U.S. Eyes Big Stake In Citi As Crisis Rages

Despite the risk that the U.S. move could dilute shareholders, Citigroup shares listed in Frankfurt were up 9 percent.

The United States could boost its stake in troubled Citigroup Inc, a source told Reuters on Monday, as governments worked to shore up capital in banks and brokerages.

The U.S. government could raise its holding in Citi to as much as 40 percent by converting a big chunk of the $45 billion in preferred shares it bought last year, the Wall Street Journal said.

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 ($6.3 billion) 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.

Despite the risk that the U.S. move could dilute shareholders, Citigroup shares listed in Frankfurt were up 9 percent at 1.62 euros at 1313 GMT, off an earlier high of 1.92.

World stocks rose from last week's three-month lows and government bonds fell on Monday as expectations grew that the U.S. government would increase its Citigroup stake instead of fully nationalising it.

Analysts said the fact the U.S. government would stop short of nationalising Citigroup while at the same time helping boost its capital base reassured investors.

"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," said Tony Morriss, senior markets strategist at ANZ investment bank in Sydney.

The U.S. Treasury declined to comment on Citigroup but said it would consider converting preferred shares it owns in banks into common equity to strengthen their capital structure.

"We are open to considering a request to do so," spokesman Isaac Baker said.

Executives at Citi hope the U.S. takes a stake of no more than 25 percent, the Journal reported. The preferred shares now amount to a stake of less than 8 percent.

EU SUMMIT

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".

"What has become increasingly clear since the intensification of the crisis mid-September last year is that the strains in the financial sector are spilling over to the real economy," Trichet said.

"This situation is more difficult to combat than if the problems had remained largely confined to the financial sector," he said.

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.

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.

The securities, which are not convertible to common stock and are aimed at overseas investors, will pay an annual dividend of almost 15 percent, underscoring the difficulty of securing cash in tightening markets.

Japan also saw its biggest bankruptcy of the year measured by debt as SFCG Co Ltd, a lender to smaller companies, failed with debts of $3.6 billion.

The United Arab Emirates central bank subscribed to half of a $20 billion sovereign bond programme launched on Sunday by the government of Dubai which needs funds to refinance debt accumulated during a six-year boom spurred by high energy prices.