Singapore GIC raises Citigroup stake to 11.1 per cent

Singapore GIC raises Citigroup stake to 11.1 per cent

US$6.88b in preferred shares converted to common shares

By Alvin Foo

THE Government of Singapore Investment Corporation (GIC) has increased its stake in US banking giant Citigroup from what was potentially 4 per cent to 11.1 per cent.
The increase, which makes GIC the second largest shareholder in the bank after the United States government, came after it decided last night to convert its US$6.88 billion (S$10.6 billion) investment in preferred shares of the bank to common shares.

The closely watched move followed a day of dramatic developments for the beleagured bank which began when the US government made the first move to convert up to US$25 billion of its own preferred shares to common shares, raising its stake to as much as 36 per cent.

The US government’s move was conditional on Citigroup getting other major preferred shareholders to do the same. The bank also agreed to reconstitute its board. CEO Vikram Pandit will stay on.

This precipitated investors like GIC, Saudi Arabia’s Prince Alwaleed Talal, Capital Research Global Investors and Capital World Investors into also converting their preferred shares.

The exchange of preferred shares for common shares is aimed at raising what is known as the bank’s ‘tangible common equity’ - a key capital adequacy measurement. It also saves money by cutting dividend payments on the preferred shares, estimated at US$5.5 billion a year in total.

Preferred shares come with a fixed yearly dividend and are usually convertible to common stock at a certain price.

Common shares are the shares that most retail investors buy on stock markets. They pay fluctuating dividends declared yearly by companies.

For GIC, the conversion will mean exchanging its preferred shares for ordinary shares at a much lower price of US$3.25 per share than its original investment in January last year.

The preferred shares were then convertible at US$26.35 per share. This translated roughly to a 4 per cent stake at the time, if the shares were fully converted.

The conversion will also enable GIC to pare the paper losses from its Citigroup investment from 80 per cent to about 24 per cent, or US$1.67 billion. That is based on Thursday’s closing price of US$2.46 for Citi shares.

The downside is that GIC will lose the yearly dividend of 7 per cent. It had already started to receive that dividend, estimated to be US$482 million a year.

As a normal shareholder with common shares, GIC will also take on more market risk, becoming fully exposed to movements in Citigroup’s share price, which fell over 90 per cent in the past year.

Mr Ng Kok Song, GIC’s group chief investment officer, said the conversion will boost Citigroup’s capacity to weather the severe economic downturn.

‘The plan will also enable Citigroup to exploit the earnings power of its unique business franchise when the world economy recovers,’ he added.

Analysts said this latest move could turn out to be a win-win situation for Citigroup and GIC.

Mr Wong Kok Hoi, APS Asset Management’s chief investment officer, said: ‘If Citigroup manages to turn around its operations, then its share price will rebound and GIC will also be a winner.’

It was a different story for other Citigroup shareholders, who now face massive dilution from the US government and other investors taking on additional common shares.

Citigroup shares slumped more than 36 per cent when US markets opened yesterday to US$1.56.

Source : Straits Times - 28 Feb 2009

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AIG, US govt discuss aid terms

AIG, US govt discuss aid terms

(New York/Hong Kong)

GLOOMY
AIG is looking to avoid a credit downgrade that would trigger a host of liquidity issues
THE US government may agree to finance the purchase of some American International Group (AIG) businesses and take direct stakes in others, a person familiar with the matter said on Thursday.

The wide range of options under discussion between the insurer and the government and credit rating agencies includes possible moves to cut the dividend or interest rate AIG now must pay as a condition of a massive taxpayer bailout.

AIG is looking to avoid a credit downgrade that would trigger a host of liquidity issues and further hurt its business, the source said, on condition of anonymity.

The talks come as AIG, once the world’s largest insurer by market value, expects to post a record US$60 billion quarterly loss, another source said earlier this week. That is equivalent to about US$460,000 a minute.

