U.S. vows bank aid and aims to avoid nationalisation
By Emily Kaiser
WASHINGTON (Reuters) - U.S. regulators promised on Monday to prop up struggling banks if needed and said lenders should remain in private hands, even as a source said Citigroup was in talks to give the government a greater stake.
In Europe, the French government said it was pumping extra cash into two mutually owned banks, and the central European central banks took the unprecedented step of talking up the region's currencies.
U.S. stocks, which started higher on the Citigroup talk, turned lower on fears that the bank stabilization plan would not be enough to keep the economy from sliding into a deeper hole. U.S. government bond prices were little changed and the dollar gained against a basket of currencies as investors scrounged for safety.
Amid worries that the United States may still have to nationalize some of its banks, the Treasury Department, Federal Reserve and three other federal agencies said they will start assessing large U.S. banks' capital needs on Wednesday to determine whether a bigger buffer is warranted.
The money could come from the private sector or the government in the form of preferred shares that convert into common stock over time as needed to ensure banks have enough resources to withstand deepening credit losses.
"Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands," the agencies said.
Healthy banks are vital to stemming recession. While some economists have argued that nationalizing weaker institutions would be the fastest way to revive lending, many investors -- particularly in the United States -- worry that government intervention would have a chilling effect on business.
"If the government tells the bank that they need more capital, it's highly unlikely any 'private' source would step up due to the stigma," said Andrew Busch, global foreign exchange strategist with BMO Capital Markets in Chicago."This means that the government's designation could signal a further death spiral for the bank's common stock shareholders," he said.
Citigroup, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, was in talks to give the government a larger stake, a person familiar with the matter told Reuters.
The idea under consideration would involve converting a big chunk of the $45 billion (31 billion pounds) in preferred shares the government bought last year into common stock, putting as much as 40 percent of Citigroup into public hands.
The British government announced a similar move last month, saying it would convert preferred shares in Royal Bank of Scotland, which is expected to announce more restructuring this week.
France on Monday also reached out to its lenders, pledging up to 5 billion euros (4 billion pounds) in additional aid for Banque Populaire and Groupe Caisse d'Epargne.
The two mutual banks are expected to detail a merger this week and the new aid could give the government a stake of up to 20 percent in what is set to be France's second-biggest retail bank behind Credit Agricole.
LOSSES MOUNT
Banks around the world have already reported hundreds of billions of dollars in losses and write-downs as defaults spike on mortgages, credit cards, corporate debt and a host of other loans. Investors worry that losses will intensify as the economy weakens, and banks may lack sufficient resources to withstand any further deterioration.
Tighter credit conditions have constrained consumer and business spending, and contributed to a steep decline in global trade. Dresdner Kleinwort economists think corporate bankruptcies worldwide will rise by at least 20 percent this year, after a 14 percent increase in 2008. In the auto industry, one of the hardest hit by the credit contraction and consumer spending slump, Ford reached a tentative agreement with the United Auto Workers union on changes to a retiree health care trust, becoming the first Detroit automaker to secure union concessions on the key issue.
European Central Bank President Jean-Claude Trichet said on Monday that the financial crisis was spilling over into the wider economy and that the euro zone's financial system is under "severe strain.
Joaquin Almunia, the EU's economic chief, said on Monday that the European Union could have to bail out a member state in financial trouble but such a move was unlikely, especially among countries in the euro zone.
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.
Emerging European Union central banks coordinated to prop up their currencies on Monday, with Czech central bank Governor Zdenek Tuma saying they had agreed that recent falls were overplayed.
In Asia, Japan's biggest brokerage Nomura Holdings Inc said it planned to raise 302 billion yen ($3.3 billion) by selling new shares to boost its capital.
Japan's second-largest bank Mizuho Financial Group said it would issue $850 million in preferred securities to replenish capital erased by a sliding stock market and economy.
Japan also saw its biggest bankruptcy of the year measured by debt as SFCG, a lender to smaller companies, failed with debts of $3.6 billion.
source : Reuters UK
