US economy suffers fresh slump

News comes as US government set to take bigger stake in troubled bank Citigroup.

    The government's actions over Citibank give
    it more control over the firm [GALLO/GETTY]

    The US stock market fell sharply following the news with the Dow Jones Industrial Average slumping 119.1 points to 1.7 per cent, to 7,062.93 at the end of the day's trading.

    Spending slumps

    The slump in the fourth financial quarter of 2008 followed a 0.5 per cent decline in the third; the first back-to-back quarterly contractions since the US's 1990-1991 recession.

    US exports of goods and services also plunged 23.6 per cent in the October to December period after an increase of 3.0 per cent in the third quarter.

    Consumer spending, which accounts for two-thirds of US economic activity, dropped 4.3 per cent despite deeply discounted sales during the Christmas holiday season, following on from a fall of 3.8 per cent in the third quarter.

    The US government's latest move to aid Citigroup marks the third bailout bid for the ailing bank in the past five months, and will dramatically dilute existing stockholders stakes to as low as 26 per cent as the government seeks to convert up to $25 billion in preferred shares for common stock.

    Nationalisation concerns

    Analyst said that while the package did not immediately inject more money into the bank, the nation's third-largest, it gave executives more time to sell unwanted assets and restore investor confidence.

    It also gives the government far greater influence on Citigroup's operations, although stops short of outright nationalisation.

    Obama's proposed $250bn 2010 budget
    includes $250bn extra bailout money[AFP]
    The firm has already recieved $45bn from the US government in bailout money.

    Vikram Pandit, the bank's chief executive officer, said senior executives "completely remain in charge" of the bank's day-to-day operations.

    "This capital should take confidence issues off the table, even in a stressed environment," he said.

    Citigroup, Bank of America and other large US banks are to undergo "stress tests" by US regulators to assess their ability to cope with a severe recession, and whether they might need more capital, the US government announced earlier this week.

    Analysts say the US financial crisis, sparked by the US subprime mortgage crisis, ailing banks and global market turmoil is the worst since the Great Depression of the 1930s.

    Barack Obama, the US president, on Thursday revealed the outline of his economic budget for 2010, including an additional $250bn for further possible bank bailouts.

    SOURCE: Agencies


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