Obama may delay tax rise

WASHINGTON/LIMA (Reuters) - President-elect Barack Obama may consider delaying a campaign promise to roll back tax cuts on high-income Americans as he works on a huge stimulus plan to counter the worst economic crisis the world has faced in decades.

In other moves aimed at reducing the impact of the recessionary conditions sweeping many economies, the 21 members of the Asia-Pacific Economic Cooperation forum pledged at the end of a two-day summit in Lima that they would take quick and decisive action.

And diplomats also said there was a high probability the World Trade Organization would hold a ministerial meeting next month to seek a breakthrough in the stalled Doha round of global trade talks.

But the politicians are up against a steady drumbeat of grim economic and corporate news. On Friday, figures from the euro zone and Japan are expected to show increases in jobless rates, and on the same day the traditional start to the U.S. holiday shopping season promises to be one of the most wrenching for retailers in recent memory.

Earlier in the week, U.S. home sales and price data, as well as durable goods figures, are also forecast to be weak.

And on Sunday night, Citigroup C.N, the second-largest U.S. bank by assets, was struggling to restore confidence after its share price dropped 60 percent last week. The Wall Street Journal reported that Citigroup was nearing agreement with U.S. government officials on the creation of a separate "bad bank" that would house some of its potentially toxic assets.

Such developments will be vying with any positive investor sentiment created by Obama’s moves as global financial markets open on Monday.

Perhaps most importantly, two Obama aides indicated that the tax cuts brought in under the current administration of President George W. Bush may be allowed to run their course until the end of 2010, rather than being rescinded by legislation before then.

When asked if the tax cuts for the wealthy would be allowed to expire on schedule after 2010 rather than be rolled back earlier, senior Obama adviser David Axelrod told Fox news channel: “Those considerations will be made.”

Another adviser, Bill Daley, said on NBC’s “Meet the Press” that the 2010 scenario “looks more likely than not.”

Business leaders and economists had expressed concern that raising taxes on the higher paid now would only exacerbate the economy’s woes.

Obama, who will take over from Bush on January 20, is ready to announce his top economic team on Monday, holding a news conference at 11 a.m. in Chicago (1700 GMT).

He plans to nominate Timothy Geithner, president of the New York Federal Reserve Bank, as Treasury secretary, a transition official said. Lawrence Summers, 53, who was Treasury secretary in the Clinton administration, will help shape policy as director of the White House National Economic Council, the official said.

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The potential size of the latest U.S. stimulus plan appears to be growing from the $100 billion to $300 billion previously suggested by congressional leaders.

One influential Democrat, Sen. Charles Schumer of New York, said on Sunday that a package of up to $700 billion was needed to support the American economy. Schumer also said he expects Congress to get the package onto Obama’s desk for signature by Inauguration Day.

“The main thing right now is to get this economic recovery package on the road, to get money in the pockets of the middle class, to get these projects going, to get America working again, and that’s where we’re going to be focused in January,” said Axelrod.

On Saturday, Obama laid out plans for a two-year economic stimulus involving the creation of 2.5 million jobs.

The comments on the tax increases, the stimulus plan and the economic appointments should bring some cheer to the furrowed brows of investors in world markets, but it may only be temporary.

U.S. stock prices, pummeled for most of last week, rallied more than 6 percent on Friday after word first leaked out that Geithner might take the helm at Treasury.

“I think it will help the market on Monday but I think it will be very short-term help,” said Michael Pento, senior market strategist at Delta Global Advisors.

“You can stimulate the economy in the short run by a temporary adrenaline stimulus and a steroid shot of deficits, but in the long run it’s extremely deadly.”

At the meeting of APEC, which includes the United States, Bush, Chinese President Hu Jintao, Japanese Prime Minister Taro Aso and other members of the group, said they would refrain from raising trade barriers over the next 12 months.

They committed to try to reach a breakthrough in the stalled Doha round of trade talks before the end of this year.

Trade officials at the WTO said that although the WTO’s 153 member states remain at odds in several parts of the Doha talks, there was growing consensus over the need for ministers to meet and seek a deal in the key areas of agriculture and industry.

“I think there is a very high probability,” U.S. ambassador to the WTO Peter Allgeier told journalists when asked about the likelihood of a ministerial meeting being called. “We have to wait and see a few more days.”

U.S. President-elect Barack Obama waves as he leaves his first press conference following his election victory in Chicago, in this file photo from November 7, 2008. REUTERS/Carlos Barria

The officials said the meeting would almost definitely occur in mid-December, after WTO talks mediators have the chance to revise negotiating texts that would form the basis of a deal on cuts to trade-hampering tariffs and subsidies.

“The window we have is not that big,” one official said.


Financial markets are waiting for some sort of Citigroup announcement this weekend, and if nothing happens, the bank’s stock is likely to plunge further on Monday, analysts said.

Citigroup’s stock dropped to a low of $3.05 on Friday, a level not seen for about 16 years, spurring the bank’s management to talk to the U.S. Treasury and the Federal Reserve about its options.

The bank is not in danger of near-term collapse, people close to Citigroup said on Friday. Depositors are sticking with the bank, as are trading counterparties. The capital ratio that regulators look at most carefully, namely the tier-one capital ratio, is well above minimum required levels.

But a rapid decline in share price can make customers skittish and cut into a bank’s business, wrote analysts at independent research boutique CreditSights on Saturday.

“Unfortunately, we feel like we have seen this movie before,” they added. Lehman Brothers Holdings Inc and Washington Mutual Inc both experienced major declines in their shares, followed by an exodus of customers. Lehman filed for bankruptcy, while regulators took over Washington Mutual.

According to the Wall Street Journal report, a newly created “bad bank” structure might take on some of Citigroup’s more than $1.23 trillion of off-balance sheet assets. Citigroup might bear the initial losses on the assets, and the government might cover losses beyond a particular threshold, the newspaper reported, citing people familiar with the matter.

In other developments, Britain prepared plans to inject billions of pounds into its economy to stave off recession amid slumping house prices, rising unemployment and shrinking manufacturing output.

Finance Minister Alistair Darling will unveil the package of tax cuts and extra public spending expected to total up to 20 billion pounds ($30 billion) on Monday, newspapers said.

A cut in the so-called value added tax, or VAT, is aimed at giving a pre-Christmas boost to consumers’ spending power.

“Doing nothing is not an option,” Prime Minister Gordon Brown said in a speech he will give to business leaders on Monday. “We need timely action now to prevent permanent damage.”


China also planned more ways to support its economy, now showing signs of being infected by the crisis after years of extraordinary growth.

State television said projects planned by provincial governments will add an additional 10 trillion yuan ($1.5 trillion) to the value of a 4 trillion yuan economic stimulus package announced earlier this month.

The investments include rail, roads, ports and housing, CCTV said. The spending plans will emphasize rural infrastructure.

South Korean officials said they had further policy options to combat the global downturn, putting pressure on the central bank to cut interest rates in Asia’s fourth-largest economy.

“We need financial support for small companies and exporters,” Prime Minister Han Seung-soo said.

In the Gulf, also feeling the crisis despite its oil riches, Saudi Arabia’s central bank slashed its benchmark lending rate from 4 percent to 3 percent, the second reduction in a month to keep credit markets moving and boost liquidity.

Reporting by Reuters bureaux; Writing by Martin Howell; Editing by Maureen Bavdek, Bernard Orr