Bankruptcy Looms for GM and Chrysler

American automobile manufacturers General Motors and Chrysler are at a decisive point in their restructuring tomorrow in Washington, needing to convince that progress has been achieved since December, as well as to justify the release of further aid without which bankruptcy appears inevitable.

The agenda was set at the end of 2008, when Washington agreed to pay 9.4 billion dollars to General Motors (GM) and 4 billion to Chrysler: the two giants, financially strapped, were asked to present a detailed strategic plan through March 31st and a progress report on February 17th. If they fail to convince of their viability, the sums already advanced will have to be reimbursed and the promised supplemental 7 billion will be canceled, leading to an increasingly plausible bankruptcy scenario.

According to sources close to the matter, cited by the Wall Street Journal on Saturday, GM did take this possibility into account in its plan: it counts on asking for supplemental funds or, if necessary, a federal guarantee if GM puts itself into the American bankruptcy system, which allows it – with conditions – to restructure.

The bankruptcy option is very delicate politically, due to the potential loss of jobs at stake – up to 3 million jobs directly and indirectly – while the economic crisis has already destroyed millions of jobs in the United States.

For their part, GM and Chrysler have increased their advertisements recently, giving the impression “of fighting to show the government that they are making decisions and exploring options,” sums up Michelle Krebs, an analyst at Edmunds.

Notably, this week GM announced two huge buyouts aimed at its white and blue collar workers. The group hopes to reduce its workforce in the United States by 31,500 in order to cut it back to about 65,000 – 70,000 from now until 2012. GM is also said to hope to renegotiate its debt with its creditors.

Chrysler, which still counted 46,000 salaried workers at the end of 2008, itself also announced a buyout in order to slim down its workforce. It is also in the process of finalizing a partnership with the Italian company Fiat, expecting that Fiat will acquire a 35% equity stake.

In addition, Chrysler gave assurances Friday of its progress in negotiations with subcontractors, creditors, and the American automobile union, UAW.

The eagerness of the two manufacturers reflects the harshness of the conditions imposed by Washington.

The aid announced by the Bush administration at the end of 2008 in effect incorporated the harshest sentiments expressed by Congress: issuing funds lower than the amounts requested by the manufacturers – GM wanted 18 billion, Chrysler 7 billion – and a shortened timetable.

According to Gregg Lemos-Stein, an analyst at Standard and Poor’s, the equation is too perilous; he sees “an elevated risk throughout the whole year” of bankruptcy of at least one of the two manufacturers. “There is a very high level of complexity involved in having to quickly complete several elements of the plan, while the endorsement of the interested parties – creditors, UAW, dealers – isn’t guaranteed,” in his estimation.

Another difficulty: the decline in demand in both the world and the United States, after an already dramatic 18% decrease in 2008.

In this context, “it is not impossible that the government will allow a little more time” to GM and Chrysler in order to implement their restructuring, according to Ms. Krebs, who also remarked that the federal teams charged with overseeing these strategic plans have not yet been named.