US carmakers

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General Motors and Chrysler are not only drinking in the last chance saloon but they’re also patting their pockets and mumbling about how they definitely had wallets on them earlier. Last night marked the deadline for the struggling carmakers to present their plans to the government outlining how they will become viable businesses, and on which future taxpayer aid relies. Yet even with former investment banker Ron Bloom to knock heads together on behalf of the government – not as a car tsar but as head of a committee of heavyweights – bankruptcy is still the likely, and preferable, option.

Simply put, the American carmakers cannot survive in their current form without very large cheques from Washington. Indeed, Chrysler was expected to submit two separate plans: one based on an alliance with Italian carmaker Fiat contingent on government assistance beyond the $7bn of loans already agreed, and one as a standalone entity. GM will also need more cash. When $13.4bn of short-term assistance was arranged in December, the group’s plan to restructure was based on 12.5m cars selling in the US this year. With January sales indicating an annual run rate of 9.5m, the lowest level for 27 years, the necessary restructuring is getting deeper and more painful by the day. Economists put the total bail-out required by the big three carmakers (but not their troubled suppliers) as high as $125bn.

Yet unions and debtholders have little incentive to agree to the restructuring as imagined. Diverse opinion among lenders asked to take a two-thirds haircut on amounts owed suggests some would rather take a chance with claims on specific assets. Union workers, who may even end up owning part of the companies, will not shift without concessions from debt owners. A bankruptcy judge is needed to break the deadlock. Funding for Chapter 11 filings is the only credit Washington should extend.

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