The U.S. government and Citigroup have reached a deal in which the government would substantially raise its stake in the bank, a person familiar with the matter said, offering hope of greater stability for the financial system.
That offered a glimmer of optimism in a day otherwise dominated by negative economic news, from Japan to India.
Together with the eye-popping $1.75 trillion budget deficit forecast by President Barack Obama, the Citi deal highlights the lengths to which the U.S. government is being forced to go in order to rescue its financial industry and the broader economy.
Under the arrangement, expected to be formally announced later on Friday, the government would convert up to $25 billion in its preferred shares in the bank into commom equity, greatly increasing its stake in what was once the world's biggest bank.
Though those conversions will depend on the bank finding private investors willing to do the same, the plan could see the government end up with around 30-40 percent of Citi's common stock and thus greatly increase the firm's equity capital ratios, making it better able to withstand losses.
"This is likely to be positive for the market," said Hideyuki Ishiguro at Okasan Securities in Tokyo. "While there were worries about nationalisation, that's mostly on the part of the shareholders. For ordinary Americans, it's important to make the financial system more stable."
MIXED REACTION
Investors around the world are watching the U.S. government's moves for signs of whether it can do enough to stop the downward spiral of its banks and help kick-start the global economy.
The proposed budget unveiled on Thursday, which must be approved by Congress, would represent 12.3 percent of gross domestic product — the largest share since World War Two.
Markets' response to the budget was muted at best. The Dow Jones industrial average was down 1.2 percent on Thursday, and U.S. stock prices hit 12-year lows this week.
However, Japan's benchmark Nikkei average closed up 1.5 percent on Friday, as banks including Mitsubishi UFJ Financial Group were boosted by the news of the Citi deal.
That came despite Japan's factory output falling by a record 10 percent in January, in line with market expectations, dragging down the number of new jobs on offer as well as spending by households.
India's economy slowed more than expected in the October to December quarter, with annual growth falling to 5.3 percent from 7.6 percent the previous quarter.
Gloom piled up in the United States as well.
The number of U.S. workers filing for jobless benefits jumped to a record high of 5.1 million in mid-February, while U.S. durable goods orders plunged to a six-year low in January.
General Motors Corp posted a loss of nearly $31 billion for 2008 and said its auditors were likely to cast doubt on its viability.
And Fannie Mae, the government-controlled company seen by the U.S. 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 U.S. Treasury.
RESENTMENT OVER BONUSES
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 cautioning that 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.
As the toll of the financial crisis around the world mounts, global financial institutions including the World Bank and European Bank for Reconstruction and Development (EBRD) launched a coordinated two-year plan to lend up to 25 billion euros ($32 billion) to banks and businesses in crisis-hit eastern and central Europe.
But such sums are dwarfed by the amount governments are spending to shore up their banks.
Britain's scheme to insure "toxic assets" threatening big banks, including Royal Bank of Scotland, is expected to cover more than 500 billion pounds ($712 billion) of such assets.
With taxpayers spending so much to bail out financial institutions, public resentment towards bank executives who have drawn sizeable bonuses despite the failure of their banks is running high.
The British government said it was "misinformed" about former RBS Chief Executive Fred Goodwin's 693,000 pounds annual pension, which he is clinging on to in defiance of criticism by government ministers.
"I can assure you that we are doing everything we can, not only to clean up the banks so they are capable of lending again but to make sure that the old bonus culture, the old remuneration culture and the old excesses are swept away," British Prime Minister Gordon Brown told Sky News.
