The Irish Independent reports that losses in pension funds are so large that most of them are now insolvent, pension fund managers told the minister with responsibility for pensions, Mary Hanafin, last night.

The Irish Association of Pension Funds (IAPF) told the minister there was an urgent need for an examinership process for pension funds.

The Minister for Social and Family Affairs was also told there was a need for later retirement, a State annuity scheme and a bar on companies walking away from pension fund responsibility when there was a deficit.

IAPF chairman Patrick Burke said that in the last 20 months Irish pension funds had suffered the largest losses ever recorded, with deficits of €30bn.

"These losses have left most defined benefit schemes in circumstances of very serious insolvency and many at the edge of an abyss with little or no assets to pay the liabilities due to current and former employees who have yet to retire," he told the annual dinner of the association.

Urgent action was needed to protect the benefits of members of pension schemes, he said. But the current legislative framework was utterly deficient, he told Minister Hanafin.

"On the legislative front, much more remains to be done from the critical perspective of protecting members and the sustainability of defined benefit provision in the private sector," Mr Burke added.

The IAPF, along with the Society of Actuaries, have submitted a number of proposals to rescue defined benefit pensions, where employers take on the investment risk and promise a set level of pension.

The two bodies said there should be a change to benefits given out as part of defined benefit schemes.

Examples of this include people drawing down their pension at 67 rather than 65, or getting a reduced pension from 65 until some later date.

Proposals

Other proposals include a formal employer covenant which would force employers to honour promises made to pay certain levels of benefits.

Minister Hanafin was also asked to ensure that those paying into a pension scheme were treated the same as pensions drawing from the scheme in a wind-up situation.

At the moment existing pensioners have first call on the assets of the scheme if it is closed down, which can mean a 64-year-old gets nothing.

The State should set up a scheme to provide annuities as this could be done up to 30pc cheaper than commercial operations, the IAPF said. Mr Burke said the package of proposals was akin to an examinership process for pension schemes.

"The situation is deteriorating week by week," he said.

"Hundreds of schemes are facing the possibility of collapse and in the absence of change the pensions of tens of thousands of employees may be lost or drastically reduced."

The Irish Independent also reports that management at embattled Shannon Company Element Six (E6) are expected to meet with Tanaiste Mary Coughlan today in an effort to secure assistance and save jobs at the plant.

The diamond manufacture announced last December that it needed to cut its 620 strong workforce by 150, and this week confirmed to workers that it will introduce short-time from Monday next, which will see staff lose as much of 50pc of their wages.

The company, formerly De Beers, is expected to meet with the enterprise minister who will be in Shannon today to confirm "a significant investment by Intel Shannon supported by Shannon Development." It is expected that E6 management, who requested the meeting, will seek financial assistance from Government for the purposes of retraining and up-skilling staff.

But there were angry scenes at a meeting earlier this month when management told over 400 staff that a new week on/week off roster would commence the following week.

And last Friday 150 workers staged a sit-in at the company canteen, claiming that the management is dealing with the current difficulties in an unfair manner. Workers called for members of management to "take the hits" and suffer cuts like them.

The 150 voluntary redundancies offered by E6 in December have been taken up, and those workers have now left the company.

Meanwhile, cable operator Chorus NTL's parent company is to create 25 new jobs in Carlow town, thanks to a €3m investment in infrastructure.

The jobs were announced yesterday by Ms Coughlan at the offices of UPC's Carlow partner, Integrated Communications Limited (ICL).

According to UPC, its new infrastructural investment programme is enabling "true platform competition" and delivering "some of the fastest broadband speeds in Ireland", passing on savings to consumers and businesses.

The new jobs will include cable technicians, civil engineers and project planners.

The Irish Times reports that former Taoiseach Garret FitzGerald has called for cross-party agreement on the introduction of an emergency mini-budget “as soon as possible” to bring in extra revenue, particularly by increasing income taxes for middle-income earners and imposing a property tax.

