, on improving their trade and combating child labor.

Ferrero also wanting to eradicate slavery from farms where it sources its cocoa by 2020. But that's just one end of it. How much effort or contribution does the public make in terms of helping eradicate child slavery? And are the public aware as they should be about what is taking place?

VAN HEERDEN: Civil society and the consumer play a very, very important role here, because I think it's that market pressure which will drive companies to do more to address this problem. And it's really a long-term development problem.

We have to help these farmers grow their way out of poverty so that they can afford to hire workers at decent rates. And then we have to create educational opportunities for their children so that they can actually send their kids to school.

SWEENEY: We'll leave it there. Auret van Heerden, thank you very much indeed for talking to us there on the line from Geneva in Switzerland.

And you can learn more about the CNN Freedom Project and the thousands of people who've been freed at CNN.com/FreedomProject. Or check out our Facebook page at Facebook.com/cnnfreedom.

Still to come on CONNECT THE WORLD, against a backdrop of relentless violence, diplomats prepare for another round of talks on the Syrian crisis.

Mexico presidential hopeful put it in writing. They will respect the results of Sunday's vote. The candidates have spoken, but what about the (inaudible)?

And basketball's diplomacy, we take a look at one American export welcomed in North Korea.

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SWEENEY: And a warm welcome to our viewers across Europe and around the world. I'm Fionnuala Sweeney. These are the latest headlines from CNN.

German Chancellor Angela Merkel has defended a deal to use Eurozone bailout funds to help struggling banks. Stocks in the U.S. and Europe soared Friday on word of new measures to settle Europe's debt crises.

Egypt's president-elect has addressed crowds in Tahrir Square. He says that no power is greater than people power. He took a symbolic oath of office. Mohammed Morsi will be officially sworn in as president tomorrow.

Wildfires in the western U.S. state of Colorado have now claimed at least one life and destroyed hundreds of homes. Another 20,000 homes are dangerously close to the fires. President Barack Obama has issued a disaster declaration for the area.

And reports from Syria say several explosions hit Damascus neighborhoods. This video purportedly showing shelling in Homs. The opposition says at least 42 people were killed across the country Friday.

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SWEENEY: Well, there is a renewed diplomatic push to find a way to resolve Syria's crisis because in less than 24 hours Special Envoy Kofi Annan, members of the U.N. Security Council, the E.U. and the Arab League are set to hold an emergency meeting in Switzerland.

Ahead of that, the top U.S. and Russian diplomats met and reportedly still have critical differences. But there is some optimism that there might be progress. Phil Black has our report.

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PHIL BLACK, CNN CORRESPONDENT: The prime ministers from the permanent members of the United Nations Security Council and some Arab League states have little reason to feel confident as they prepare to meet in Geneva with the intention of thrashing out a workable model for a transitional government in Syria, something that would involve members of the current regime and the opposition.

The talks are going to be based on a document, a draft that has been put together by the U.N.'s envoy on Syria, Kofi Annan. But the key sticking point is an obvious one. What role, if any, can there be for the current president, Bashar al-Assad? The position of the broader international community and the Syrian opposition is very clear: there can be no role for him. He has to go.

But Russia has long maintained that that is not a decision for the international community to make. It is something the Syrian parties must decide through negotiations once the fighting has stopped.

Late on Friday, the U.S. secretary of state, Hillary Clinton, met with her Russian counterpart, Sergey Lavrov, with the hope of pursuing that position, nudging it, getting some sort of concession that could perhaps result in a significant agreement in Geneva. The talks lasted for an hour. Both figures walked away without making any public statement.

But before those began, the Russian foreign ministry posted an ominous statement on its website, saying, "Russia is not changing its principled approach that Syrians should determine the future of the country themselves."

It means that Russia will continue to block any international call, any United Nations Security Council resolution that calls for Assad to step aside. And that means there can be very little hope of a game-changing agreement at those talks in Geneva -- Phil Black, CNN, Moscow.