‘We continue to work with the US government to evaluate potential new alternatives for addressing AIG’s financial challenges,’ AIG spokesman Joe Norton said, without elaborating.

AIG has been trying to sell assets to pay back the US government after a bailout last year that swelled to about US$150 billion, but it has been difficult to find buyers and get a good price for assets.

Loans for deals remain difficult to arrange due to the credit crisis and many would-be buyers are struggling with their own problems. — Reuters

Source : Business Times - 28 Feb 2009

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PM sketches scenario of 8 per cent GDP contraction

PM sketches scenario of 8 per cent GDP contraction

By CHUANG PECK MING

PRIME Minister Lee Hsien Loong has said it again - the economy could shrink more than 5 per cent this year. And this time he said the contraction could be as sharp as 8 per cent - much more than the official forecast of -2 to -5 per cent.

‘People have asked me, ‘Can it be worse than minus 5?’ he said in a half-hour interview with business news channel CNBC. ‘Yes, it is possible, because it depends on the global situation.’

If Singapore’s exports were to fall by a third, its manufacturing output, which accounts for a quarter of gross domestic product (GDP), would also go down by a third ‘because we export nearly everything we make’, Mr Lee said.

‘And that means GDP will go down by one-twelfth, which is about 8 per cent, unless you can make up and grow some other part - construction, for example. So I think we brace ourselves for a tough year ahead.’

This is the second time in a week that PM Lee has raised the possibility of the economy shrinking more than 5 per cent.

At a Singapore Tripartism Forum dialogue last Sunday, he told an audience of 550 employers, unionists and government representatives: ‘Our GDP growth is forecast to be between minus 2 and minus 5 per cent. It could be worse if the global economy worsens, even lower than minus 5 per cent is possible.’

The International Monetary Fund last month slashed its forecast for 2009 global growth to 0.5 per cent, from a forecast of 2.2 per cent it made in November last year.

Some private-sector economists here have already started revising their growth forecasts, after the Ministry of Trade and Industry released figures on Thursday showing the economy shrank 4.2 per cent in the fourth quarter of 2008, worse than the 3.7 per cent decline estimated last month.

OCBC Bank, for example, now believes the economy will contract 4.8 per cent this year, compared with its previous forecast of a 2.8 per cent decline.

Mr Lee said that the current growth forecast of minus 2 to minus 5 per cent for 2009 - made after two revisions - is the worst since Singapore’s independence. ‘I think it is a realistic estimate because, if you look at the trade figures, all the countries in Asia now are having dramatic reductions in their trade,’ he said.

Japan is down 45 per cent, Taiwan 40 per cent plus and South Korea more than 30 per cent. Singapore’s total trade plunged 36 per cent in January.

Mr Lee also said that Singapore’s unemployment rate could hit 5 per cent this year - up from 2.3 per cent in 2008. ‘We see the retrenchment figures going up in the first quarter already,’ he said. ‘I don’t know what the latest numbers are. But the last one, which the unions mentioned, was almost 5,000 in the first quarter. So the retrenchment numbers will go up, the unemployment numbers will go up.’

The government is prepared to dig deeper into the national reserves if need be, but spending money is not the answer to Singapore’s current economic woes, Mr Lee said.

‘(It) depends on the situation. We have to see,’ he said. ‘We don’t want to spend all of our reserves. Neither is this a situation where (if) you spend money you will solve your problem. This is a global problem. We have to go through it.’

He said what the government can do is minimise the harm the downturn could do to Singapore’s economy.

‘And that’s what we have done with this (recent) Budget,’ he said. ‘We’ve had a very big Budget. And if we need to do more, we will do more. We have the resources, we can do it. But it is not a problem where spending the money will cure you.’