“We need a budget that will bring in additional tax revenue; we need an early, interim budget,” he said.

In an interview on RTÉ Radio One’s Morning Ireland, Dr FitzGerald said the Government needed the support of the Opposition to get the “courage” needed to increase tax revenues.

“And the Government has begun to recognise the need for more tax revenue.

“They denied that up to the end of December. In January the Minister for Finance began to face up to it. Then about 10 days ago the Taoiseach, in his address to the Engineers’ Association, also came round to recognising that.

“But no action has been taken on it; they’re still talking of leaving it over until the Commission on Taxation reports in the autumn: no sense of urgency.”

He said the Opposition was very careful to say nothing about tax as “they want to avoid the issue”.

Later yesterday, Fine Gael leader Enda Kenny issued a statement in which he called for a new budget to raise taxes.

Dr FitzGerald said the two sides had to get together to agree on the need for a budget and the requirement for substantial tax increases to replace lost revenue.

“You cannot run the country if your revenue disappears and you don’t replace it.”

Asked if he wanted an immediate mini-budget to be brought in, he replied: “Yes, as soon as possible. It may take a few weeks to put it together but certainly within a month or so we should have a mini-budget, and that should be supported by the Opposition.”

Asked if he was saying that the Opposition parties should join forces with the Government to form a government of national unity, the former taoiseach said: “No, I would avoid that as long as possible, if it is possible to avoid it, because it is very important that a government should face an opposition, a critical opposition, and many of the criticisms and suggestions the Opposition have made here have been very constructive and useful.

“To have no opposition would, I think, be a great mistake at this stage, if we could avoid it.

“So what we need is agreement on taxation between the Government and Opposition and the Opposition, whoever they would be, would be continuing to make criticisms and suggestions on other issues. But the Government clearly seems to be afraid of doing anything about the need for tax revenue, though they have made it publicly clear they recognise the need for it.

“And the Opposition are not prepared to mention it. In the meantime the country is drifting on in an impossible situation with a huge gap in borrowing which is, in fact, growing all the time and getting more and more out of control.”

Asked if what he was suggesting was a 2009 version of the Tallaght Strategy in which then Fine Gael leader Alan Dukes decided not to oppose necessary cuts in government spending, Dr FitzGerald replied: “We’re talking about a budget, an interim budget to be brought in as we did after we came into government in 1981. I’m not sure we got much support for that at the time. In this case you would need to have the support of the Opposition.

“The Government clearly are reluctant to get into this before the local and European elections – into the tax issue – in the absence of support from the Opposition.

“The Opposition are prepared to avoid this subject till they get through the election. Everything is to be dominated by elections; what should be dominating today should be saving the country.”

The Irish Times also reports that a political consensus is developing between Government and Opposition about the need for a new budget to raise extra tax this year to deal with the crisis in the public finances.

Minister for Finance Brian Lenihan told a Dáil committee yesterday that taxes would have to be increased, but he did not specify any timescale.

Fine Gael leader Enda Kenny and Labour leader Eamon Gilmore both called on the Government yesterday to bring in a new budget this year.

Last night, Government sources indicated that if there was a prospect of all-party agreement on the need for a budget, such a move would be given careful consideration.

The sources emphasised, however, that any new tax changes this year would have to be designed to protect jobs and competitiveness.

Writing in today’s Irish Times , Fine Gael leader Enda Kenny said his party was prepared to look at budget options for this year such as increasing the current 41 per cent top rate of income tax, examining the scope for a new top rate of tax for those on very high incomes and introducing a carbon levy of €25 per tonne. He also suggested that stamp duty might be abolished and replaced with capital gains tax on the sale of houses of the super rich.

Infrastructure projects such as the Dublin metro would be deferred and Fine Gael would stick with its proposals to control public sector pay, with a two-year freeze on increments and bonuses as well as pay cuts.

Mr Kenny also proposed cutting the number of junior Ministers and the number of Dáil committees in addition to the staff in Ministers’ press and constituency offices.