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SWEENEY: Well, within the last few minutes, we have heard from the Russian foreign minister, Sergey Lavrov, who now says that after his talks with the U.S. secretary of state, Hillary Clinton, there is, in his words, "a good chance" to find a common ground at those Geneva talks tomorrow.

So perhaps some optimism in the air. Of course, it's all about Kofi Annan's transitional plan. And he spelled that out in a "Washington Post" editorial.

He called for a unity government that would include members of this present government as well as opposition groups. He emphasizes that those whose presence would undermine the credibility and stability of the transition would be excluded. He called for a constitutional revision put to a national vote, followed by free and fair multiparty elections.

Well, diplomats aren't alone in trying to end the bloodshed. Arwa Damon now with a story of a Jesuit priest who was expelled from Syria after proposing his resolution to the crisis.

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ARWA DAMON, CNN CORRESPONDENT (voice-over): On a near daily basis, Christians and Muslims alike hike up more than 350 steps, just like CNN's Hala Gorani did back in 2005 for "Inside the Middle East," to reach the Mar Musa monastery, a center for interfaith dialogue, lovingly restored by Father Paulo Dall'Oglio 30 years ago.

UNIDENTIFIED MALE: And we are now a little community of monks (inaudible). We (inaudible) what we underline very much is our service of Islamic, Christian harmony building (inaudible).

DAMON (voice-over): Father Paolo embodies that, an Italian Jesuit priest who speaks impeccable Arabic, studied Islam and fasts during Ramadan. We met him in Beirut, now an exile, expelled from the country he calls his own.

I said, oh, my body came out of Syria.

DAMON (voice-over): Father Paolo's problems with the government began even before the uprising, but an open letter that he wrote to Kofi Annan last month was the final straw. It proposed casting aside Annan's U.N. implemented peace plan and replacing it with his own.

His solution: thousands of armed blue helmet peacekeepers to keep the warring communities apart, and tens of thousands of members from global civil societies to get grassroots democracy going.

FATHER PAOLO DALL'OGLIO, EXILED PRIEST: Without the exercise of radical international responsibility, we will have a long-lasting civil war. We have a national tragedy that -- with long-lasting output for the entire region.

DAMON (voice-over): And, he says, the time to act is now.

DALL'OGLIO: We are already beyond salvation.

DAMON (voice-over): He says the only way to save the country he loves so much is to start working on reconciliation, even though the country is at war. He told the story of one young fighter he recently met in the town of Pusait (ph).

While he was meeting with activists, news came of a massacre of 13 Sunni (ph) workers said to be at the hands of pro-government Alawite thugs. Father Paolo headed to the scene with a member of the Free Syrian Army, whose relative was among the dead.

DALL'OGLIO: At one moment, we were just alone, me and him and the body, the dead body of somebody of his family. He said, "A bona (ph), Father, I have no desire for money and glory. I just want to be a free peasant, working and plugging (ph) my land, free in a free country."

DAMON (voice-over): The memory of that moment and all that is at stake, overwhelming.

DALL'OGLIO: (Inaudible) to him and to all the youth that are looking for dignity and real humanity in this devastated Syria by the international lack of responsibility.

DAMON (voice-over): Arwa Damon, CNN, Beirut.

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SWEENEY: Every year, thousands of civilians get caught in the crossfire of Mexico's deadly drug wars. So will this Sunday's election change anything for the locals? We'll head for Mexico after the break.

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SWEENEY: And there you have it, Mexico's heading to the polls this Sunday to elect a new president and one of the issues at the forefront of voters' minds will no doubt be security. Mexico has been plagued by drug-related violence with more than 50,000 people killed in the past five years alone.

CNN's senior Latin American affairs editor, Rafael Romo, reports.

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RAFAEL ROMO, SR. LATIN AFFAIRS EDITOR (voice-over): At this abandoned gas station, the only thing you hear is the howling wind. Nearby, a partially collapsed wall and a car with its back window blown out.

