US plans big stake in Citi as crisis rages

PARIS-NEW-YORK. February 24. KAZINFORM Citigroup Inc is in talks that could see the US government boost its stake, a source told Reuters on Monday, as governments and financial firms in Japan, France and elsewhere announced fresh capital raising.

A report in the Wall Street Journal said the two sides were discussing a plan under which the government could convert a big chunk of the $45 billion in preferred shares it bought last year, raising its holding to as much as 40 percent. The British government last month said it would convert preferred shares it took in Royal Bank of Scotland, expected to unveil more restructuring this week. While the US plan could see the government owning as much as 40 percent of Citi, the bank hopes to limit the stake to closer to 25 percent, the Journal reported. The preferred shares now amount to a stake of less than 8 percent. "This gives you the sense that authorities' worries have intensified, that problems relating to the US economy may potentially spill over to the rest of the world," said Sailesh Jha, senior regional economist at Barclays Capital in Singapore. The Financial Times said Citi wants to limit the government's stake to no more than 40 percent, or at least below the 50 percent mark that would spell nationalization -- anathema to many US politicians, executives and voters. "We are open to considering a request to do so if the institution and its regulator believe it would promote the long-term stability of that institution, and if we believe it's in the best interest of long-term stability of our economy and financial system," spokesman Isaac Baker said. European Central Bank President Jean-Claude Trichet said on Monday that the euro zone's financial system is under severe strain and that net credit flows have started to fall in recent weeks. "What has become increasingly clear since the intensification of the crisis mid-September last year is that the strains in the financial sector are spilling over to the real economy," Trichet told a conference on regulation; Kazinform cites Today's Zaman. "This situation is more difficult to combat than if the problems had remained largely confined to the financial sector," he said. European Union leaders at a weekend summit in Berlin backed a doubling of funds for the International Monetary Fund, which has spent billions of dollars in recent months shoring up economies in Eastern Europe and elsewhere. Latvia's government collapsed on Friday and the currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions of citizens who have borrowed in foreign currencies such as the euro. World stocks rose from last week's three-month lows and government bonds fell as expectations grew that the US government will increase its stake in Citigroup instead of fully nationalizing the bank. "They are certainly moving much faster this time, and it can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate," said Tony Morriss, senior markets strategist at ANZ investment bank in Sydney. US President Barack Obama is expected to unveil a plan to halve the budget deficit by 2013 with a mix of tax increases on wealthier Americans and spending cuts.