As world stock markets tumble, fears are rising that the liquidity outlook for GM and Ford has just worsened, increasing the chance that they could head into bankruptcy by the end of next year. Almost a third was wiped off GM's share price yesterday.

The Standard & Poor's (S&P) ratings agency said yesterday that GM's credit could fall further into junk status due to a 'rapidly weakening' global auto market. GM's share price plunged 31% to the lowest level since 1950 and Ford's stock also fell by 21%.

S&P put both GM and its GMAC financing arm on its lowest possible rating: 'creditwatch'. It then did the same to Ford.

A report by Citigroup this week suggested that if conditions deteriorated further, Ford and GM could be forced into 'drastic spending cuts' including slashing jobs and making new pay deals with unions — or even debt-for-equity exchanges, in which the banks would take ownership of part of the two companies.

Citigroup downgraded Ford and GM to 'sell' from 'hold' citing deteriorating global credit conditions. Citigroup's analyst Itay Michaeli said: "Already weak balance-sheet positions will find it difficult to accommodate a prolonged global downturn. The risk-reward balance has tilted decidedly negative."

"For GM, we continue to view liquidity to be adequate through year-end 2008, but the margin of error beyond that has increased, and we continue to view mid-2009 as the deadline for GM to raise substantial external liquidity," Michaeli said.

Financial analyst Rob Golding told just-auto: "These are probably the same credit ratings agencies that put a triple AAA on Iceland's savings banks (now deceased) but nevertheless there can be no doubt that all the US Big Three have been caught right in the middle of restructuring costs and transforming products.

"Their recent actions in putting up for sale peripheral assets (Jaguar, Land-Rover and Hummer) tell the story of negative profits in 'normal' trading. Now we have abnormal trading with credit denied to marginal new car buyers and consumer confidence collapsed.

"GM and Ford in their last results announcements both described the way in which they could achieve cash flow sufficient to last another year or so. The arithmetic really is that tight, and now getting tighter at frightening speed."