SINGAPORE (Reuters) - Citigroup is in talks with federal officials which could see the U.S. government holding as much as 40 percent of the struggling lender’s common stock, the Wall Street Journal reported on its website.
Citigroup executives are hoping the talks with U.S. federal officials will result in a stake closer to 25 percent, the Journal reported, citing sources familiar with the talks.
The report comes amid heavy selling of U.S. bank shares last week on fears the U.S. government may be forced to nationalize some ailing banks to stave off further damage to the economy.
Below are analysts’ comments on the report.
KU YONG-UK, ANALYST, DAEWOO SECURITIES, SEOUL
“For the government to take on a stake in a bank would mean the government itself would like to resolve fundamental problems at the bank.
“But that may precede a capital writedown. We need more details on what the government will mark as losses for Citi before it buys a stake.”
SEAN CALLOW, CURRENCY STRATEGIST AT WESTPAC, SYDNEY
“(The report) is definitely drawing much interest, supporting S&P futures and also Asian FX.
“It seems markets are taking the story on face value and pricing in the U.S. government not fully nationalizing banks. Whether that ends up proving to be the case is very debatable, but for now it is helping broad risk appetite and thus weighing on dollar/Asia FX, pushing Treasury yields higher.”
ALEX WONG, DIRECTOR, AMPLE FINANCE, HONG KONG
“The news itself is hardly positive, if anything it is indicative of further weakness in the financial markets going forward, but at least now investors know the extent of the damage that will be done in terms of equity dilution.”
STEPHEN ROBERTS, ECONOMIST AT NOMURA, SYDNEY
“This still maintains a high degree of uncertainty regarding the financial rescue package from the United States. It is reasonable enough to expect markets to remain volatile and my suspicion is the rise in risk appetite that we are seeing now could peter out in the U.S. session as it will not be taken very positively.”
TONY MORRISS, SENIOR MARKETS STRATEGIST, ANZ INVESTMENT
“It’s a sign of relief that the move at least removes some of the uncertainty around the banking sector. It confirms that markets have the greatest sensitivity to uncertainty in the banking sector. 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.
“Now we need further clarity on the criteria they will use to stress test the banks. Nationalization is still possible. If you continue to see pressures on lending, they will have to take more measures down the road.”
SHARADA SELVANATHAN, CURRENCY STRATEGIST AT BNP PARIBAS,
“The possibility of nationalizing a major U.S. bank turns away private capital flows, and this needs to be seen in the context of Asia’s pool of liquidity that funds the U.S. current account deficit.
“Asian investors would hence raise questions with regards to how the United States will be able to fund its deficit in the medium to long term, hence we could see an extension of the euro/dollar rally this morning.
“But I don’t think this is the turnaround for the dollar. Remember that when a bank gets nationalized, it will be forced to handle business in a more domestically oriented manner; this would mean that the nationalized bank would have to pare back its business offshore. Repatriation flows would prove to be dollar positive.
“Thus I would allow for the euro/dollar rally to extend until the 1.3070 level and then sell into euro/dollar strength.”
YASUTOSHI NAGAI, SENIOR ECONOMIST, DAIWA SECURITIES SMBC IN
“The media report that the U.S. government may inject capital into Citigroup has sparked unwinding of flight-to-quality buying on U.S. Treasuries. If the government really takes such a step, it would help Citi tackle its problems, thus it is a negative factor for Treasuries.
“The dollar was sold against the euro, also on a reverse of flight-to-quality buying of the U.S. currency.
“The U.S. government is very fast in taking necessary measures to fight the financial crisis. The United States could be the first to arise from the crisis before Europe and Japan, so I think the dollar will be on a rising trend against other major currencies.”
SAILESH JHA, SENIOR REGIONAL ECONOMIST, BARCLAYS CAPITAL
“This gives you the sense that authorities’ worries have intensified that problems relating to the U.S. economy may potentially spill over to the rest of the world.
“We have lowered our U.S. economy growth forecasts for 2009.”
“In Europe, the banking sector problems have started to intensify as well. You have seen the problem in Eastern Europe relating to Hungarian banks having contagion to developed country banks in Europe as well.
“There are risks that you will get continued government involvement in the financial sector in Europe as well.”
DARIUSZ KOWALCZYK, CHIEF INVESTMENT STRATEGIST, SJS
MARKETS, HONG KONG
“Longer term, it is necessary for the government to recapitalize banks, and if they put in more capital, then obviously their ownership has to increase. I think 40 percent may not be the end of it.”
“Until most of the news is known, there will be a lot of volatility and probably a downward trend in the equity market because we don’t know how much pain for investors government measures will induce, by which I mean, will current holders of bank equity lose everything, or most?”
“What I don’t like is this kind of creeping mode of announcing this sort of news. It would be best if a sort of full-fledged plan could be announced in detail in one go. Then the market could fall, the air would be cleared, and it could start rising again.”
DAVID COHEN, ECONOMIST, ACTION ECONOMICS, SINGAPORE
Cohen said that talk of nationalizing the bank might seem like a “scary precedent,” but there was also a sense of moving forward.
“There might be some bumps in the road as we move along in cleaning up the mess.”
He expects a general sell-off in the short run as a temporary reflex action to the news. “But looking back in the long term, markets might see Nationalization as a source of relief.”
U.S. equity futures turned positive, and Treasuries fell after the report, while the euro jumped to the day’s highs against the dollar and the yen. Asia stocks also rose.
* S&P 500 futures were up 0.9 percent and Dow futures rose 0.7 percent; the MSCI index of Asia-Pacific stocks outside Japan rebounded from a 3-month low and was up more than 1 percent.
* The benchmark 10-year Treasury yield ticked up to 2.82 percent from 2.79 late on Friday.
* The euro jumped around 1 percent to $1.2914, while the dollar slid 0.5 percent to 92.98 yen.
* For the latest news on Citi, click
Reporting by Asia bureaus; Editing by Kim Coghill
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