March 30, 2009 / 4:56 PM / in 8 years

Canada bails out carmakers, says they could fail

<p>A General Motors logo is seen at a car dealership in Toronto December 12, 2008.Mike Cassese</p>

TORONTO/OTTAWA (Reuters) - Canada joined the tough talk of the Obama administration about the auto industry on Monday, saying no car maker is too big to fail, but it nonetheless offered billions of dollars in bridge financing to the Canadian units of General Motors and Chrysler.

Industry Minister Tony Clement said the plans set out by GM Canada and Chrysler thus far fall short of making them viable and called for further concessions all around.

"The old rule book is thrown out the window. I don't think anything is too big to fail, but we're going to give it our best shot at having a restructured auto sector and this is all part of it," Clement told CBC television.

He made the statement after announcing C$4 billion ($3.2 billion) in loans to tide the two automakers over while they come up with new restructuring plans.

The governments of Canada and the province of Ontario will provide Chrysler with C$1 billion, advancing C$250 million right away. They will distribute another C$500 million in early April and the remainder as of May 1.

"Very clearly, if the money had not been forwarded today, (Chrysler) would not have been able to meet payroll today or tomorrow," Clement told a news conference in Ottawa.

"So we were faced with this choice of a disorderly bankruptcy ... We felt now was the time to announce this."

GM is eligible for up to C$3 billion in bridge loans and the government said it hoped to close that deal "very soon".

Ottawa and Ontario first announced the short-term financing in December but neither company has drawn on it.

Canada will provide no further financing unless acceptable plans are produced. If they aren't, the government would have the option of calling the loans.

In addition to proving their viability, the companies will have to commit to maintaining 20 percent of their North American production in Canada.

On Monday, Washington demanded tough new restructuring plans at GM and Chrysler and forced out GM's chief executive.

Clement said the Canadian and U.S. governments were working closely on the file. He said Ottawa endorsed plans arrived at jointly with the United States under which Chrysler would have until the end of April to come up with a viability plan that must include a link-up with Italy's Fiat SpA.

LABOR CONCESSIONS

Chrysler will also have to find a compromise with the Canadian Auto Workers union on cutting labor costs, while Canada says a deal that the union already cut with GM does not go far enough.

The union recently agreed to reopen the three-year contract deals it reached with the companies last May to help GM and Chrysler qualify for government aid.

Earlier this month, the CAW reached a deal with GM that the company said will eliminate nearly C$1 billion of costs related to its retired workers from its books, on top of cutting active labor costs by more than C$7 an hour.

Chrysler has said it needs a better deal from the union, or it could be forced to pull its operations out of Canada.

Clement said the GM-CAW deal falls short of what's required.

The Canadian government is "expecting General Motors and the CAW to continue their discussions, particularly on the issue of legacy costs where it has become apparent there wasn't as much progress as we would have liked to have seen," he said, referring to costs related to retiree benefits.

CAW President Ken Lewenza dismissed the idea of reopening the contract with GM to address legacy costs, saying there was nothing the union could do even if it wanted to.

"You can't do it in bargaining, and nor will we," he said at a press conference in Toronto. "I mean, at the end of the day, it's not legal to say to pensioners that you're not entitled to the pension benefits that you left on."

However, Clement said that if the companies enter bankruptcy protection in the United States, they would do the same in Canada, and the unions would then be forced to take a "haircut" along with everyone else.

"While we believe in the long-term viability of these companies, I agree with President Obama that we must also consider the possibility of court-supervised restructuring," he said.

Later, he elaborated to the CBC: "Bankruptcy protection is a whole new ball game for unions as well as for pension holders and others. I would suggest to them that it's in their best interest to start discussing these things directly with the companies."

Lewenza said the union would be willing to sit down with the federal and provincial governments, and the companies, to look at the possibility of setting up a plan similar to what the United Auto Workers union and the companies have agreed.

In the United States, GM and Chrysler have obligations to a retiree healthcare trust, known as a Voluntary Employee Beneficiary Association, and are pushing the UAW to allow them to pay the union in stock rather than cash for half of the remaining obligations.

($1=$1.26 Canadian)

Additional reporting by Louise Egan and David Ljunggren; Editing by Peter Galloway

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