U.S. autos should not get aid: bank body IIF

By David Chance and Varsha Tickoo

KUALA LUMPUR (Reuters) - Pleas by the big three U.S. carmakers for aid from Washington should go unheeded as they do not represent a systemic risk to the economy in the same way as financial institutions, the head of leading bank body IIF said.

Auto executives, seeking a $25 billion aid package, warned Congress on Tuesday that their industry was on the brink of a disaster that would hit the ailing U.S. economy.

"I know it may sound a bit self-serving for someone who represents the financial industry.. but that (bankruptcy) is the only sensible approach for economic stability," Charles Dallara managing director head of the Institute of International Finance (IIF), a powerful bank lobby group told Reuters on Wednesday.

The financial services industry represented by the IIF has been bailed out to the tune of hundreds of billions of dollars by governments around the world in an effort to staunch contagion from the U.S. mortgage market that threatens to send the global economy into a tailspin.

The U.S. economy contracted by 0.3 percent in the third quarter, according to data released on October 30.

Dallara conceded that allowing the "Big Three," General Motors Corp (GM.N), Ford Motor Co (F.N) and Chrysler LLC to go bust would worsen the economic downturn in the U.S. and add to unemployment, which hit a 25-year high in September, but said still it should be allowed to happen.

"We face some real tough choices right now because no one likes to see the job losses that we're going to probably see in the next six months, which are probably going to total an additional 2 million job losses," he said.

The auto industry says that one in ten jobs in the U.S. depends on their survival and a bailout has been backed by Democrats.

"It (bankruptcy for autos) is obviously a major burden for this economy but frankly so has been their 30 year decline," Dallara said.

MARKET RISK, RISK FROM OBAMA

Dallara said that the confidence of financial markets remained fragile and said he expected another 12-18 months in which credit markets would not work efficiently.

Policy flip-flops like changes to the U.S. Treasury's $700 billion Troubled Asset Relief Program (TARP) had further unnerved investor confidence.

"This will lead to further capital write downs. They are putting capital in the front door and the combination of bad assets and accounting system are taking capital out the back door that's simply not a viable way to spend taxpayer money or to stabilize the system," Dallara said.

At the same time, there is policy uncertainty in Washington as the U.S. waits for President-elect Barack Obama's administration to take power on January 20.

There is a risk not only of greater regulation on the financial services industry from the incoming administration but also that it will seek to stop globalization, Dallara said.