By Chris Cermak Jun 11, 2009, 2:08 GMT
Washington - Major US companies that for months had been at the mercy of the government, or their creditors, are starting to emerge from under a devastating economic crisis, but economists caution that the downturn is far from over.
It has been a positive few days of news: US carmaker Chrysler put the finishing touches Wednesday on an alliance with Italian company Fiat, which will allow it to exit bankruptcy in less than two months.
A group of Chrysler's bondholders had tried to block the merger, but the deal was formalized after the US Supreme Court refused to intervene Tuesday night.
The speed of Chrysler's bankruptcy process came as a surprise to most analysts and offers some hope for larger rival General Motors, which only entered bankruptcy on June 1 but hopes to come out healthier on the other side in 2-3 months.
'You're looking for signs of life - these are signs of life,' said Bruce Belzowski of University of Michigan's Transportation Research Institute. But the car industry will have a true indication of where it stands only once GM comes through the same tortuous process, he said.
Also this week, the Treasury Department said it would allow 10 major banks to return nearly 70 billion dollars in government loans, which were handed out at the height of the US financial crisis last October.
With the United States mired in its longest recession since the 1930s, bail-outs of the financial and car industries have been at the heart of the government's efforts to keep the world's largest economy afloat.
Starting with former president George W Bush and continuing under his successor Barack Obama, the government has pumped about 600 billion dollars into both sectors since October and claimed controversial equity stakes in a number of private firms in return.
The government bail-outs have been widely unpopular among the US public and many conservative legislators, but each has been billed as critical to the health of the wider US economy.
Wall Street's survival is considered essential to keeping credit flowing through the wider economy. The Detroit-based car industry accounts for about 4 per cent of US economic output and its collapse could cause the loss of more than 2 million jobs.
This week's developments mark a sharp improvement from the early days of the crisis in October and suggest that maybe - just maybe - both sectors have put the worst days behind them.
'The financial sector isn't all the way back,' said Gus Faucher, director of macroeconomics for Economy.com, a website run by credit rating agency Moody's. 'But it's an indication that banks are more confident about the outlook.'
Tentative signs that the US economy may be stabilizing have been thrown about since April. Obama called them 'glimmers of hope' as confidence among businesses and consumers inched upwards. But it is still far too early to talk of a real recovery, Faucher cautioned.
Some of the banks now set to pay back government loans, including Goldman Sachs and JPMorgan Chase, were likely pressured by the Treasury Department to take the money in the first place and may have survived without it, Faucher said.
Meanwhile, major financial firms including Bank of America, Citigroup and American International Group are still likely to depend on the government's support for some time.
Most US economists predict the country's 18-month long recession will end some time towards the end of this year, but still see only meagre growth of just over 1 per cent in 2010.
For the car industry, the bankruptcy reorganization may be giving GM and Chrysler a new lease on life, but Belzowski warned that the industry efforts could come to nothing if car sales in the United States don't rebound in coming years.
Car sales across the US are expected to fall below 10 million this year, after averaging about 16 million vehicles a year for much of the last decade.
But the crisis also merely reinforced longer term problems in Detroit that will not be solved merely as the economy begins to stabilize. The US industry has been losing market share to cheaper, cleaner foreign competitors for more than a decade.
Chrysler's answer is an alliance with Fiat that will give it access to the Italian carmaker's smaller, more fuel-efficient line-up of cars. GM is shedding a series of inefficient and loss-making brands like Hummer.
The US Congress is looking to kick-start sales and green the industry with incentives for consumers to trade in dirty cars for cleaner alternatives. The so-called 'cash-for-clunkers' programme passed the House of Representatives on Tuesday and now moves to the Senate.
GM and Chrysler have also entered into new agreements with their labour unions, which brings their fixed costs roughly in line with workers at Asian carmakers operating in the United States.
'These are once-in-a-lifetime opportunities and challenges for them,' Belzowski said. 'It's really just the beginning.'
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