US govt. may take big stake in Citi bank as crisis rages

[Naveed Yaseen]

PARIS/NEW YORK: Citigroup Inc is in talks that could see the US government boost its stake to 40 per cent, according to media reports, as governments and financial firms in Japan, France and elsewhere announced fresh capital raising on Monday.

The Wall Street Journal said Citigroup and US officials are discussing a plan under which the government could convert a big chunk of the $45 billion of preferred shares it bought last year.

The British government last month said it would convert preferred shares it took in Royal Bank of Scotland, which is expected to announce a restructuring plan this week. The US plan could see the government end up owning as much as 40 per cent of its common equity, though Citi executives hope to limit the stake to closer to 25 per cent, the newspaper reported. The preferred shares now amount to a stake of less than 8 per cent.

“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’s aim was to keep the government’s stake to no more than 40 per cent, or at least below the 50 per cent mark that would spell nationalization, which is anathema to many US politicians, executives and voters.

The US Treasury declined to comment on Citigroup but said it would consider converting preferred shares it owns in banks into common equity to strengthen their capital structure. “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. “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 across the region who have borrowed in foreign currencies such as the euro.

“We’re dealing with an extraordinary international crisis the likes of which we have not seen for decades, both as regards financial markets and the global economy,” German Chancellor Angela Merkel said.

There was no respite for Western European banks and brokerages either, as French Economy Minister Christine Lagarde on Monday pledged to extend up to 5 billion euros ($6.3 billion) in additional aid to Banque Populaire and Groupe Caisse d’Epargne, two mutual banks which are merging.

A source close to the deal told Reuters on Sunday that the French state could take a stake of up to 20 per cent in the merged company, which will be France’s second-biggest retail bank behind Credit Agricole.

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