US piles pressure on carmakers, unions

The US Government announced it would guarantee warranties for American buyers of General Motors and Chrysler vehicles and appointed a tsar to oversee aid to communities devastated by car plant closures, putting in place contingency plans for a bankruptcy by one of the two giant auto companies.

After an unexpectedly harsh assessment of the car-makers' plans to return to profitability and the firing of GM's chief executive, Rick Wagoner, the Obama Administration has set a new, firmer, deadline for a restructuring.

The moves pile pressure on the United Auto Workers union and on GM and Chrysler's creditors to agree to concessions demanded as part of the Government bailout, something they have so far been unwilling to do.

Indeed, in both cases, the Government said it expected bondholders to make even more concessions than had been urged by the Bush administration when it advanced temporary bailout money to the industry in December.

GM bonds fell in value yesterday.

Auto industry executives have argued since last autumn that a bankruptcy filing would be a death sentence for any carmaker because consumers would not buy cars from a company if they feared it would not be around to fulfil obligations under their warranty.

"If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired just like always," Barack Obama said.

"Your warranty will be safe. In fact, it will be safer than it's ever been, because starting today, the United States Government will stand behind your warranty."

The two Detroit-based firms have agreed to put up 15 per cent of the likely costs of servicing a warranty, with the US Government lending another 110 per cent.

That would be more than enough to employ a third-party firm to carry out repairs, the Government said.

The Administration also appointed a former deputy labour secretary, Ed Montgomery, to co-ordinate Government aid to communities in Michigan hard hit by the coming restructuring of GM and Chrysler.

Both companies promised tens of thousands more jobs will be shed as part of their proposals for returning to viability, but the Government said they need to go much further.

The cuts are not deep enough and the economic assumptions on which they are based are impossibly rosy, Obama's car task force concluded.

The President insisted that he would not allow the US car industry to "simply disappear", but his announcement put in place the essential elements of a post-bankruptcy strategy for the besieged car makers.

A bankruptcy filing would allow a judge to impose a financial restructuring by ripping up existing contracts such as pension and healthcare benefit deals with the union or repayment obligations to bondholders.

"The UAW and the unsecured creditors have been playing a game of chicken with the Government," said David Whiston, an auto industry analyst at Morningstar.

GM creditors are being asked to swap 67 per cent of their bondholding into equity, and the UAW to accept that the impending lump sum payment into a new healthcare fund be made in GM and Chrysler shares instead of in cash, as well as other concessions.

- INDEPENDENT