Page last updated at 22:00 GMT, Monday, 13 April 2009 23:00 UK

GM stock hit by bankruptcy report

GM cars at showroom
GM has seen demand for its cars slump

US carmaker General Motors has seen its shares fall sharply after a report that the US government wants the firm to start bankruptcy proceedings by 1 June.

The New York Times said the Treasury Department wants a court-led reorganisation, but the firm wants to reorganise without going to court.

Shares in the firm end 16% lower at $1.71 by close of trade in New York.

On 30 March, the US government gave GM 60 days to develop a new restructuring plan and gain further state aid.

'Fast track'

The White House has already given the firm $13.4bn (£9bn) in public money to prevent it from collapsing, but any additional aid requires the firm to meet tougher rules.

It is not alone. Chrysler was given 30 days to submit new plans for recovery from 30 March.

US President Barack Obama, who recently ordered the resignation of GM chief Rick Wagoner, has argued that bankruptcy protection could help the restructuring process.

According to the Wall Street Journal, the creditors may discover their rights are limited and are nervous that bankruptcy proceedings could be one step before collapse.

"Some bondholders fear GM's fast-track reorganisation inappropriately mirrors what was done last [autumn] when Lehman Brothers filed for bankruptcy protection as the US financial system seized up," said the newspaper.

Investment bank Lehman Brothers, which had been a stalwart Wall Street institution, was left to fail instead of being bailed out by the government

Foreign rivals

Car firms worldwide have been hard hit by a slowdown in demand, as consumers tighten their belts faced with the current financial crisis.

In fact, the problems faced by GM pre-date the recent crisis. It and other US car firms have faced increasingly tough competition from Japanese car firms, which have developed more energy-efficient and smaller models.

GM and other car firms have been reducing the workforce and cutting costs in a bid to improve their balance sheets.

The glum outlook for the industry was highlighted last week when ratings agency Standard & Poor's reduced certain debt ratings of GM and Chrysler Holding, in view of their uncertain outlook.



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