Source : Business Times - 28 Feb 2009

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Singapore GIC cuts loss in one fell swop

Singapore GIC cuts loss in one fell swop

Conversion of its Citigroup preferred shares into common stock will pare paper loss from US$5.5 billion to US$1.67 billion

By CONRAD TAN

THE Government of Singapore Investment Corp (GIC) will convert all its preferred shares in Citigroup into common stock to cut its losses. The swop will give it an 11.1 per cent stake in the troubled US bank, which yesterday announced a sweeping plan to boost its common equity base. The conversion will pare GIC’s paper loss on its original US$6.88 billion investment in Citi from 80 per cent or US$5.5 billion to 24 per cent, or US$1.67 billion, based on Thursday’s closing price of US$2.46 for Citi shares.

Citi says the share conversion plan has just one goal - to increase the bank’s tangible common equity
Separately, Citi said yesterday that it plans to swop up to US$52.5 billion of its preferred stock, including US$25 billion of the US$45 billion held by the US government, for ordinary shares.

Citi also recorded a massive US$10 billion charge for impairment of goodwill and other intangible assets in the fourth quarter, resulting in an additional net loss of US$9 billion for the final three months of last year.

For GIC, the decision to convert its shares appears to have been the lesser of two unpalatable choices. Citi yesterday suspended dividend payments on its preferred shares as well as common stock, which means that GIC would lose the 7 per cent annual dividend that it has been receiving if it chose not to convert its holdings.

The conversion will make GIC the second-biggest shareholder in Citi with a stake of about 11 per cent, compared to about 4 per cent at the time of its original investment. The US government will be Citi’s largest shareholder, owning 36-38 per cent of Citi’s common equity. The final stakes will depend on how many investors in the publicly held tranche of Citi’s preferred stock decide to participate in the share conversion.

One thing is certain: Existing ordinary shareholders will suffer massive dilution of more than 70 per cent. Citi shares plunged 37 per cent to US$1.55 at the start of US trading yesterday after the bank’s announcement. At that price, GIC’s unrealised loss on its Citi investment would be US$3.6 billion. The profitability of US banks ‘is likely to be impaired in the next two years’, said Ng Kok Song, GIC’s group chief investment officer in a statement.

‘GIC’s view is that with this latest move, Citigroup’s capacity to weather the severe economic downturn will be strengthened.’

Before yesterday’s announcement, the market value of the preferred shares held by GIC had already slumped 80 per cent to just US$1.376 billion since its initial investment in Citi, as mounting losses made it less likely that the bank would be able to keep up its dividend payments.

The US government, GIC and other investors that bought Citi preferred stock alongside GIC in January last year will receive common stock at a price of US$3.25 a share. Those investors, including Saudi Arabia’s Prince Al-Waleed bin Talal, have agreed to the exchange, said Citi.

At the conversion price of US$3.25, GIC will get some 2.12 billion common shares in exchange for its US$6.88 billion in preferred stock. Based on Thursday’s closing price of US$2.46 a share, GIC’s stake after conversion is worth US$5.21 billion.

That puts GIC’s unrealised loss on its original US$6.88 billion investment in Citi at US$1.67 billion after the conversion, compared to US$5.5 billion before.

Under the original terms of GIC’s investment in Citi, it would have had to pay a much higher conversion price of US$26.35 for each common share, GIC said. That would have translated into a stake of just 261.1 million shares, worth a mere US$642 million at Thursday’s closing price for Citi shares.

But the conversion also means that GIC will now bear greater risk than before, as an ordinary shareholder. It also gives up for good the 7 per cent annual dividend that it previously earned on its preferred shares.

Citi chief executive Vikram Pandit said that the conversion plan had just ‘one goal’ - to increase the bank’s tangible common equity or TCE. Converting its preferred shares into ordinary equity will boost its TCE ratio - the focus of stress tests by US regulators starting this week as a key measure of the bank’s ability to withstand further losses if the recession is worse than expected.

Ordinary shareholders are the first to suffer any losses, so common equity is seen as the highest quality of capital that a bank holds, and the size of a bank’s common equity base relative to its assets is considered the purest measure of its buffer against losses.

