SEOUL (Reuters) - The collapse of a proposed bailout for U.S. automakers has raised fears of a deeper economic slowdown and further financial shocks that may jeopardize worldwide efforts to ease a global recession.
Any failure or bankruptcy of General Motors Corp, Ford Motor Co or Chrysler LLC could cost tens of thousands of jobs, hit credit markets and disrupt the auto industry’s global supply chain, economists said on Friday.
Financial market reaction to the plan’s collapse was swift, brutal and broad, with the dollar, Asian stocks and commodity prices tumbling.
“If any one of them fails, it will create an endless vicious circle in the global economy as the auto sector hires so many and there are so many industries that rely on the sector,” said Kim Jae-eun, economist at Hana Daetoo Securities in Seoul.
“That will incapacitate all worldwide efforts, including hefty interest rate cuts and massive fiscal spending, to revive the economy,” she added.
Late on Thursday, the U.S. Senate failed to agree a $14 billion rescue package after weeks of debate. GM and Chrysler had sought billions of dollars in immediate aid to avert a collapse in their businesses, while Ford wanted a hefty line of credit.
The U.S. “Big Three” employ some 250,000 people directly, and 100,000 more jobs at parts suppliers could hang on their survival. The companies say 1-in-10 U.S. jobs are tied to the auto sector.
“Everybody knows that a failure will badly hit the economy and financial markets. That will need much bigger stimulus packages to avoid more shocks,” said Lim Ji-won, an economist at JPMorgan Chase.
A bankruptcy at GM, Ford or Chrysler would also exacerbate the credit crisis, partly because of the vast amount of debt issued over the years by the car makers and their related financing companies, GMAC and Ford Motor Credit.
About 10 percent of the junk bond market is tied to GM, Ford and its financing arms, while $250 billion of credit default swaps (CDS) have been written on Ford, GM, Ford Motor Credit and GMAC, according to data from the Depositary Trust and Clearing Corp, a securities transaction clearinghouse.
The failure of the U.S. auto bailout prompted investors to dump riskier assets such as stocks and to sell raw materials including metals and oils.
The news also slammed the dollar, sending it to a 13-year low below 90 yen, fuelling a vicious spiral for export-dependent automakers.
Tokyo’s Nikkei average fell 5.6 percent, with leading auto shares down more than 10 percent.
The price of crude oil fell by more than $2 a barrel, or 5 percent, while rubber, nickel and copper all tumbled on fears that further grim economic news will follow.
“It’s a big setback because the markets have been waiting for this (bailout bill) to pass,” said Joseph Tan, Singapore-based chief Asian economist at Credit Suisse.
“What the failure of this deal does is it will set back sentiment not only in the U.S., but also globally. There is going to be further risk aversion going forward.”
Some economists warned that any failure of U.S. automakers could cause a fall in the dollar and U.S. Treasuries, further hitting the country’s battered financial system and economy.
“A jump in U.S. corporate bankruptcy may prompt investors to flee the dollar and U.S. Treasuries amid concerns over a bubble in Treasuries,” said Park Sang-hyun, chief economist at HI Investment & Securities.
“That will lift U.S. Treasuries yields and overall U.S. mortgage interest rates.”
Additional reporting by Chang-Ran Kim in Tokyo; Editing by Lincoln Feast
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