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U.S. bailout of Citigroup


The US government’s massive bailout of Citigroup had an instant impact on the stock market. The blue chip index surged 400 points, and Citigroup's stock, which had been hammered 60 per cent last week, zoomed up 57 per cent just on Monday.

According to the market-watchers, this is an effective short-term fix and economic recovery may be the only reliable long-term fix.

“In essence what they're doing is injecting capital and liquidity into a company that's very sick, and so just like a blood transfusion, that'll keep the patient alive. But it's unclear that it fixes the problem. What we need to have is job growth that supports home prices, which will then lead towards healing in the financial sector. But that may not come for some time. The recession has to end. So the question really is, will this transfusion keep Citi alive until the recession ends? And that's an open question,” says Managing Director Economic Cycle Research Institute Lakshman Achuthan.

Analysts point out that Citigroup still has hundreds of billions of dollars of consumer and corporate debt that could turn risky as the recession takes hold. So while the US government-led rescue has given it some breathing space, a turnaround could take much longer.

“You don’t know precisely how great their losses are going to be in the future. The government is guaranteeing that it will pick up some bad debt for them, but Citigroup will still have some responsibility for that,” says senior editor at Forbes Magazine.

But despite this bailout of Citigroup, over 50,000 employees of the bank will still lose their jobs in the coming months. However, CEO Vikram Pandit and other senior managers won’t be among them for now.
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