Welcome to Pesqueria, Mexico. The town near the Texas border used to boast a population of more than 20,000 only three years ago. For all practical purposes, it has now become a ghost town. A handful of residents remain, only those who can't afford to leave.

Efraim Viderrez (ph) says he lives in terror, and that's the reason why most people left. Constant shootouts between rival drug cartels and an explosion in violent murders drove people to leave Pesqueria in a panic.

Almarosa Lopez (ph) would like to leave as well, only if she had the money to do it, she says.

ROMO: Pesqueria is among dozens of places in northern Mexico that have become ghost towns after terrorized residents left in droves. According to the U.N. the drug violence has displaced 140,000 people in Mexico since 2007. That's nearly as many as were displaced in all of Libya during the revolution that toppled Moammar Gadhafi.

PATRICIA LIIANA CERDA PEREZ, NUEVO LEON AUTONOMOUS UNIVERSITY: Whole (ph) families with rushes (ph) in power decide to go to the United States or some places that they consider safer.

ROMO (voice-over): Professor Patricia Cerda says many people have moved to places like Monterrey, Mexico's third largest city, located only 30 miles away from Pesqueria. Artist Rosa Lucia, one of those displaced, is painting a mural to protest drug violence.

ROSA LUCIA, DISPLACED ARTIST (through translator): We need to realize what's happening to us. We need to stop seeing it as normal and do something about it. We chose this way of communicating so that people can realize what's going on.

ROMO (voice-over): According to polls, security is the main concerns for Mexicans as they get ready to choose a new president Sunday. About 50,000 people have died in drug violence in the last five years. Meanwhile, back at Pesqueria, a lamppost that nobody would fix lies on the ground rusting, a sad reminder that a town has fallen to organized crime, a challenge of a generation to the next leader of Mexico.

ROMO: President Felipe Calderon has sent 50,000 troops and the police to those parts of Mexico that have been spot areas in the past (ph). The violence has been reduced in some parts, but that has not been the case in the town of Pesqueria that we featured on this story.

Fionnuala, back to you.

SWEENEY: And in terms of using the police locally or the army, which seems to be working as a favored method overall? And how do you see that developing?

ROMO: In places where both have been sent and the government has saturated with security forces those areas, it has worked very well. I'm talking specifically about, for example, the state of Chihuahua, where violence has effectively been reduced.

But what we're seeing now is in the state of Nuevo Leon, where Pesqueria is located. There's a turf war between two major drug cartels, and that's what's generating most of the violence there. And keeps telling the story, people are just fleeing in panic, Fionnuala.

SWEENEY: Rafael Romo there reporting live. Thank you very much indeed.

You're watching CONNECT THE WORLD and when we come back, Rafael Nadal was unpacking at Wimbledon, heard another big name forward well, Mark McKay tells all in sports.

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SWEENEY: Now Thursday for one of the biggest upsets at Wimbledon, as Rafael Nadal fell in the second round to the 100th ranked player in the world, Lucas Rosol. But has another of tennis' biggest stars suffered the same fate? Mark McKay is here to tell us.

MARK MCKAY, CNN CORRESPONDENT: Whoo! What a close call for Roger Federer. Can you imagine Roger Federer and Rafael Nadal not playing in the same grand slam into the fourth round? We came that close to seeing it tonight at the All-England Club as just like Nadal,

Roger Federer was put on the ropes, this time by a player also looking to make a name for himself, Frenchman Julien Benneteau, the six-time champion of Wimbledon, Federer, came within two points actually of crashing to his worst defeat at Wimbledon in 10 years. But he ended up clinching an 8th career fight back from two sets to love-down to beat the inspired French player in five.

So it is Roger Federer moving on and it's the world number one as well moving on. A bit of a scare as well today -- tonight from Novak Djokovic as he lost the opening set of his match at Wimbledon.

Another Czech surprise perhaps on Center Court at the All-England Club? No. Novak dropped the first set six games to four to Radek Stepanek, but then came back and won in four.

