US, EU banks cede control to govts; India, Japan falter


Posted at Feb 27 2009 11:49 PM | Updated as of Feb 28 2009 07:52 AM

WASHINGTON/STOCKHOLM - Crippled banks in Europe and the United States sank deeper into state control on Friday as governments fed them more cash to stabilise lending and kickstart faltering economies worldwide.

The US government did a deal to convert $25 billion of its preferred stock in Citigroup to common stock, giving it a stake of up to 36 percent in the bank.

And global development banks launched a two-year plan to lend up to 25 billion euros ($32 billion) to shore up banks and businesses in crisis-hit eastern and central Europe.

US stock index futures SPc1 turned lower on the news and Citi, which once dominated US financial services, said it would take an impairment charge of $9.6 billion.

The Citi deal came a day after Britain agreed to insure 500 billion pounds ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland to 95 percent.

On Friday, a second major British institution, Lloyds Banking Group, prepared to tap the insurance scheme.

Together with the $1.75 trillion budget deficit forecast by US President Barack Obama, the deals highlight the lengths to which governments are prepared to go to rescue the financial industry and the broader economy.

"There's a feeling that the banks might need yet more capital and nationalisation is back on the agenda both here and in the US, it looks as if there's no end in sight," said Graham Exton, fund manager at the UK's Tilney Investment Management.

Fannie Mae, the government-controlled company seen by the US administration as a key conduit to stabilise the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the US Treasury.

Stocks weak, economies stagger

World stock markets slipped towards the six-year lows they registered earlier in the week and the dollar hit a three-month high against major currencies as concerns intensified about profits at pharmaceutical companies and banks.

Data showed economies faltering from Japan to Sweden.

Japanese factory output fell a record 10 percent in January, dragging down the number of new jobs on offer and showing Japan's recession deepening.

India's economy slowed more than expected from October to December, with annual growth falling to 5.3 percent from 7.6 percent in the previous quarter.

Fourth quarter data from the Nordic region showed the Danish and Swedish economies contracting at record paces and Finland entering recession.

In the euro zone, unemployment crept up and inflation fell to its lowest in almost 10 years.

And the South Korean won fell to an 11-year low against the dollar as analysts said risk aversion fuelled by the fragility of global financial system would impede any recovery.

China gave a mixed picture on its economy's outlook for the coming year, with one official saying he was confident the government could engineer 8 percent growth, but another saying growth would not pick up until at least the second quarter.

"I don't think China's economy will bottom out in the first quarter. That means China's economy will be further weighed down by the worsening external environment," Vice Commerce Minister Fu Ziying told a forum.

Gloom piled up in the United States as well in data released on Thursday. The number of US workers filing for jobless benefits jumped to a record high of 5.1 million in mid-February, while US durable goods orders hit a six-year low in January.

Carmaker General Motors posted a 2008 loss of nearly $31 billion and said auditors were likely to cast doubt on its viability.