Mr Kenny said the new budget should be wide-ranging and comprehensive in its scope, and not simply rely on the easy targets for short-term cash-raising. “The international markets need to see that there is a Government with a plan, one that is fair and one that is realistic about getting Ireland out of the mess it is currently in,” he said.

In the Dáil, Mr Gilmore also called for an early budget. “The Labour Party stands ready and willing to engage with the Government if the Government intends to introduce a new budget,” he added.

Later in a speech in Limerick, he repeated his call for a national recovery plan involving the whole of Irish society and not just the social partners. “In the Dáil on a number of occasions, I have specifically invited the Taoiseach to bring forward proposals to deal with the jobs haemorrhage which we could support.

“The response from the Taoiseach was a deafening silence,” he said.

Mr Gilmore said the Government had repeatedly spurned offers of constructive engagement from the Opposition. “In the 10 months since he was elected, the Taoiseach has never held a conversation with me on the economic situation, other than across the floor of the Dáil,” he said.

Separately, German chancellor Angela Merkel indicated that Germany would consider assisting Ireland and other euro-zone members in financial difficulty, but only if they made clear the true state of their banks’ finances at Sunday’s EU summit. “We have shown solidarity and that will remain. We should use Sunday’s summit for member states affected to give an honest report of their situation,” she said.

“We will have to discuss the situation in each individual country. It all depends on whether we are able to speak openly and honestly about the situation, because there are a lot of rumours flying around.”

The president of the European Central Bank, Jean-Claude Trichet, said in Dublin yesterday that “hard decisions” would have to be taken to overcome the severe challenges facing the Irish economy. An opinion poll conducted by Millward Brown IMS for today’s Irish Independent shows Fine Gael on 30 per cent (up three points since the last election), Fianna Fáil 25 per cent (down 17 points), Labour on 22 per cent (up 12 points), Sinn Féin on 7 per cent (no change) and the Green Party on 5 per cent (no change), while Others were on 11 per cent (up 2 points).

The Irish Examiner reports that Europe's top banker moved to restore Ireland’s battered financial reputation last night as he expressed strong confidence in the country’s recovery.

European Central Bank president Jean-Claude Trichet rounded on speculation in some quarters that Ireland may default on its national debt burden, dismissing such claims as "absurd".

The boost came as Finance Minister Brian Lenihan signalled taxpayers could foot the bill for a multi-billion euro "toxic land bank" to ease pressure on debt-laden financial institutions.

Mr Trichet, in Dublin to address the Institute of International and European Affairs, said while Ireland faced "very challenging times" the Government was "acting resolutely to address the situation".

He was "optimistic" about Ireland and predicted the country will emerge strongly from the recession, but warned pay cuts may be needed to restore competitiveness.

Floating the idea of "sequestering" bad property portfolios from banks, Mr Lenihan warned Ireland’s financial debt exposure was heavily weighted towards construction.

"I believe that the Irish impaired assets are, by and large, related to property. If there was some way of sequestering them, or putting them in a separate place, it might be possible to create a property company which wouldn’t operate as a bank but which could be capitalised and be an attractive investment in due course," he told the Oireachtas finance committee.

Labour’s finance spokeswoman Joan Burton insisted such a "toxic estate agency" should not be used to "give developers an easy ride at taxpayers’ expense".

The minister defended the controversial appointment of internal candidate Richie Boucher to be the head of Bank of Ireland, but came under heavy opposition for suggesting outside applicants may have been put off over fears that pay would not be high enough due to control by a government committee.

The Financial Times reports that Sir Fred Goodwin’s pension arrangements were at the centre of a war of words on Thursday night as the former chief executive of Royal Bank of Scotland traded allegations over the terms of his departure from the ailing bank with Lord Myners, the City minister.

The two men exchanged terse letters in public after it emerged that Sir Fred, who was forced out of RBS last October without a payoff, had started collecting a £693,000-a-year pension.

