Italian industrial group Fiat will increase the capital of its troubled auto unit by up to 2.5 billion euros by cancelling its debts to the Fiat group, a group source told Reuters yesterday (October 31).

"The group's loans toward the auto unit will be cancelled," the Fiat source told Reuters.

Reuters had earlier reported that the fresh cash injection was required under Italian law as Fiat Auto's losses consumed more than one third of its 1.8 billion euro share capital.

In several reports, Reuters yesterday carried more bad news about the huge Italian industrial group and its ailing car division.

Reuters said that the Fiat group posted a third-quarter operating loss of 339 million euros, more than double analysts' expectations, as the key auto unit "continued to bleed".

A Reuters' poll of eight analysts had forecast the insurance-to-energy group would make a third-quarter operating loss of 156 million euros.

Reuters also added that Fiat Auto, planning to cut thousands of jobs in an effort to stem a financial crisis and return to profit by 2004, posted an operating loss of 340 million euros for the third quarter, compared with an analysts' forecast of a 245 million euro loss.

Reuters said the "sputtering" car maker generated third-quarter sales of 4.66 billion euros, down 10.2% from the same period last year while, at group level, Fiat posted third-quarter revenues of 11.99 billion euros, worse than forecasts.

Reuters noted that, in July, the company had said its car unit's second-half loss would be significantly lower than its first-half loss of 823 million euros and that the group would make a full-year loss in line with its first-half operating loss of 426 million euros.

But, Reuters said, group net debt at the end of September was 5.8 billion euros, unchanged from the end of the second quarter while Fiat has promised creditor banks to slash net debt to three billion euros by early 2003.

Fiat said in its results statement that the 2.5 billion euro capital increase for Fiat Auto would not have any impact on its consolidated group debt levels, according to Reuters.

Reuters also quoted Fiat chairman Paolo Fresco as saying yesterday that the struggling car maker is committed to carrying out its recovery plan and not seeking any new partners.

"I think we are finally seeing some signs of a turnaround," Fresco said, according to Reuters. "There is no plan to find or accept new partners. This plan has been discussed with a number of interested parties."

"We have the will and the resolve to carry out the recovery plan and we will go forward with it. Decisions will not be tainted by any sentimental attachment to any activity in our portfolio," Fresco added in a conference call reported by Reuters.