The hope is that by raising its TCE ratio, Citi will be able to weather the worst recession that the US has seen in decades. The plan is expected to increase its TCE as a proportion of its risk-weighted assets from less than 3 per cent now to 7.9 per cent.

Crucially, it does so without the need to inject more money from the public purse. That makes it unnecessary for the US government to seek the approval of lawmakers for more funds amid growing public fury over the use of taxpayers’ money to bail out large banks.

But the US government could still inject more capital into Citi - in the form of mandatory convertible preferred shares - if the stress tests show that the bank’s capital cushion still needs bolstering. That would mean further dilution for ordinary shareholders, including GIC, when the shares are eventually converted to common stock.

‘As a shareholder, GIC supports the initiative by Citigroup and the US government to strengthen the quality of the bank’s capital base in view of the challenging economic environment,’ GIC said in a statement.

Source : Business Times - 28 Feb 2009

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Contractors found touting for business in Punggol housing estates

Contractors found touting for business in Punggol housing estates

By Liang Kaixin and Cheryl Lim,

SINGAPORE : It may be a property buyers’ market now, but the poor economy has brought woes to another segment of the housing industry.

The business slump is turning contractors into casualties of the recession, forcing some to tout for business.

Residents in Punggol have recently become the targets of touts. Several callers to Channel NewsAsia’s news hotline said they had been approached by many contractors seeking to do renovation work on their homes.

Checks with these contractors revealed that they have resorted to such tactics because of the bad economy.

The Singapore Renovation, Contractors and Materials Suppliers Association said the renovation business is undergoing tough times.

Many contractors said new home owners are now holding off plans to renovate. Those who do plan to have work done are asking for lower prices.

The number of customers defaulting on their payments has also risen in recent months.

On top of that, the Housing and Development Board’s (HDB) Build-to-Order scheme, which offers flat with standard or premium finishes, has drastically reduced the need for contractors.

“Many of our members say they haven’t had any jobs since the start of 2009. If the situation continues, nearly half the contractors in Singapore might close down,” said Lim Ah Bah, honorary advisor of the Singapore Renovation, Contractors and Materials Suppliers Association.

Under the HDB’s Registered Renovation Contractors’ Scheme, registered contractors are not allowed to tout or solicit for business in HDB estates. Those found guilty of such offences can be fined S$500 and given demerit points. - CNA /ls

Source : Channel NewsAsia - 27 Feb 2009

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AIG execs in China to push sale of AIA

AIG execs in China to push sale of AIA

(BEIJING) US insurer American International Group (AIG) has sent senior executives to China to discuss the sale of its Hong Kong-based AIA unit, a top official with China’s insurance regulator said yesterday.

But Chinese firms’ potential bids for the embattled US insurer’s Asian life insurance unit would be solely a corporate decision, said Li Kemu, vice-chairman of the China Insurance Regulatory Commission.

Potential bidders face a deadline today to submit bids for the roughly US$20 billion unit, American International Assurance Company Ltd. Reuters reported on Tuesday that AIG was willing to give up control of the prized Asian division.

Asked whether China Life or Bank of China might bid for the American insurer’s assets, Mr Li said that Chinese companies were holding discussions with AIG about a possible deal.

‘The discussion is still going on, and we are paying high attention to it,’ he said.

He added that the regulatory commission had a favourable view towards the AIA assets in China and Hong Kong.

‘We think AIA is a good company; at least its assets in China and Hong Kong are pretty good,’ he added.

‘As a regulator, we care more about risks, or whether AIA’s business in China is stable,’ Mr Li told reporters.

Plans to sell up to 49 per cent of AIA, considered AIG’s crown jewel in Asia, were put in place last fall shortly after the US government saved AIG from bankruptcy with a rescue that has since ballooned to around US$150 billion.

On Wednesday, people close to the matter told Reuters that UK insurer Prudential plc, Canadian insurer Manulife and Singapore sovereign wealth fund Temasek Holdings were considering offers, although no formal bids had been submitted.