Gordon Brown, the prime minister, on Thursday demanded action on the issue, arguing that the pension payment for Sir Fred could not be justified. However, in a letter to Lord Myners, Sir Fred said he was not giving up the pension and alleged that the minister had been involved in discussions with members of the RBS board about his pension arrangements when he was negotiating his departure.

Last night Lord Myners fired back. In a letter to Sir Fred he described the decision as ”unfortunate and unacceptable”. He also claimed to have only recently become aware that the decision to allow Sir Fred to claim a pension was discretionary rather than a contractual arrangement. ”It was only last week that the Government became aware that the decision of the previous Board of RBS may have been a discretionary choice,” he wrote.

Sir Fred’s letter

View a copy of the letter from the former RBS chief executive to City minister Lord Myners

The row comes against the backdrop of the government’s decision to insure £325bn of RBS assets in an effort to stabilise the ailing bank and kick-start lending to the economy.

The dispute centres on negotiations between Sir Fred, the RBS board and the government last October, when the government injected £20bn in fresh capital into the bank. At the time Sir Tom McKillop, then chairman of RBS, and Bob Scott, the director who was chairman of the board’s remuneration committee, led negotiations with Sir Fred over the terms of his departure. According to people familiar with the matter, Mr Scott had regular conversations with Lord Myners to keep him informed about the discussions.

The result of the negotiations was that Sir Fred agreed to give up his contractual entitlement to a year’s salary, worth around £1.3m, and – following further pressure from the government – also gave up the right to share options worth another three months’ salary. However, he insisted on holding on to his pension, which would allow him to start drawing an annual payment almost immediately. ”I believed that these ‘gestures’ were appropriate in the circumstances, and sufficient, and revisiting the position today, I believe that they remain so,” Sir Fred wrote.

Sir Fred’s early departure effectively doubled the value of his total pension from around £8m to more than £16m. According to people involved in the talks, Mr Scott told Lord Myners that he estimated Sir Fred’s pension pot had increased in value.

On Thursday it emerged that the RBS board could have denied Sir Fred his early pension if it had dismissed him as chief executive rather than allowing him to depart as a so-called ”good leaver”. However, people with knowledge of the matter said such a move would have been likely to have triggered a legal challenge by Sir Fred, opening the bank to greater liabilities.

Lord Myners’ letter

The text of the City minister’s response to Sir Fred Goodwin

Gordon Brown, prime minister, and Alistair Darling, chancellor, insisted they only became aware of Sir Fred’s £693,000 annual pension settlement in the past few days. Lord Myners’ letter last night says the government only learned last week that the pension deal with RBS was discretionary.

Mr Brown had said earlier he would explore all legal avenues to try to claw some of the pension back. And in his letter Lord Myners goes on to say: “UK Financial Investments [the state’s bank holding company] has, on behalf of the Government, been vigorously pursuing with the new Group Chairman whether there is any scope for clawing back some or all of your pension and whether, at the point the Board made their decision, it was made clear to the then remuneration committee and Board that the scale of the pension payment was discretionary, as it now proves to be.

Mr Darling’s call came amid increasing political pressure on ministers over the “eye-watering” pension that Sir Fred, aged 50, is now drawing from the bank that he ran until it needed a multibillion-pound taxpayer bailout.

“You cannot justify these excesses,” Mr Darling stated earlier in the day. The chancellor said he had asked Lord Myners, the City minister, to speak to Sir Fred on Wednesday and “put it to him quite simply – ‘look, in the circumstances in which this bank is now in, do you not think it right that you should forgo this?’.”

“I am very clear that we will do whatever we can. That’s why we have the lawyers looking at this,” Mr Darling told the BBC. “But I do think that, on a voluntary basis, Sir Fred could resolve this problem and he could do it quite quickly.”

The FT also reports that Iceland’s new government is working on a plan to restructure billions of dollars of its bonds held by foreign investors as part of a drive to restore confidence in its shattered economy.

