The United States government agreed on Friday to an emergency loan of $13,4-billion dollars to ailing car makers to stave off collapse of the sector that could deal a crippling blow to the economy.
General Motors and Chrysler were expected to draw on the funds immediately to avert bankruptcy, and will be required to implement new belt-tightening moves and demonstrate their long-term viability.
“These are not ordinary circumstances,” President George Bush said in announcing the aid.
“In the midst of a crisis and a recession, allowing the US auto industry to collapse is not a responsible course of action.”
The funds will be drawn from the Treasury’s $700-billion Troubled Asset Relief Programme (Tarp).
An additional $4-billion from Tarp will be available in February, contingent upon congressional approval of the second portion of that programme.
The car makers will have to take steps to demonstrate their viability by March 31.
“The automakers and unions must understand what is at stake and make hard decisions necessary to reform,” Bush said. “We intend to send a clear message to everyone involved in the future of American automakers.”
He added that restructuring the industry — a pillar of the US economy — would “require meaningful concessions from all involved in the auto industry”.
Among the “targets” established by the loan would be a two-thirds reduction in debt by exchanging debt for equity, more flexible work rules and cuts in wages to make the companies competitive with foreign manufacturers established on US soil.
“The loan will be automatically called by the government and will be repaid in full if certain conditions are not met” by March 31, a senior administration official said.
“The most important one is that the firms must be viable.”
The official added that “this does not mean the firms has to be profitable, but clearly to have a positive net present value the firms have to be profitable soon”.
Chrysler chairperson and chief executive Bob Nardelli said a letter of intent for the loan had been signed.
“These requirements will require consideration from all constituents, requiring commitment first in principal, leading to implementation this coming year,” Nardelli said.
“Chrysler is committed to meeting these requirements.”
GM, Ford and Chrysler had asked earlier for a government rescue to help weather the economic crisis after Congress refused a bailout in a dispute over union wages.
The Detroit Big Three have repeatedly warned that without a package of loans, millions of jobs could be lost, which they say would have devastating effects for the nation’s already stumbling economy.
Chrysler said on Thursday it was closing its American units for a month from Friday after GM announced it was idling 30% of its North American production “in response to rapidly deteriorating market conditions”.
Bush had faced pressure to act before the Christmas and New Year holidays while White House officials had warned bankruptcy was one of the options being considered.
Bush said on Thursday he was worried about leaving a mess behind for his successor, president-elect Barack Obama.
“I thought about what it would be like for me to become president during this period. I believe that good policy is not to dump him a major catastrophe” on his first day of office, Bush added.
Obama, who takes over on January 20, has called for the administration and the Congress to give the auto industry temporary assistance while demanding mandatory long-term restructuring. — AFP