Fiat has issued a statement denying ‘fanciful’ press reports following a meeting between Fiat’s management and Italian government representatives – including the Prime Minister Silvio Berlusconi – held on October 13.

The statement said that the tone and atmosphere of the discussions were not as reported in certain circles and that they were characterised by a mutual desire to resolve the difficult problems faced by Fiat Auto as expeditiously as possible.

However, the heavy involvement of the Italian government in discussions over Fiat Auto’s restructuring plans places a question mark over the future of the GM-Fiat alliance.

GM’s alliance with Fiat Auto could deepen from 2004, when Fiat can exercise a put option to sell the remaining 80% of Fiat Auto to GM (GM currently has a 20% equity stake in the carmaking unit). But a change in ownership before then could prompt GM to back out of the alliance and reverse the integration of operations with Fiat Auto. GM CFO John Devine has already said that any change in control negates the put option.

Recent press reports in Italy have suggested that the government could be about to take a stake in Fiat and that the government is strongly opposed to the shutting of any plants. It has been speculated too that Fiat’s major creditor banks could also play a part in providing finance for a Fiat Auto rescue plan. An investment bank may be appointed to advise on a cost-cutting plan.

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La Repubblica has suggested that the government may invest as much as 1 billion euros in a new company that would be set up to purchase the assets of Fiat Auto.

However, Italy’s Economy Ministry issued a statement on October 15 denying as ‘groundless’ reports the government could take a stake in Fiat.

Analysts say that the prospect of state intervention is generating further uncertainty and bad PR among investors for Fiat. Italian PM Berlusconi has said that he hopes to find ‘market-oriented’ solutions to Fiat Auto’s troubles by the end of October and Fiat is making it clear that dialogue between its management and the government is continuing.

Yesterday, GM announced Q3 results that included a $2.2 billion write-down on its Fiat Auto investment and the company will no doubt be keeping a close eye on Fiat Auto developments over the coming weeks.