Foreign investors own up to ISK400bn ($3.6bn, €2.8bn, £2.5bn) in krona-denominated bonds which the central bank fears could be dumped once capital controls imposed during its banking crisis are removed.

The Icelandic central bank has warned a huge outflow of currency would seriously destabilise the krona and these fears are one of the main reasons the capital controls are still in place.

The new government is considering asking Icelandic owners of foreign assets, such as the nation’s pension funds, to swap their overseas assets for the Icelandic assets held by the foreign investors, according to Steingrimur Sigfusson, finance minister.

Mr Sigfusson said the government was also considering offering foreign investors the chance to swap their existing bonds for longer maturity instruments, thus eliminating the chance of a sudden withdrawal.

“Swapping assets will not solve the whole problem as there are not enough Icelandic foreign assets to match the ISK400bn, but other foreign investors might be interested in taking advantage of high interest rates over a longer time and decide to stay,” he said.

The proposed plan is significant because it gives international investors an exit, having had their investments frozen since trading in the krona was frozen last year.

The plan, if adopted, could clear the way for capital controls to be removed, a potent symbol of Iceland’s return to normality, and then make it easier for interest rates to come down from the current 18 per cent as the currency will no longer need such overt support.

“This is one of our high priorities. We realise that not dealing with it will hinder lowering interest rates and lifting capital controls,” said Mr Sigfusson in an interview.

The new left leaning government, comprising the Social Democrat Alliance party and the Left Green party, was formed this month after the previous administration led by the right wing Independence Party collapsed amid public protests at its handling of the banking crisis last year.

Iceland is locked in an economic crisis that will see gross domestic product contract by 10 per cent this year. The country was forced to accept a $10bn (€7.8bn, £7bn) bail-out led by the International Monetary Fund.

Representatives from the IMF arrive in Reykjavik on Friday to discuss the progress of a plan it devised with the last government to reform the economy and banking system.

High on the agenda will be interest rates, which the new government wants to reduce as soon as possible, although the IMF has said the currency must have stabilised before a reduction can be considered.

The New York Times reports that proclaiming a “once in a generation” opportunity, President Obamaproposed a 10-year budget on Thursday that reflects his determination in the face of recession to invest trillions of dollars and his own political capital in reshaping the nation’s priorities.

Mr. Obama would overhaul health care, begin to arrest global warming, expand the federal role in education and shift more costs to some corporations and the wealthiest taxpayers.

In a veiled gibe at the Bush years, Mr. Obama said his budget broke “from a troubled past” and attributed the current economic maelstrom to “an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies’ executive suites to the seats of power in Washington, D.C.”

Without trimming his ambitious campaign promises, the president projects a budget for the 2010 fiscal year of nearly $3.6 trillion. He said he would shrink annual deficits, now at levels not seen in six decades, mostly through higher revenue from rich individuals and polluting industries, by reducing war costs and by assuming a rate of economic growth by 2010 that private forecasters and even some White House advisers consider overly rosy.

None of the new taxes and other sources of revenue, however, would take effect until the economy recovers, administration officials said.

Mr. Obama’s first budget was light on proposals to cut spending, despite his statement at the White House on Thursday that the government would be “cutting what we don’t need to pay for what we do.” But the cuts he does propose, contrasted against his new spending, underscore the change he seeks.

Mr. Obama would slash about $5 billion in the coming year for direct payments to agribusinesses and farmers with more than $500,000 in annual revenue, and $4 billion in annual subsidies to private banks that make college loans. Instead he would increase spending for government Pell Grants to needy students, and for the first time index the maximum yearly grant for inflation.

Those two cuts alone will provoke big fights with the farm and banking lobbies and their supporters in Congress.

Republicans and business groups condemned the tax proposals. Robert Greenstein, executive director of the left-leaning Center on Budget and Policy Priorities, praised the budget as “bold, courageous and honest” but acknowledged that it takes on “one vested interest after another, and that will require all of the president’s skills to get through Congress.”

