The Abu Dhabi Investment Authority's $7.5 billion bailout of Citigroup, for a near 5 per cent stake, has been portrayed as an expression of confidence in Citigroup, a real win-win which at least initially did good things for the market.

But let's not kid ourselves. The deal effectively puts Citigroup at Junk bond status because it's paying the government of Abu Dhabi, the oil-rich emirate, 11 per cent for its money.

Only a company in serious trouble and desperate for cash would pay that much. And Citigroup, which recorded about $6.8 billion in write-downs and losses in the third quarter on the back of the subprime meltdown, and which lost its CEO Charles Prince in the process, is in deep strife. And 11 per cent is almost double the rate Citigroup paid investors in bond issues.

Let's put it in context. Rewind to two months ago when Countrywide Financial Corp agreed to pay dividends of a much lower 7.25 per cent when Bank of America injected $US2 billion as part of the rescue package.

What a deal! Abu Dhabi gets a real bargain, the shares are being diluted and Citigroup managers come out looking like heroes!!! Yes, 11 per cent is a junk bond rate. "If you look at 11 percent, that's basically junk bond yields, and so it's great for Abu Dhabi,'' William Smith, chief executive officer of Smith Asset Management told Bloomberg.

Let's also remember that Saudi Prince Alwaleed bin Talal bailed out Citigroup 16 years ago when it was reeling from loan losses in Latin America and a collapse in US property prices. What this latest deal means is that more than 9 per cent of Citigroup will be owned by Middle East interests.

But in the meantime for Citigroup investors, and for the market generally, it's bad news. Citigroup would not be paying 11 per cent if it was not expecting more trouble ahead and the bank could be in for a bad fourth quarter.

"That's the negative part of the story. You wonder how bad charge-offs will be in the fourth quarter, or the first quarter, and why they need to raise the capital now," Peter Kovalski, an analyst at Alpine Woods Capital Investors, which owns Citigroup shares told Reuters.

There is every chance that the dividend will be cut.