Motoring to bankruptcy

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Kicking the can down the road is practically an official sport in Washington. It was therefore little surprise that the lame duck Bush administration overruled Republican dissenters in December to ply ailing General Motors and Chrysler with enough cash to keep them limping along until they became someone else’s problem. However tarnished his legacy may be, pulling the plug on an industry that symbolised America’s 20th century economic supremacy was not something Mr Bush relished.

With leading Democrats in Congress opposed to bankruptcy, it was an almost foregone conclusion the Obama administration would keep the drip-feed of loans flowing. But Mr Obama is trapped between pleasing the labour unions and keeping Detroit from absorbing tens of billions more that could best be spent elsewhere. The two companies last week asked for an extra $22bn for a new total of $39bn and some estimates put the total tab of rescuing Detroit outside of bankruptcy court at up to $125bn.

Creating the impression that bankruptcy was politically unacceptable gave unsecured creditors and the union less incentive to make voluntary concessions. On Monday though, the stakes rose following news reports that up to $40bn in post-bankruptcy “debtor-in-possession” financing is being arranged.

Such a large amount of Dip financing would be five times the previous record amount – one reason opponents of bankruptcy have been able to predict a “collapse” of the industry after a Chapter 11 filing. But a government backstop and pressure on banks could help make it available. This, in turn, increases the odds of a breakthrough on concessions.

It may be a bluff. But making preparations for bankruptcies appears a shrewd move for a new president facing a politically thorny problem. Showing he can wield a stick, not just a carrot, will concentrate minds at negotiating tables in Detroit.

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