February 27, 2009 / 6:05 PM / 10 years ago

UPDATE 2-No conflict in Mexico with Citi bailout - Banamex

(Adds lawyer comments, updates peso price)

MEXICO CITY, Feb 27 (Reuters) - The U.S. government move to boost its equity stake in Citigroup (C.N) does not violate Mexican law and will not change the company’s strategy, Citi’s Mexican unit, Banamex, said on Friday.

“There are clear arguments that affirm that the (transaction) announced today does not conflict with any Mexican legislation,” Banamex said, citing the North American Free Trade Agreement.

Speculation has mounted that Citi could be forced to sell Banamex, which it describes as one of its crown jewels, to raise funds to bolster its depleted capital levels.

The U.S. government will boost its equity stake in Citigroup to as much as 36 percent to bolster the fallen financial giant’s capital base.

Mexican analysts say Mexican law might require Citi to sell Banamex, which it bought for $12.5 billion in 2001 in what was then the biggest foreign takeover in Mexico.

Francisco Diez, director of emerging markets trading at RBC Capital Markets in New York, said that based on talks with local officials, any stake in a foreign bank held by a foreign government would prohibit that bank from owning a Mexican financial institution.

“So Citibank’s sale of Banamex is really a fait accompli,” Diez said.

Edward “Ned” Kelly, head of Citigroup’s global banking, said the bank was not open to offloading assets it really wants to keep.

“Banamex is a very important property to us, and we intend on retaining it,” he said.

According to Mexico’s bank legislation, foreign governments cannot own equity in Mexican banks.

“It has to be analyzed, it could definitely be a risk situation” for Banamex, said Antonio Franck, a lawyer at law firm Haynes and Boone in Mexico City,

The Citigroup news added to losses for the Mexican peso on concerns that local investors may have to raise dollars to acquire Banamex.

The peso MXN= traded at life-lows of 15.22 per dollar despite an earlier intervention from the central bank to curb the decline. (Reporting by Robert Campbell, Cyntia Barrera and Michael O'Boyle; editing by John Wallace and Matthew Lewis)

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