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George W. Bush on Friday handed the fate of US carmakers to president-elect Barack Obama as he announced plans to lend General Motors and Chrysler $17.4bn to survive the next three months.
The loan, which Mr Bush said would come with tough conditions to force the companies to restructure, means the president avoids having two of the country's best-known manufacturers going bankrupt on his watch
Mr Bush said he had been left little option but to step in with aid after the Senate last week failed to pass legislation to help Detroit. "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," Mr Bush said.
"Such a collapse could send our suffering economy into a deeper and longer recession and it would leave the next president to confront the demise of a major American industry in his first days of office."
Mr Obama, who takes office on January 20, backed the move, saying it was a "necessary step to help avoid a collapse in our auto industry".
The White House said a failure of the Detroit Three could see about 1.1m workers losing their jobs and a more than 1 per cent cut in real GDP growth.
Under the conditions of the loan, the companies will have to conclude new agreements with groups including unions, dealers, creditors and suppliers, by March 31, or the loans will be recalled.
The loan provides carmakers with $13.4bn from the Troubled Assets Relief Program, originally intended to stabilise the financial system, which will exhaust the $350bn first tranche of the fund. An additional $4bn would be available in February if the second tranche of the TARP is released by Congress.
Ron Gettelfinger, president of the United Auto Workers, gave a sign of the challenges this may present, saying the union was disappointed that Mr Bush had "added unfair conditions singling out workers".
Analysts at IHS Global Insight, a consultancy, described the bailout as a "band-aid" that is unlikely to be sufficient to see the carmakers through 2009.
"It is a $17.4bn football that the Bush administration is punting to the incoming Obama administration," they said.
In recent days both General Motors and Chrysler said they would idle factories for at least a month in order to save money at a time when sales have plummeted. GM had asked the federal government for $4bn ($5.5bn) for December and $4bn for January, while Chrysler had asked for $7bn until the end of March. Ford has said it has enough funds of its own to keep functioning.
Cerberus, Chrysler's owner, said on Friday it would "backstop" the loan with "the first $2bn of proceeds from Chrysler Financial". Cerberus's role has complicated the situation, due to political resistance to any step that would be seen as helping a private equity company
In New York, GM shares were 11 per cent higher in afternoon trading, while Ford was flat.
Fitch downgraded GM and Chrysler credit ratings on Friday, saying that a debt-for-equity exchange under the terms of the bailout, which intends to cut the companies' debt by two thirds, amounts to an imminent default.
Republican legislators who opposed Congressional efforts to authorise the aid to Detroit have argued that the industry's problems are so severe they can only be addressed if the companies file for chapter 11 bankruptcy protection. But Mr Bush argued that such an approach was unlikely to work given the current stricken state of both the auto industry and the economy as a whole.
Copyright: The Financial Times Limited 2008