Hopes for the auction were fading, as economic conditions have worsened since the sale began, causing several major suitors to drop out.

AIA has more than two million policies in force according to its website, with branches and affiliates in most major countries throughout Asia outside of Japan. — Reuters

Source : Business Times - 27 Feb 2009

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Singapore HDB launches BTO project in Woodlands

Singapore HDB launches BTO project in Woodlands

THE Housing & Development Board (HDB) has launched its first 2009 build-to-order (BTO) project at Woodlands.

Champions Court, at the junction of Champions Way and Woodlands Avenue 1, has 815 units, comprising 224 studio apartments, 182 three-room, 224 four-room and 185 five-room flats.

About 50 per cent of the units are studio apartments and three-room flats, in line with the government’s commitment to provide a greater supply of smaller dwellings this year, HDB said.

The studio apartments will have elderly-friendly features such as grab bars and non-slip flooring.

Three-room flats cost from $118,000 to $142,000, four-room flats from $194,000 to $227,000 and five-room flats from $247,000 to $296,000.

The units are being offered at less than equivalent market prices so they are affordable for first-time buyers, HDB said.

Eugene Lim, associate director for ERA Asia-Pacific, said: ‘HDB seems to have deliberately priced the flats well below resale flats in the area.’

Likewise, PropNex chief executive Mohamed Ismail said that based on HDB’s Q4 2008 figures, flats at Champions Court are priced 27 to 40 per cent lower than resale flats in the area.

The project is expected to be well received and could be about five times over-subscribed, Mr Ismail said.

Both analysts also reckon the location will be a draw.

‘Woodlands is a mature estate,’ said Mr Ismail. ‘Besides being within walking distance of Woodlands Regional Centre and the MRT station, Champions Court is within 1km of a good number of schools. So I expect it to be quite popular

Source : Business Times - 27 Feb 2009

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Singapore is tops in industrial competitiveness

Singapore is tops in industrial competitiveness

Ireland and Japan came in second and third, according to a UN survey

By OH BOON PING

SINGAPORE came out top in terms of industrial competitiveness, a United Nations (UN) survey has found.

The 2009 Industrial Development Report, which ranked 122 markets, said that the city-state took pole position in 2005 and 2000, based on an index that assesses national industrial performance across a five-year period.

Ireland and Japan came in second and third, while Switzerland, Sweden and Germany followed behind.

Developed by the UN Industrial Development Organisation (UNIDO), the competitive industrial performance (CIP) index considers factors such as industrial capacity, manufactured export capacity, industrialisation intensity and export quality.

In the report, UNIDO pointed out that the United States was the only mature industrial power that saw a deterioration in its relative position. This resulted from the improved performance of South Korea and Taiwan.

Among the top 60 countries, the largest improvements were seen in Qatar (up 23 places), Cyprus (18), Iceland (13) and Slovenia (10).

Among the bottom 60, several African countries, including Mozambique, Senegal and Cote d’Ivoire, improved their rankings considerably - by 21, 18 and 13 places, respectively.

Manufactured exports in those three countries grew much faster than manufacturing value added (MVA), while the share of primary exports in total exports declined sharply.

East Asia leads the developing world in the CIP index, where the four mature ‘tigers’ continue to dominate the rankings.

However, Hong Kong has dropped in industrial competitiveness, while China continues its impressive performance and is in 26th position in the 2005 ranking.

Sub-Saharan Africa lagged behind all other regions. Most of the region’s countries cluster at the bottom of the CIP index.

Latin America continued to lose ground to East Asia. The best three performers in the region - Mexico, Costa Rica and Brazil - lost several positions in the rankings.

South Asia does not perform well on the CIP measure. India leads the CIP in the region but lost three positions in the global rankings, despite its strong information technology and electronics sectors.

In the Middle East and North Africa, Tunisia and Morocco continued to improve in industrial competitiveness.