So the Serb insisted that he was not at all influenced by what happened to Nadal the day before, saying I have to play my own match and be at my own game. But, boy, we saw a couple of close calls Friday, one day after Nadal crashed out, Fionnuala.

SWEENEY: All right there, really exciting Wimbledon. But the question is, all eyes on Sunday, the Euro 2012 fight final, and of course that wonderful two goals scored yesterday, if you're Italian, that is.

MCKAY: Yes.

SWEENEY: And that by Mario Balotelli.

MCKAY: He's been called Super Mario, and for good reason, Fionnuala. Mario Balotelli has put Italy into the European championship final for the first time since 2000. All of Italy talking about his incredible performance Thursday in Warsaw against the favored German side.

The Germans' perfect record mattered not against the inspired Italian team. And now they eye the trophy Sunday in Kiev. The 21-year-old Manchester City striker Balotelli has impressed many, not the least of which, his coach.

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CESARE PRANDELLI, ITALY MANAGER (through translator): That's a huge satisfaction because it was a great performance by Mario for the whole team, because he has the capacity. I gave him instructions and he followed them perfectly.

So he has also the capacity to read the game. He's not just a typical forward. In my opinion, he's not the symbol, because the blue shirts are the symbol. It's the blue shirts that unite us. A few times he did divide us, but I'm convinced that with time he will unite us.

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MCKAY: And we will see how it plays out. We'll have much more on Balotelli's legacy as it stands now, going into the Euro 2012 final this weekend. That's on "WORLD SPORT" at the bottom of the next hour, Fionnuala.

SWEENEY: Mark, thanks as always.

Now I want to bring you this story of an incredible swim between Cuba and the U.S. state of Florida, and it is happening right now.

Penny Palfrey is trying to break her own record for the world's longest unassisted swim. The 49-year-old grandmother has been in the water since leaving Havana over eight hours ago. This is what she said before diving in.

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PENNY PALFREY, ENDURANCE SWIMMER: It's been a really big time (inaudible) before. I expect it to be very challenging but I'm very excited about it. So I'm looking forward to it.

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SWEENEY: Well, the swim is about 166 kilometers long, but the distance isn't even the toughest part. The Florida strait is teeming with sharks. In 1997, Susan Mulroney (ph) finished the swim in a shark cage. But Palfrey isn't using one of those to keep her safe from sharks. Aren't the only threats: stinging jellyfish float through the strait as well, a toxic trap for any swimmer.

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SWEENEY (voice-over): Sixty-two-year-old Diana Nyad had tried to swim the strait three times, each one ending in failure. The last time jellyfish left her in terrible pain.

DIANA NYAD, ENDURANCE SWIMMER: Oh, my God, the first night, I don't -- I was -- my back was paralyzed. Portuguese men-o'-war, and it was just a -- you know, it's a deadly rip, oh, my God, I was in pain. There's such thing as (inaudible), but also (inaudible) parts of the corner of the eyes, the nose, just the entire face, my God.

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SWEENEY: Well, we'll be following Ms. Palfrey's progress every stroke of the way.

Now, politicians may come and go. Athletes, however, it seems, are here to stay. CNN's Paula Hancocks reports on the American basketball players making headway in Pyongyang.

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PAULA HANCOCKS, CNN CORRESPONDENT (voice-over): Chengdu (ph) means friend, not necessarily what you'd expect Americans and North Koreans to be shouting together. But this is basketball, no politics here.

A group of Americans, many of them coaches and former U.S. college basketball players, formed a club, the Coaches' Team, while living in South Korea, and they took their talents north this month to teach and compete.

LUKE ELIE, FOUNDER, COACHES' TEAM: We really wanted to promote basketball diplomacy, friendship, break those barriers, you know, bring in a whole team of Americans and say, hey, you know, we're not those, you know, those guys that you see on posters. We're not those guys that, you know, that you guys hate so much.

HANCOCKS (voice-over): The team had far more interaction with North Koreans than most visitors, although Luke said it took a little while for their hosts to relax.

