US buyers of Chrysler and GM cars get guarantees

Government sets new deadlines for restructurings
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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, but firmer, deadline for a restructuring.

The moves pile pressure on the United Auto Workers union and on GM and Chrysler's creditors to agree 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 car-maker, because consumers would not buy cars from a company if they fear it will 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, as he announced more aid to the car industry. "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 will be more than enough to employ a third-party firm to carry out repairs, the government said. Other car-makers can join the scheme if they wish.

The administration also appointed a former deputy labour secretary, Ed Montgomery, to coordinate government aid to communities in Michigan hard hit by the coming restructuring of GM and Chrysler.

Watch: Obama discusses the GM plan

Both companies promised tens of thousands more job losses 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, Mr Obama's auto task force concluded.

The President insisted yesterday 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 beleaguered 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. Watch: Obama discusses the US auto industry

"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. "You have got to set a deadline, because you can't keep the game going indefinitely with the US taxpayer subsidising these companies."

The two companies have burnt through almost all the $17.4bn (£12.2bn) lent to them in December, without which they would already be bankrupt. Buyers can no longer find car loans on easy terms, and the global downturn has caused consumers to be more cautious – a deadly combination that has sent car sales plunging.

GM creditors are being asked to swap 67 per cent of their bondholding into equity, while the UAW is being asked 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.

GM must reach a deal in the next 60 days and demonstrate a more realistic cost-cutting plan if it is not to be put into bankruptcy. Chrysler has just 30 days, and it must also iron out the details of its proposed alliance with the Italian car-maker Fiat. The Obama administration is demanding promises that new fuel-efficient small cars, based on Fiat technology, will be built in the US.

If satisfactory agreements are not forthcoming by the deadlines, the government will force the firms into bankruptcy, the administration's auto team threatened. The government will continue to provide financing through a shortened, structured bankruptcy proceeding, it said. "Our strong preference is to complete this restructuring out of court," GM said yesterday. "However, we will take whatever steps are necessary to successfully restructure the company, which could include a court-supervised process."

Streiff's trouble: Car chief bitter at sacking

Christian Streiff, outspoken chief executive of Peugeot Citroen, said yesterday that his firing by the Peugeot family was "incomprehensible".

Mr Streiff became the first boardroom casualty of the slump in car sales late on Sunday, when the Peugeot board said it was responding to the "extraordinary difficulties currently faced by the automotive industry" by shaking up its management. Within hours, his departure had been eclipsed by news that the US government had ousted Rick Wagoner as chief executive of General Motors.

Trouble and Mr Streiff have often gone together. He was sacked from his last job as chief executive of Airbus after just 100 days, falling out with its parent company, EADS, and angering workers by speaking his mind about the quality of a major German manufacturing plant. Earlier, he left a French building materials group, where he had been number two, after clashing with his boss.

The amateur pilot and published novelist is believed to have had an increasingly strained relationship with the Peugeot family, which controls 45 per cent of the company. Aggrieved, he said yesterday that his recovery plan for Peugeot was bearing fruit.

Stephen Foley