Us Bid To Bail Out Citigroup

The Age

Tuesday November 25, 2008

BRENDAN NICHOLSON, LIMA, and PETER MARTIN, CANBERRA, With ARI SHARP, NYT

THE US Government has launched a radical plan to rescue Citigroup, once the world's largest bank, in a deal in which the Government could absorb tens of billions of dollars in losses at the struggling bank.

The bail-out is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the crippled financial system and the US and world economy.

The Citigroup plan involves the US Government backing about $US306 billion ($A488 billion) in loans and securities and directly investing about $us20 billion in the company.

Citigroup employs 2500 people in Australia, and while some are likely to be sacked as part of worldwide job losses announced last week, the rescue package could save the jobs of others.

News of the bail-out comes as two prominent Australian companies desperately seek to cope with their high debt levels. Investment bank Babcock & Brown remains in a trading halt on the stock exchange as it continues negotiations with a German-based bank to access a $a70 million deposit. The investment bank's 25 lenders fear the inability to access the deposit could threaten its solvency.

Meanwhile, Channel Nine owner PBL Media is turning to its bankers and private equity owners for help as part of a $a445 million recapitalisation of the company. PBL said the money was a precaution against a dramatic earnings fall, but said such a situation was unlikely.

It came as Australian Prime Minister Kevin Rudd opened up the possibility of the budget going into the red, saying if there was a budget deficit, the shortfall was likely to be met from funds such as the Government's $20 billion Building Australia Fund rather than by borrowing.

Under questioning at the conclusion of the APEC summit in Peru, Mr Rudd repeatedly refused to rule out a deficit, saying only that the Government expected to get by without having to borrow.

"What I am saying is, under current circumstances, we do not see the need to borrow for the purposes of Government spending and investment," he said.

Asked whether he was drawing a distinction between a budget deficit funded by borrowing, and one funded from the reserves of funds including the Building Australia Fund and the $11 billion Education Investment Fund, Mr Rudd said the purpose of the funds was clear-cut and that "each year as you draw down on the funds, of course it goes to the budget bottom line, that is clear".

"What I am talking about is borrowing for the purposes of Government investment or spending ... based on current circumstances, we do not see the need to borrow," he said.

The distinction opens the way for this year's forecast deficit of $5.4 billion to turn into a deficit funded by some of the $30 billion the Government salted away in infrastructure investment funds in the May budget.

The Government would be able to argue that although the budget had fallen into deficit, it did not need to borrow in order to fund it.

The Citigroup plan, which emerged after a harrowing week in the financial markets, would be the Government's third attempt in three months to contain the deepening economic crisis.

If applied to other banks, the plan could set a precedent for other multibillion-dollar financial rescues.

The futures market foreshadowed a rise in US trading overnight as investors saw the rescue as a further sign of the Government's change of tack following the decision in September to allow Lehman Brothers to collapse. -- With ARI SHARP, NYT