ELIE: At first it was distant. But before the end of the -- before the end of the games, before the end of the practice sessions, the kids were definitely laughing with us.

HANCOCKS (voice-over): Basketball is one of the few American (inaudible) sports welcome in North Korea. Young leader Kim Jong-un is believed to love the sport, as did his father. Rumor has it the late Kim Jong-Il was a huge fan of American star Michael Jordan.

It wasn't all sports for Coaches' team.

UNIDENTIFIED FEMALE: This is Kimisong (ph) Square.

HANCOCKS (voice-over): The usual tours and visits were filmed by their tour group in conjunction with North Korean partners, hence the music and, of course, the propaganda.

UNIDENTIFIED FEMALE: (Inaudible) imperialists who are afraid that future generations might (inaudible) where they signed a surrender document after suffering shameful defeat.

HANCOCKS (voice-over): The team were treated to a visit to U.S.S. Pueblo, a U.S. ship captured by North Korea in the 1960s and the anti-American rhetoric that went with it.

ELIE: We tried not to look to the anti-Americanism or the propaganda. We knew it was coming . We knew it -- I mean, we were briefed ahead of time. And we didn't want to get caught up in that.

HANCOCKS (voice-over): There was the obligatory visit to the giant bronze statues of former North Korean leaders Kim Il-sung and Kim Jong-Il. And a trip to Pyongyang's fun fair. The whole trip cost $50,000 and was self- funded by the players. The intention is to find sponsorship for future visits.

ELIE: We're convinced we introduced the high-five to North Korea. That's our claim. We don't know if that's true or not, but they responded well to it.

HANCOCKS (voice-over): Their hope is that basketball diplomacy can build trust where politics can't -- Paula Hancocks, CNN, Seoul.

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SWEENEY: And in tonight's parting shots, a great way to kickstart your day. One hundred soldiers in the U.K. have taken a popular British breakfast to new extremes. The troops lining up with strips of toast and boiled eggs and awaited their orders to set a new Guinness world record for the most people simultaneously to think egg soldiers (ph).

UNIDENTIFIED MALE: Right (ph). (Inaudible). Eat (ph). (Inaudible). Eat (ph).

SWEENEY (voice-over): It was the 21st world record that has been set in London this year. The first was in January. Eight couples embracing for 24 hours and 44 minutes, and thereby entering the history books for the longest marathon hug.

Among some of the other records, the fastest time that anyone has finished a marathon while hula-hooping, then there was this, the longest line of fanfare trumpeters, 91 uniformed musicians, to be exact.

And earlier this month, the largest parade of boats. That spectacular process was, of course, in celebration of the Queen's Diamond Jubilee. It is all part of London's countdown to the Olympics and what the city hopes to be a record-breaking year, literally.

I'm Fionnuala Sweeney. That was CONNECT THE WORLD. Thanks for watching. The world headlines are up next after this short break.

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UNIDENTIFIED MALE: Right (ph). (Inaudible). Eat (ph). (Inaudible). Eat (ph).

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SWEENEY: This is CNN, the world's news leader. The headlines this hour, German Chancellor Angela Merkel has defended a deal to use Eurozone bailout funds to help struggling banks. Stocks in the U.S. and Europe soared Friday on word of new measures to tackle Europe's debt crises.

Egypt's president-elect has addressed crowds in Tahrir Square. He said that no power is greater than people power and took a symbolic oath of office. Mohammed Morsi will be officially sworn in as president tomorrow.

Wildfires in the western U.S. state of Colorado have now claimed at least one life and destroyed hundreds of homes. Another 20,000 homes are dangerously close to the fires. President Barack Obama has issued a disaster declaration for the area.

Russia is reportedly expressing optimism for Saturday's emergency talks on the Syrian crisis. Foreign minister Sergey Lavrov met U.S. Secretary of State Hillary Clinton ahead of those talks and say there was a good chance to find a common denominator to move forward.

And those are the latest headlines from CNN, the world's news leader. "AMANPOUR" starts right now.

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