Mr. Obama will need the help of Democratic leaders in Congress, who promised to get to work right away. Republicans, however, were quick to charge that the proposals to raise some taxes would be job-killers, and served notice that they would challenge Mr. Obama’s agenda by drawing an ideological distinction with the Democrats.

“I have serious concerns with this budget, which demands hardworking American families and job creators turn over more of their hard-earned money to the government to pay for unprecedented spending increases,” said the Senate Republican leader, Mitch McConnell of Kentucky.

Having inherited an economy in recession and reeling from interrelated credit and housing crises, Mr. Obama starts off from a stunning deficit for 2009 that is projected to reach $1.75 trillion when the fiscal year ends Sept. 30, or nearly four times last year’s shortfall. That would represent 12.3 percent of the gross domestic product, a deficit level that is larger than any since the end of World War II.

By the last year of his term, in the 2013 fiscal year, Mr. Obama projects a deficit of $533 billion, or 3 percent of the overall economy, a level that economists consider sustainable. Even so, he foresees the level of the nation’s debt held by the public rising from 58.7 percent in the current year to 67.2 percent in a decade, a level not seen since 1951.

Of the $3.55 trillion requested for the 2010 fiscal year that begins in October, more than $2 trillion is mandatory spending for the programs — chiefly Medicare, Medicaid and Social Security — that provide benefits to all who are eligible.

Departing from the free market orthodoxy of his predecessor, George W. Bush, Mr. Obama would use the government’s powers of spending and taxation to push the private market in new directions.

With higher taxes on the wealthy and savings squeezed from health care providers, drugmakers and insurers, Mr. Obama would create a $634 billion, 10-year “health reform reserve” as a down payment to finance disease prevention, wellness programs and research on cost-effective treatments ultimately to cut health care costs. More than any other expense, health care is driving future projections of unsustainable deficits. The health reserve would also be used to create affordable insurance programs for individuals and employers.

The president would remake the energy sector to reduce reliance on foreign oil and address global warming, by requiring industries to buy permits to emit the heat-trapping gases that contribute to global warming. The revenue would pay to develop alternative energy sources and to provide tax relief for Americans facing higher prices from utilities and industries passing on their permit costs.

Mr. Obama’s tax proposals would reverse a trend toward greater income inequality in recent years by adding about $1 trillion over 10 years to the tax burden of the top 5 percent of taxpayers, roughly those making more than $250,000 a year. He would let the Bush income-tax cuts lapse after 2010 as scheduled for people at that income — he would extend them for everyone else — and limit the deductions top-earners can take. He would also raise income taxes on hedge fund and private equity partners.

“Over the past two or three decades, the top 1 percent of Americans have experienced a dramatic increase from 10 percent to more than 20 percent in the share of national income that’s accruing to them,” Mr. Obama’s director of the Office of Management and Budget, Peter R. Orszag, said in a briefing for reporters. “So we are asking them to pitch in a bit more.”

Mr. Orszag emphasized that it was “just factually wrong” to say the administration was raising taxes in a recession because the tax increases and industry permits would not take effect until at least 2011.

Republicans pounced anyway, charging that Democrats were returning to their tax-and-spend habits of the past. Senator Judd Gregg of New Hampshire, the senior Republican on the Budget Committee, asked, “Where is the restraint on spending?”

Representative Steny H. Hoyer, a Maryland Democrat who is the House majority leader, dismissed the charge in an interview by recalling the six years during the Bush administration when Republicans controlled Congress. “What they did was raise spending and raise debt,” Mr. Hoyer said. “Now we are left with the obligation to try to get us back to balance.”

Mr. Hoyer predicted that the House, where Democrats have a significant majority, would pass an energy bill this year but that health care legislation might take longer. Both initiatives face bigger hurdles in the Senate, where Republicans have just enough votes to block legislation, requiring Mr. Obama to court the few Republican moderates, as he did to pass the $787 billion two-year economic stimulus package.

