December 12, 2008 / 11:35 PM / 11 years ago

Potential GM bankruptcy catastrophic for U.S. economy

WASHINGTON (Reuters) - A General Motors bankruptcy would push the U.S. economy deeper into recession and cause a labor market catastrophe, highlighting why the government has signaled it could step in to prevent an outright collapse.

The embattled No. 1 U.S. automaker was still facing the possibility of a bankruptcy filing on Friday after lawmakers rejected a $14 billion bailout proposal late on Thursday.

Analysts said the ripple effects of such a chain of events would be felt far and wide.

“It would significantly intensify the recession, it would make it deeper and it could also prolong it,” said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.

“There will be massive job losses not only directly related to the auto makers, but also their suppliers. It would exacerbate the existing financial and some of the ongoing credit problems as well.”

Faced with that kind of scenario, the White House said on Friday it was ready to use part of the $700 billion Wall Street bailout fund to keep to auto companies afloat, reversing its previous position.

The worst financial crisis since the Great Depression has left the U.S. economy mired in a recession since December 2007, claiming nearly 2 million jobs so far. Analysts said this could worsen if the troubled auto makers do not get financial help.

“The lost GM output could easily lower GDP growth over a quarter by four percentage points or more. It would a stunning blow to the U.S. economy,” said Cary Leahey, senior managing director at Decision Economics in New York.

GM and Chrysler urgently need a bridging loan while Ford Motor Co’s financial position is not as dire. Analysts said Chrysler’s fortunes were closely tied to those of GM and would also be unable to avoid bankruptcy without loans now.

“If GM went down and Ford is still standing, it would still take time for Ford to ramp up their production to fill up the gap,” Leahey said.

Motor vehicles and parts contributed $440.4 billion to the U.S. economy, unadjusted for inflation, in 2007, according to government data, roughly 3.2 percent of GDP.

As well as the United States, GM operates in countries around the world, so job losses could spread far and wide.


“If you lose GM’s...output for a period of time, you are talking about losses of $150 billion to $200 billion in GDP, just from GM alone,” said Leahey.

“You can come up with extraordinary declines in GDP since in a given quarter you lose about $28 billion per percentage point, so it may be phenomenal losses to the economy in that quarter.”

The impact on jobs would be equally devastating, analysts said. GM, Ford and Chrysler employ nearly 250,000 people directly and 100,000 more jobs at parts suppliers could hang on their survival.

The companies say one in 10 U.S. jobs are tied to the auto sector, which adds up to several million.

According to Gary Burtless, a senior fellow at the Brookings Instution in Washington, in mid-November there were roughly 2.1 million workers engaged in the production of vehicles, supplying parts and dealerships.

“My guess would be that well over half of the 2.1 million are in the supply or distribution chain for the big three. GM and Chrysler’s portion would 40 percent of that,” he said.

Burtless warned of major spills to other sectors not directly linked to the auto sector in the event of bankruptcy filings by both GM and Chrysler.

“You have to add a couple of 100,000 workers at banks, retail stores ... which are in the communities where auto assembly, part plants and dealerships are located,” he said.

“Just the GM and Chrysler impact alone is likely to be over a million workers within a very few months which would add a little bit more than one percentage point to the unemployment rate.”

The jobless rate is at 6.7 percent, already the highest since 1993. Analysts say that is one good reason why the government would not let GM to go bankrupt, given the implications such a step would have on fragile credit markets.

GM has $36 billion in unsecured debt and another $6 billion owed to secured creditors.

“We have been here before. Now that the stock market has vaporized, it is going to force Congress to reach a deal, which again will be more expensive than the deal that was on the table last night,” said McCarthy.

“The Treasury has already indicated it is prepared to step in. It’s possible that some TARP funds could be used to sustain the auto makers until the new Congress resumes in January.”

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