ECB says crisis "bearable"; Citi strikes deal

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LONDON, Nov 27 (Reuters) European central bankers on Tuesday played down the damage inflicted by the global credit crunch while Citigroup struck a .5 billion deal with the Gulf Arab emirate of Abu Dhabi to get fresh capital.

Citi is paying a high price for the funding by selling mandatory convertible securities to Abu Dhabi that pay fixed interest of 11 percent. The average yield on U.S. junk bonds is 9.4 percent, according to Merrill Lynch data.

Meanwhile British bank Barclays, whose shares have been hit by speculation of funding problems due to the squeeze, reassured investors it is on track to meet analysts' forecasts of earnings growth of 4 percent this year.

Addressing a forum in Tokyo, European Central Bank policymaker Christian Noyer quoted estimates of around 0 billion for the direct cost of defaults on U.S. mortgages -- the problem that brought a long-running global credit boom to an abrupt halt in August.

''It is significant but bearable, especially starting from a point of very favourable economic conditions and high profitability,'' Noyer said of the default cost.

However, banks are hoarding cash, fearing a crisis in short-term funding over the year-end, and relying heavily on funding based on Libor interbank deposit rates.

These rose further on Tuesday, despite pledges from both the ECB and the U.S. Federal Reserve on Monday to keep money markets moving through the year end by promising to lend extra funds.

INTERBANK RATES SURGE Noyer's fellow ECB policymaker Nicholas Garganas, who heads the Greek central bank, told Reuters the impact of the crisis on economic growth had so far been more potential than actual.

''I'm not saying that there has not been any effect on the real economy, but so far as we can discern it, it has not been all that important,'' he said in an interview in Athens.

But he added: ''It is clear that it has affected the downward risks to growth considerably.'' The risk to growth is that banks are making it harder and more expensive for companies and consumers to borrow to invest and spend.

Banks have run scared of exposure to high-risk debt that had been widely repackaged into increasing complex structures during the boom years and are already limiting the terms under which they will lend to each other.

They are relying increasingly on the Libor market, where three-month euro rates rose to 4.72 percent on Tuesday, unusually far above the ECB's 4.0 percent policy rate.

Three-month sterling Libor rates rose to 6.56063 percent the highest since mid-September and also distant from the Bank of England's 5.75 percent base rate, while three-month dollar Libor rates rose to 5.06188 percent, widening the gap with the Fed's policy target rate of 4.5 percent.

CITIGROUP The Citigroup deal will deliver a 4.9 percent stake in the banking group to the 0 billion Abu Dhabi Investment Authority, the world's largest sovereign wealth fund.

The capital injection will shore up Citi's balance sheet, which has been hurt by some .8 billion of writedowns and losses in the third quarter, with potential for another billion in the fourth quarter.

A person familiar with the matter said while the interest Citi will pay on the deal may seem steep, the coupon rate is similar to the dividend rate on Citi's shares after accounting for the fact that 60 percent of that coupon is tax-deductible.

REUTERS BJR AS1937

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