The U.S. government could end up owning as much as 40 percent of ailing financial giant Citigroup, according to media reports, underlining the depth of the crisis gripping the world economy.
The Wall Street Journal said Citigroup had proposed converting into common equity a big chunk of the preferred shares the government bought last year in an attempt to stabilize what used to be America's most valuable bank.
While Citi executives hope to limit the government's stake to closer to 25 percent, it could end up as high as 40 percent, the paper reported on its website. The preferred shares now amount to a 7.8 percent stake in the company.
The Financial Times said Citi's aim was to keep the government's stake to no more than 40 percent, or at least below the 50 percent mark that would spell nationalization -- something that is anathema to many U.S. politicians, executives and voters.
This gives you the sense that authorities' worries have intensified that problems relating to the U.S. economy may potentially spill over to the rest of the world, said Sailesh Jha, senior regional economist at Barclays Capital, in Singapore.
At a summit in Berlin on Sunday, European Union leaders backed a doubling of funds for the International Monetary Fund, whose finances have been stretched by bailouts of governments in Eastern Europe and elsewhere.
We're dealing with an extraordinary international crisis the likes of which we have not seen for decades, both as regards financial markets and the global economy, German Chancellor Angela Merkel said.
Latvia's government collapsed on Friday, a day after Germany pledged to support Eastern Europe, where banking strains are mounting.
The currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions across the region who have borrowed in foreign currencies such as the euro.
There are risks that you will get continued government involvement in the financial sector in Europe as well, Jha at Barclays Capital said.
HOW BIG'S THE BILL?
Citi's talks with government officials over the weekend followed a slump in its shares on Friday as investors feared the bank would be felled by loan losses as the recession, which began in the housing sector, rages unchecked through the rest of the economy.
Asian stocks rose and the dollar fell in response to the reports, while U.S. equity futures rose 1 percent, as traders expressed relief that the scale of the problems dogging Citi are at least becoming clearer.
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.
But some other market-watchers suspected the rally would be short-lived until investors know for sure how much the crisis will cost taxpayers and shareholders.
It would be best if a sort of full-fledged plan could be announced in detail in one go. Then the market could fall, the air would be cleared, and it could start rising again, said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.
ASIA'S TALES OF WOE
The reports of Citi's woes coincided with more grim news from across Asia.
The Thai economy shrank 6.1 percent between the third and fourth quarters, while Singapore's prime minister said the export-dependent city state's economy could contract by more than 5 percent this year.
Toyota Motor Co, the world's largest automaker, plans to cut global production at the parent company level by 20 percent this year to 6.5 million units as demand plunges, the Nikkei business daily reported.
And SFCG Co Ltd, a Japanese lender to smaller companies, failed with debts of $3.6 billion, making it the country's biggest bankruptcy filing this year measured by the amount of debt.
Even though his young administration is still busy fighting fires, U.S. President Barack Obama is also looking ahead to the austerity policies that will be needed to repay the trillions of dollars Washington is pumping into the financial, housing and auto sectors.
Obama, who chairs a fiscal responsibility summit on Monday, is expected to unveil a plan to halve the budget deficit by 2013 with a mix of tax increases on wealthier Americans and spending cuts. Private economists project a deficit of $1.5 trillion this year.
We can't generate sustained growth without getting our deficits under control, Obama said in his weekly radio address on Saturday.
Obama releases his first budget on Thursday, while Federal Reserve Chairman Ben Bernanke testifies before the U.S. Congress from Tuesday.
Analysts expect him to offer assurances that the central bank, which has slashed interest rates to near zero and flooded markets with dollars, still has the ammunition to pull the economy out of its worst downturn since the 1980s.
(Writing by Alan Wheatley; Editing by Ken Wills)