January 15, 2008 / 12:40 PM / 10 years ago

Central banks inject liquidity, Citi news weighs

NEW YORK (Reuters) - Global central banks on Tuesday provided relief to money markets by offering liquidity to financial institutions, but huge losses at Citigroup reminded investors that the credit crisis was far from over.

The Federal Reserve, European Central Bank, and Swiss National Bank all conducted dollar-denominated auctions that drew lukewarm to steady demand, with market lending rates easing after a sharp surge since late November.

The ECB and SNB allotted the full $10 billion and $4 billion, respectively, at their auctions.

In the case of the Fed, which offered $30 billion, funds were auctioned at an average interest rate of 3.95 percent, well below the rates of 4.65 percent and 4.67 percent at the two auctions in December.

The Fed action “is consistent with an expected reduction in the target federal funds and discount rate of 50 basis points on January 30,” said Brian Bethune, a U.S. economist at Global Insight in Lexington, Massachusetts.

“The Federal Reserve is pulling out all the stops in order to make sure that the banking system has more than adequate reserves available. As such, we do not believe that stress from unusual withdrawals from any major banks will create any severe problems in terms of liquidity or cash availability,” he added.

But problems at Citigroup could be the fly in the ointment.

On Tuesday, Citigroup wrote off $18.1 billion, but secured new capital from overseas, as Merrill Lynch, also seen heading for big losses due to the U.S. subprime mortgage meltdown, announced a $6.6 billion shot in the arm.

Citi (C.N), the largest U.S. bank by assets, announced an overall fourth quarter loss of $9.83 billion -- its first quarterly loss since its creation in 1998 -- on the back of losses tied to subprime home loans and other risky debt.

It said it was raising $14.5 billion from offerings of convertible preferred securities and cut its dividend. Saudi Arabian Prince Alwaleed and the government of Singapore were among the investors.

“Believe it or not, the write-downs are better than what was being discussed. Yesterday, I saw an analyst estimate of $27 billion,” said William Smith, chief executive of Smith Asset Management in New York.

Standard & Poor’s cut Citigroup’s ratings on Tuesday, citing the bank’s “severe losses” and expectations of a rocky near-term outlook this year.

U.S. investment bank Merrill MER.N said it would issue $6.6 billion in preferred shares to investors, including the Kuwait Investment Authority, the Korean Investment Corp and a unit of Japan’s Mizuho Financial Group (8411.T), as it looked to shore up its capital base.

The New York Times on Friday reported Merrill was expected to suffer $15 billion in losses stemming from bad mortgage investments, when it releases its fourth-quarter results on Thursday. It wrote off $8.4 billion in the third quarter.

Banks, wrestling with huge losses stemming from U.S. mortgages lent to people ill-equipped to repay them, have been actively seeking cash from abroad.

    In December, Merrill secured as much as $7.5 billion by selling a stake to Singapore’s government and an asset manager. The month before Citi agreed to sell up to a 4.9 percent stake to Abu Dhabi for the same amount.

    Other big names such as State Street (STT.N) and JP Morgan Chase (JPM.N) also report results this week, which is shaping up to be a pivotal one in the credit crunch saga.

    While interbank lending rates have fallen recently amid coordinated central bank action to provide liquidity, analysts say ongoing losses at major banks means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

    Former Fed Chairman Alan Greenspan said the U.S. economy was probably in or about to enter a recession.

    The odds are “not overwhelming but they are marginally in that direction” of recession, Greenspan was quoted as saying in a Wall Street Journal interview, published on Tuesday.

    The worldwide scope of the wreckage from the U.S. subprime mortgage crisis was again amply demonstrated.

    Australian property investor Centro Property Group CNP.AX, which is struggling to refinance its debt, said its current liabilities may be higher than previously stated, sending its shares down as much as 48 percent.

    Centro, which owns and manages 700 shopping malls in the United States, has put itself up for sale after falling victim to the credit crunch.

    Additional reporting by Mike Peacock in London; Editing by Neil Stempleman

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