GM and Chrysler Bankruptcy Looks Increasingly Likely

With $17.4 billion owed to the U.S. government amid falling auto sales, General Motors Corp. (GM) and Chrysler LLC may be forced into bankruptcy to reassure loan repayment.

And in a separate story yesterday - which underscores that the auto sector’s woes are going global - Nissan Motor Corp. (ADR:NSANY) said it would cut 20,000 jobs by the end of 2010 and expects to book a net loss for the year ended March 31, which would be its first loss in 14 years.

But the outlook for Detroit’s “Big Three” is clearly worse, right now. From the time U.S. carmakers first approached Congress about obtaining bailout money for the American auto industry, GM and Chrysler have adamantly opposed bankruptcy. Indeed, as far back as their first visit to Washington - when the CEOs caused a firestorm of controversy by flying to the meeting in their corporate jets - the automakers’ top executives said the bankruptcy labels would weaken their companies’ reputations by pushing potential customers to other brands.

However, the government could force bankruptcy by applying the debtor-in-possession status to the loans, which would make debts owed to the government the top priority.
GM and Chrysler have until next Tuesday (Feb 17) to demonstrate progress on their plans - reducing labor costs and showing how they’ll begin repaying loans - enacted in order to receive loans from the Troubled Asset Relief Program (TARP).

GM said it plans to close dealerships and continue cutting union retirement benefits. Chrysler’s CEO Robert Nardelli previously said the company would try reducing debt, Bloomberg reported.

GM is talking with parts maker and supplier Delphi Corp. (DPHIQ) - which was spun off from GM 10 years ago - about buying back assets, which will shore up GM’s supply chain, Reuters reported.