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US and European banks cede control to governments

  Crippled banks in Europe and the United States sank deeper into state control on Friday as governments fed them more cash to stabilize lending and kickstart faltering economies worldwide.

The US government was set to unveil a deal later on Friday that will boost its stake in Citigroup through conversion of $25 billion in preferred shares, according to a person familiar with the matter.

And global development banks launched a two-year plan to lend up to €25 billion ($31.6 billion) to shore up banks and businesses in crisis-hit eastern and central Europe.

The Citi initiative could leave US taxpayers with as much as 40% of a bank that once dominated the country’s financial services industry. It will come a day after Britain agreed to insure £500 billion ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland to 95%. On Friday, a second major British institution, Lloyds Banking Group, prepared to tap the insurance scheme.

Together with the $1.75 trillion budget deficit forecast by US President Barack Obama, the deals highlight the lengths to which governments are prepared to go to rescue the financial industry and the broader economy.

“This is likely to be positive for the market,” Hideyuki Ishiguro at Okasan Securities in Tokyo said. “While there were worries about nationalisation, that’s mostly on the part of the shareholders. For ordinary Americans, it’s important to make the financial system more stable.”

Fannie Mae, the government-controlled company seen by the US administration as a key conduit to stabilize the housing market, reported a $25.2 billion Q4 loss, forcing it to ask for $15.2 billion from the US Treasury.

STOCKS WEAK; JAPAN, INDIA STAGGER

World stock markets slipped towards six-year lows they registered earlier in the week and the dollar hit a three-month high against major currencies as concerns intensified about profits at pharmaceutical companies and banks.

Data on Friday showed Japanese factory output fell a record 10% in January, in line with market expectations, dragging down the number of new jobs on offer as well as spending by households.

India’s economy slowed more than expected from October to December, with annual growth falling to 5.3% from 7.6% in the previous quarter.

China gave a mixed picture on its economy’s outlook for the coming year, with one official saying he was confident the government could engineer 8% growth, but another saying growth would not pick up until at least the Q2.

“I don’t think China’s economy will bottom out in the Q1. That means China’s economy will be further weighed down by the worsening external environment,” Vice Commerce Minister Fu Ziying told a forum.

Gloom piled up in the United States as well in data released on Thursday. The number of US workers filing for jobless benefits jumped to a record high of 5.1 million in mid-February, while US durable goods orders hit a six-year low in January.

And the South Korean won fell to an 11-year low against the dollar as analysts said risk aversion fuelled by the fragility of global financial system would impede any recovery.

China gave a mixed picture on its economy’s outlook for the coming year, with one official saying he was confident the government could engineer 8% growth, but another saying growth would not pick up until at least the Q2.

“I don’t think China’s economy will bottom out in the Q1. That means China’s economy will be further weighed down by the worsening external environment,” Vice Commerce Minister Fu Ziying told a forum.

Gloom piled up in the United States as well in data released on Thursday. The number of US workers filing for jobless benefits jumped to a record high of 5.1 million in mid-February, while US durable goods orders hit a six-year low in January.

Carmaker General Motors posted a 2008 loss of nearly $31 billion and said auditors were likely to cast doubt on its viability. (Reuters)