US: Doubts grow over US auto bailout as EU makes threats
Doubts grew in the US yesterday about the chances of an additional US$25bn rescue of the Detroit 'big three' automakers, analysts said GM alone needs up to $30bn in aid and the EU today threatened to complain about any 'illegal' aid to the World Trade Organisation.
Opponents yesterday complained about yet another bailout while even industry supporters questioned whether the idea could win enough backing in congress to pass next week, the Detroit Free Press reported.
The report said lawmakers spent the day considering where help money might come from and whether the industry deserved help at all. The automakers get chances to put their cases on Tuesday in the senate, and on Wednesday in the house.
Democratic party leaders, Michigan legislators and senators from states with large auto manufacturing plants back the plan but many senate Republicans said the proposal raises serious questions about how far the government should go in bailing out failing firms, the Motown paper said. And it added that senate Republicans who supported the earlier help for the financial industry rescue were noncommittal at best about bailing out the auto industry.
Aides told the paper that if congress doesn't appear ready to act, there is a chance the house would not reconvene for a post-election 'lame-duck' session and would wait for the senate to act on the plan first.
Democrat senator Christopher Dodd, who chairs the senate's banking, housing and urban affairs committee, told the Detroit Free Press it wasn't clear whether the senate would support using part of the $700bn financial industry bailout for the auto industry, given the continuing turmoil in financial markets and high levels of home foreclosures.
"Right now, I don't think there are the votes," Dodd was quoted as saying. "I want to be careful about bringing up a proposal that might fail."
The paper noted that General Motors has said that it needs government help before the end of the year to avert a crisis. Analysts have said GM could run out of cash by January without help while Ford and Chrysler LLC also need immediate government aid.
Automakers and Michigan lawmakers reportedly have targeted the financial industry money as the fastest option but one senator, while supporting automaker help, said all the $700bn under the 'troubled asset relief programme' was likely to be needed for the finance business.
"The auto industry ought to rise on its own merit, and the money ought to come out of something earmarked for that," the senator told the paper.
The Free Press said other Republicans and the Bush administration have said aid for the industry should come from the $25bn in loans for retooling plants that congress approved in September - but noted those loans were designed to be made over a 12-year period and can only be used for a narrow range of costs, limits that the automakers said hurt their ability to get help over the next few months.
The paper also noted that treasury secretary Henry Paulson had said that any help to automakers should ensure their viability. Under the rules for the $25bn retooling loans, one of the standards for an automaker's viability is the ability to survive without government aid.
Views varied widely. One senator called for the retooling loans to be released as soon as possible, instead of authorising yet more taxpayer money, while another said spending "billions of additional federal tax dollars with no promises to reform the root causes crippling automakers' competitiveness around the world is neither fair to taxpayers nor sound fiscal policy."
According to the Detroit Free Press, Chrysler chairman Bob Nardelli said on Thursday that his company needs immediate aid, too. With Chrysler 80% owned by private Cerberus Capital Management, Nardelli said that Cerberus founder Steven Feinberg had vowed to give up any profits from the sale of Chrysler's auto business if the company took government money.
Democrats reportedly said that, under their proposal, the automakers would be held to the same conditions the financial firms took as part of the $700bn bailout, such as government stock purchases and limits on executive pay.
Democrat senator Sherrod Brown told the paper he believed the chances of congress helping the automakers next week during the lame-duck session were good.
Meanwhile, analysts yesterday predicted the federal government would need to provide GM as much as $30bn in aid to survive to the end of 2010, and, in exchange, should demand deeper cuts in the automaker's costs.
The Free Press reported that JP Morgan analyst Himanshu Patel, who lowered his rating on GM's shares to 'neutral' from 'overweight', said "the GM bailout alone ... could easily have a $30-billion tab."
Goldman Sachs analyst Patrick Archambault, who suspended his investment rating and price target on GM on Thursday, said he thought GM needed at least $22bn. And Standard & Poor's equity analyst Efraim Levy said the firm saw only one solution: "government assistance."
GM executives said recently their company could run short of the $11bn to $14bn it needs to pay its bills by the end of the year and would be significantly short of that by the end of June without outside assistance.
Patel reportedly said GM needs as much as $30bn, with at least $15bn to get through 2009; $5bn to $7bn for 2010, and $7bn for its 2010 payment into a health care trust for UAW retirees.
"In our view, [the government] should provide a near-term loan to cover one to two quarters of cash burn," Patel wrote, according to the Detroit Free Press. "A second sleeve of additional aid should be contingent on a recut of both financial debt and UAW legacy liabilities, and after GM draws up a plan to accelerate dealer network/brand cuts."
A capital injection from the government remains "highly uncertain" this year, and one would dilute shareholder value, the analysts wrote.
Next, to cap the US automakers' woes, the European Union on Friday said it was ready to take action at the World Trade Organisation if it judged that US state aid for its struggling auto industry was "illegal," European Commission head Jose Manuel Barroso said.
"We are looking at the (US) plan. The plan has not yet been made official but certainly, if it amounts to illegal state aid, we will act at the WTO," Barroso told Europe 1 radio, Agence France Presse reported.