In a worrisome sign for the president, one of those Republican allies on the stimulus, Senator Olympia J. Snowe of Maine, in a statement called the president’s goals “worthy” but added, “While this budget claims to be long on fiscal responsibility and deficit reduction, it falls woefully short of these objectives.”

A significant share of Mr. Obama’s projected deficit reduction owes to assumptions about economic growth that are more optimistic than private forecasts. Some Obama advisers privately objected that the rosy projections would draw criticism about manipulating the numbers, but Christina D. Romer, the chairwoman of Mr. Obama’s Council of Economic Advisers, insisted to them that the projections were realistic.

After negative growth of 1.2 percent this year, the budget projects growth of 3.2 percent in 2010, and 4 percent or more in the following three years. In contrast, the consensus of business economists surveyed by Blue Chip Economic Indicators this month projected growth no higher than 2.9 percent through 2013.

The NYT also reports that the Treasury Departmentreached a deal late Thursday to take a stake of 30 to 40 percent in Citigroupas part of a third bailout of the embattled bank, according to several people close to the deal.

Vikram S. Pandit, the chief executive, will remain at the helm, but Citigroup will have to shake up its board so that it has a majority of independent directors, a move that federal regulators had already been pursuing.

Under the terms of the deal, the Treasury Department has agreed to convert up to 25 billion of its preferred stock investment in Citigroup into common stock.

It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.

The Treasury Department will match the private investors’ conversions dollar-for-dollar. That accounts for uncertainty in how big the government’s stake will be.

Citigroup and Treasury officials reached an agreement late Thursday night, but final details were still being worked out. The deal is expected to be announced Friday.

A Treasury spokeswoman did not return a phone call seeking comment. A Citigroup spokesman declined to comment.

The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction. Taxpayers, after pumping more than $45 billion into the bank, have become Citigroup’s single largest shareholder. The government will not put in any additional money for now, but some analysts believe Citigroup may require more down the road.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of an institution deemed “too big too fail,” as its downfall could send shockwaves through the global markets. The government also took a major ownership stake in the American International Group, and seized control of Fannie Mae and Freddie Mac in September. So far, none of those deals have turned out well.

The Obama administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its deteriorating financial condition made it almost inevitable the government would have to convert its stake.

The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position in the coming weeks if a new “stress test” that examines their ability to cope with rising losses shows they do not have sufficient capital, or the right amount of common stock, to appease regulators. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.

The Citigroup deal tries to address a potential shortfall of common stock, which investors and regulators now demand. Details remain murky, but the government has agreed to convert its investment at a price of as much as $5 a share, more than twice the value of Citigroup’s $2.46 closing share price on Thursday. That means the government’s stake could rise to as much as 40 percent, from 8 percent, giving taxpayers more risk, but more potential for profit if the company recovers.

Still it will severely dilute Citigroup’s existing shareholders. Those shareholders include longtime investors like Saudi Prince Walid bin Talal and Sanford I. Weill, its former chairman, and many large asset management and pension funds that manage money for ordinary investors.

Citigroup has been pursuing a similar conversion plan with several big preferred stock investors, including several government investment funds like the Abu Dhabi Investment Authority and the Kuwait Investment Authority, as part of a broader financial restructuring.

By retiring the debt and issuing new shares of common stock, Citigroup can bolster it common equity position. So far, no preferred shareholders have agreed to swap their shares. And without the government alongside them, it is an even tougher sell because of fear their positions might be wiped out.

Citigroup officials hope the government’s additional support bolsters confidence and helps revive the company’s sunken stock price. The deal also frees up some several billion a year in additional capital because it no longer has to pay out the dividend to preferred stockholders.

But it does little to address the bank’s underlying problem: Citigroup may not have the earnings power to weather the tsunami of consumer losses expected over the next several quarters. That is because tens of billions of toxic mortgage-related assets remain stuck on its balance sheet. Until they are removed, few private investors will be willing to pour new capital into the bank.