Us Billions To Bail Out Bank Giant

The Age

Tuesday November 25, 2008

By ARI SHARP and BRENDAN NICHOLSON in LIMA, With PETER MARTIN

THE US Government has launched one of the biggest rescue packages in corporate history in a bid to save Citigroup - once the world's largest bank - from succumbing to the global financial crisis.

Under the radical plan, Washington will directly invest about $US20 billion into the banking giant and will provide backing for about $US306 billion ($A488 billion) in loans and securities.

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. It represents a change in direction following the decision to allow Wall Street bank Lehman Brothers to collapse in September, prompting dramatic falls in sharemakets across the globe.

Investors appeared to welcome the news, with sharemarkets opening strongly across Europe, and Citigroup shares rising sharply in Germany.

This follows a 60 per cent plunge in stocks last week, prompting fears investors might pull their money.

Despite that, Citigroup remains the world's fifth largest bank, with $US2 trillion in assets and operations in more than 100 countries, including Australia, where it employs 2500 people.

"It really was a must-do thing," said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors. "If they'd let Citigroup go, that would've been disastrous."

The bail-out comes as two prominent Australian companies desperately seek ways 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 an inability to access the money threatens its solvency.

And Channel Nine owner PBL Media is turning to its bankers and private equity owners for help as part of a $A445 million recapitalisation in the wake of declining revenue. The company, which has more than $A4billion in debt, said the money was a precaution in case of a dramatic fall in earnings.

Australian Prime Minister Kevin Rudd, meanwhile, opened up the possibility of the budget going into the red, saying that if there is a budget deficit, the shortfall is likely to be met from funds such as the Government's $A20 billion Building Australia Fund rather than by borrowing.

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

"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 $A11 billion Education Investment Fund, Mr Rudd said that "each year as you draw down on the funds, of course it goes to the budget bottom line".

The distinction opens the way for this year's forecast deficit of $A5.4 billion to turn into a deficit funded by some of the $A30 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 borrow to fund it.

Opposition Leader Malcolm Turnbull repeated his claim, first made in The Age a fortnight ago, that Mr Rudd was the only national leader whose responses to the global financial crisis had actually made things worse. -- With PETER MARTIN