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Saturday, November 15, 2008

Should or Should not General Motors file for bankruptcy?

The economic slow down severely hit the US economy and the US automobile is one of the worst affected sectors. Before the economic slowdown, the top US automakers were already under huge pressure due to rising fuel cost. The sudden rise in fuel prices forced American people look for small Japanese cars. Now, the financial crisis made the situation far worse. General Motors Corporation (NYSE:GM), one of the “Detroit three” is now in a critical condition. Financial firms are predicting that the automaker might have to liquidate. According to Nariman Behravesh, Chief Economist, IHS Global Insight, Inc. such an incident could translate into more financial aid for Michigan, Ohio and Indiana and more money for unemployment and extended benefits. Bloomberg reports:

Behravesh's projection of $100 billion to $200 billion in costs dwarfs the $25 billion industry bailout plan that will be debated in Congress next week to prop up Detroit-based GM, Ford Motor Co. and Chrysler LLC. The drain on taxpayers from a rescue or a GM failure is a central issue for U.S. lawmakers.

Included in the Global Insight estimate, which Behravesh supplied to Bloomberg News, are the anticipated costs for existing programs, such as unemployment insurance, and new measures that the economist said would be needed to revive economic growth after millions of auto-related job losses.

The shut down of GM means further increase of the unemployment rate. By the end of June, GM had $21 billion which went down to $16.2 billion on September 30, 2008. The company requires $11 billion to clear its monthly bills. On November 7, 2008, GM said that it might run out of cash by the end of 2008. People are divided over whether GM should file for bankruptcy or not. According to some people, filing for bankruptcy would make the situation all the more complicated.

Related articles:

Bloomberg

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