US President Barack Obama has confirmed that car maker Chrysler is filing for bankruptcy today after talks to restructure its debt with lenders broke down.
Despite intense negotiations over the past few weeks, Chrysler failed to gain the full support from its lenders to avoid the first bankruptcy filing by a major US car maker.
At the same time, Chrysler as expected entered into an alliance with Italy's Fiat. It has sold Fiat a stake starting at 20%, and the Italian company can become the majority owner once the US government loans are re-paid.
The Chapter 11 filing, in US Bankruptcy Court in Manhattan, will send shock waves through the entire industry - including Chrysler's rivals, suppliers, dealers and the hundreds of thousands who rely on the industry for their livelihoods.
As part of the filing, the U.S. government will provide up to $3.5 billion in loans. Obama said he hoped the entire bankruptcy process would take only 30 to 60 days.
The bankruptcy signals that Obama is prepared to play hardball with lenders rather than knuckle under to their demands. It is likely to set the tone for similar discussions with bondholders of General Motors - which is due restructure its operations by the end of May.
This is not the first big US government action with Chrysler. In 1980, President Jimmy Carter signed a bill providing Chrysler with more than $1 billion in loan guarantees.
The bankruptcy filing did not preclude the Fiat deal. Chrysler has been seeking a rescue deal from the Italian car maker while also trying to finalise its debt agreement. The debt restructuring talks have been spearheaded by the Obama administration's car task force and former investment banker Steve Rattner.
In a bid to win over three fund firms that had spurned an offer to accept $2 billion in cash in exchange for writing off all of Chrysler's $6.9 billion in secured debt, US officials were reported to have sweetened the terms by throwing in another $250m,
Chrysler is majority-owned by Cerberus Capital Group. Its plight reflects a slump in demand facing an industry whose $2.6 trillion annual revenue is equivalent to the GDP of France and which employs more than nine million people.
