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GM Likely to File for Bankruptcy

Posted May. 25, 2009 03:00,   


With only a week left before the restructuring deadline set by the U.S. government, the fate of General Motors is attracting huge interest.

As a precondition to the government’s additional financial support, Washington wants the auto giant to come up with its own restructuring measures. Experts say, however, that the carmaker will definitely file for bankruptcy.

Investors are following how seriously GM’s bankruptcy will affect the global financial market.

The U.S. government asked GM to suggest its own restructuring measures to write off debts, restructure its brands, cut the number of dealerships, and get its union’s agreement to cut labor costs by June 1. GM has struggled to reach an agreement on debt write-off plans and cutting labor costs with creditors and its union members.

GM persuaded its union to agree with its proposal. The United Auto Workers allowed the company to use stock instead of cash to fund its healthcare trust for retirees Thursday.

The carmaker also reached an agreement with Canadian Auto Workers to cut weekly wages 28 percent Friday. GM plans to close about 40 percent of its nearly 6,000 dealerships nationwide by the end of next year and has notified 1,100 dealerships that it will terminate their contracts.

GM will stop manufacturing uncompetitive brands, such as Pontiac.

To avoid bankruptcy, GM needs to persuade creditors to agree to its proposal by Tuesday. In exchange for a debt write-off of 24 billion dollars, or nearly 90 percent of GM’s 27 billion dollars in debt, GM offered 10 percent of its stocks to creditors, but this was rejected.

An agreement with creditors thus looks unlikely. The Financial Times quoted a source as saying, “Even if 100 percent of bondholders agree to a debt swap proposed by the company and the government, GM is likely to file for bankruptcy protection.”

The U.S. government says filing for bankruptcy is a more effective measure for GM as Chrysler has rapidly recovered after doing so. In an interview with C-SPAN, U.S. President Barack Obama said he hopes both GM and Chrysler emerge from their restructuring as “leaner and meaner” companies that are more competitive.

Whether GM’s restructuring will proceed as required by the U.S. government remains unclear. Certain congressmen are opposed to the company’s restructuring plan to close down factories and cut staff and dealerships. Senators and congressmen have sent a letter to President Obama asking Washington to ponder the measure on GM for a longer time.