AILING US carmakers were handed a $17.4 billion (€12.5 billion) lifeline by President George W Bush yesterday following weeks of deliberation on whether allowing the auto industry to fail would only deepen the country’s economic crisis.
General Motors, the biggest of America’s so-called Big Three, received an initial $9.4 billion in loans, while Chrysler, which is owned by private equity firm Cerberus Capital Management, is in line for $4 billion. Ford did not ask for any government help as the company claims it has adequate capital reserves to see it through the current economic decline.
The initial $13.4 billion of loans to GM and Chrysler will be made in tranches handed out this month and next from the $700 billion Troubled Assets Relief Program (Tarp) originally designed to bail out struggling US banks.
The remaining $4 billion of loans will be made to GM in February and March if Congress allows the White House access to the $350 billion of Tarp funds not yet made available. The loans must be paid back within three years and carry an interest rate of 5 per cent. If the carmakers default, the interest rate will double to a punitive 10 per cent.
The White House stipulated that GM and Chrysler must demonstrate a turnaround plan by March 31st, or the loans will be recalled. The loan terms carry restrictions on executive pay and bonuses.
President Bush made the funds available after Congress twice refused to help the automakers.
“If we were to allow the free market to take its course now it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,” President Bush said, adding that to do nothing would deepen and prolong the US recession.
Wall Street rallied on news of the lifeline, with GM shares jumping 16 per cent. Ford shares rose almost 3 per cent as investors took comfort in the fact that the company said it does not need a loan to survive.
Rick Wagoner, the embattled GM chief executive, said he was confident the company would be able to live up to the terms of the loan.
