The recent downgrade by Standard & Poor's Corp. of Citibank's claims-paying ability triggered a two-notch demotion of 48 municipal issues backed by the bank's letters of credit, for a total of $3.72 billion in municipal issues affected.

Citibank last week lowered the bank's letter-of credit, certificate-of-deposit, and deposit-note programs to A, from AA-minus, because of its inability to raise asset levels quickly enough, according to Tanya Azarch, vice president at the rating agency.

The short-term ratings also were dropped, to A1 from A1-plus. The letter-of-credit supported debt, mostly variable-rate industrial development and housing bonds, relies heavily on Citibank for liquidity. The A1 rating is only two notches form the below-investment-grade category.

The deals -- issued by authorities from coast to coast, including small-town America as well as major urban area -- reflect Ctitibank's position as the nation's number one bank. Indeed, its credit enhancement reached into nearly every aspect of American life, from shopping mall and gas company borrowings to pollution control and multifamily housing bonds.

"They've made slower-than-expected progress on capital raising," said Ms. Azarchs. "And their [earnings] losses are an obvious setback." Last week, Citibank announced it lost $885 million in the third quarter of 1991 and that it was suspending its common stock dividend. Most analysts and stock watchers expected the size of the loss, and the bank's common stock actually increased slightly on the news.

"We have an increasingly pessimistic view of Citibank's asset quality," Ms. Azarchs explained. Problems with the bank's exposure to California real estate and the possibility of another "letdown" in the New York City real estate market also prompted the downgrade, she said.

"We also have been very disturbed by th extent of the problem in [Citybank's] single-family mortgage lending area," Ms. Azarchs added. "This is usually a low-risk business."

One of Citibank's primary means of capital to better secure its gargantuan asset base is to sell its stake in AMBAC Indemnity Corp. Citibank sold a 50.1% share of the firm to the public in July, raising about $350 million, and plans to sell at least another 25% in the future.

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