They have emerged as small dynamic economies and are able to compete in global markets not only in basic manufacturing, but also in sophisticated products.

Source : Business Times - 27 Feb 2009

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Singapore GDP growth slowed to 1.1% last year

Singapore GDP growth slowed to 1.1% last year

Manufacturing, services hard hit; construction sector only bright spot

By Fiona Chan

THE verdict is finally in.
Singapore’s economy grew a dismal 1.1 per cent last year, as the worldwide recession dealt severe blows to its key manufacturing and services sectors.

Both shrank in the fourth quarter - services for the first time since 2001 - and pushed the economy into the red with a worse-than-expected 4.2 per cent contraction in the quarter.

The final figures, released by the Ministry of Trade and Industry (MTI) yesterday, capped a tumultuous 12 months that saw the official growth estimate for 2008 being revised seven times. Just last month, MTI had estimated that the economy grew 1.2 per cent last year. At its most optimistic, in November 2007, MTI expected economic expansion of between 4.5 per cent and 6.5 per cent last year.

This brand of economic uncertainty looks set to continue well into this year. MTI’s official forecast is for the economy to shrink between 2 per cent and 5 per cent, although Prime Minister Lee Hsien Loong recently hinted worse might be in store.

While economists largely stood at the brighter end of the spectrum last month, many of them have since downgraded their forecast for the year’s growth to be nearer to the worst-case scenario.

DBS Bank and OCBC Bank now think the economy will shrink 4.8 per cent while Credit Suisse puts it at 5 per cent.

‘It is hard to envisage a recovery scenario earlier than late 2009,’ said OCBC economist Selena Ling.

There is ‘no light at the end of the tunnel’ as yet, with regard to the financial sector returning to normal and economic growth in the United States, Eurozone, Japan and China stabilising.

DBS economist Irvin Seah highlighted three key risks this year: The US government’s restructuring of its ailing banking sector, the slowdown of the Chinese economy and the uncertainties around eastern European economies, which will affect Eurozone growth. ‘All signs seem to be pointing in the direction’ of the economy shrinking near to the Government’s worst-case scenario, he said.

The jobless rate for last year was 2.3 per cent, up from 2.1 per cent previously. 227,200 jobs were created last year, fewer than the 234,900 seen in 2007.

Manufacturing and services are likely to stay in the red for at least the first half of the year, economists predict.

The manufacturing sector, which makes up about a quarter of Singapore’s total output, shrank 10.7 per cent in the fourth quarter and 4.1 per cent over the full year last year.

But it was the services industries that led the decline. This sector, which makes up three-fifth of the economy, shrank by 1.3 per cent in the fourth quarter, much more than the 0.1 per cent contraction MTI had estimated.

For the whole of last year, services grew only 4.7 per cent, less than the 5 per cent growth previously estimated and the strong 8.1 per cent growth in 2007.

Construction, the third pillar of the economy but by far the smallest, was the only sector that did better than predicted. It grew a strong 20.3 per cent last year, up from the 17.9 per cent that was estimated last month and even outperforming 2007’s growth of 18.2 per cent.

Source : Straits Times - 27 Feb 2009

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Obama’s first budget sees $2.7 trillion deficit

Obama’s first budget sees $2.7 trillion deficit

US president in for tough fight in Congress over plan to heal economy, revamp health care

Saying there are some hard choices ahead, President Obama yesterday said his first budget is ‘an honest accounting of where we are and where we intend to go’. — PHOTO: REUTERS

WASHINGTON: President Barack Obama sent his first budget proposal to the US Congress yesterday, bracing himself for fights over how best to heal the economy, create a new health care system and still cut out-of-control deficits.
‘This budget is an honest accounting of where we are and where we intend to go,’ he said before unveiling a summary that forecasts an eye-popping US$1.75 trillion (S$2.7 trillion) deficit for 2009, followed by US$1.17 trillion in 2010. ‘There are some hard choices that lie ahead.’

The soaring US$1.75 trillion deficit is the biggest since World War II.

That and the proposed US$3.55 trillion spending plan for the 2010 fiscal year that begins on Oct 1 sent US Treasury bond prices lower and yields up to three-week highs yesterday.

What was delivered to Congress yesterday was a summary of the President’s budget request. The complete document is to follow in April.

The ambitious plan seeks to halve the deficit over the next four years, with higher taxes on richer Americans and a planned drawdown of US troops from Iraq expected to help rein in the shortfall.

Besides tackling a deficit swollen by the US$787 billion stimulus package, the administration is also pushing for progress on the domestic agenda outlined during Mr Obama’s presidential campaign. This includes key changes to environmental policies and a major expansion of health coverage.

Mr Obama can take some comfort in knowing that his fellow Democrats in Congress - who control both chambers - are generally supportive.

Even so, experts think that over the next several weeks, he could be in for his first real fight with Congress, with particularly fierce battles waged over the huge deficit and tax policy.

‘It won’t be smooth sailing,’ predicted Ms Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, which wants tough controls to bring down deficit spending.

The projected spending would include some US$200 billion to fight wars in Iraq and Afghanistan over the next 18 months, and a huge US$634 billion, 10-year fund to pay for health care reforms.

Mr Obama has asked for US$250 billion to be set aside if needed to bail out the financial industry.

He argues that a spending binge is crucial to head off an bigger economic disaster. But it has riled Republicans, who accuse him of ramming through Democratic priorities.

Taxes are another red flag for Republicans.

Mr Obama is proposing the first tax increase on high-income earners in 16 years to help pay for sweeping health care reforms, asking Congress to cap the tax deductions for affluent Americans.

The move would reverse a course set by former President George W. Bush of lowering taxes for the rich, the cornerstone of his economic programme.

‘It’s a clear repudiation of Bush’s policy,’ said Mr Peter Morici, an economist at the University of Maryland in College Park. ‘It’s more Obama Robin Hood.’

The President is also seeking to raise at least US$31.5 billion over 10 years by raising royalty fees and imposing new taxes on oil companies.

His spending plan is not only built on the assumption that lawmakers can resolve some hugely contentious issues, but also relies on a few well- worn budget tricks.

His proposed ‘downpayment’ on an expansion of health care coverage is a case in point. It identifies US$634 billion in tax increases and spending cuts to cover the cost of part of the plan, but does not say how the administration hopes to raise the rest of the money - hundreds of billions of dollars.

His budget is also dependent on a big infusion of cash from a politically controversial cap-and-trade system, which would force companies to buy allowances to exceed pollution limits. Even if that plan is approved, some lawmakers have other ideas about how to spend the money.

Democrats in Congress have defended the budget proposal. ‘It’s a bold plan. This is big strokes. This is not a budget about little things,’ said congressman Chris Van Hollen.

But some experts fear that if the record pace of government borrowing to finance debt continues, it could hit financial markets by raising interest rates for borrowers, which would slow economic growth.

Budget highlights
Deficit: 2009 deficit projected at US$1.75 trillion (S$2.7 trillion), or 12.3 per cent of the GDP, the largest since World War II.

Taxes: Some of the Bush-era tax cuts to expire on schedule for those making more than US$250,000 a year. Highest US income tax bracket to rise from 35 per cent to over 39 per cent.

Health care: A 10-year, US$634 billion reserve fund for health-care reforms. Half the sum to come from new revenue, the rest from cost-savings.

Climate change: Hundreds of billions of dollars in revenue, starting in 2012 and spread out over many years, from a greenhouse gas emissions trading system.

Ailing banks: A safeguard option of US$250 billion to rescue the financial industry. This is on top of the US$700 billion that Congress has already authorised.

Military: US$130 billion for Iraq and Afghanistan wars in 2010.

REUTERS, BLOOMBERG, WASHINGTON POST

Source : Straits Times - 27 Feb 2009

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