TORONTO (Reuters) - Canada's government will take an ownership stake in troubled automaker Chrysler in exchange for more than $2 billion in loans, under a sweeping North American rescue plan, government officials said on Thursday.
Chrysler filed for Chapter 11 bankruptcy protection in the United States earlier in the day and also entered into an alliance with Italian automaker Fiat SpA.
Ottawa and Washington demanded the Detroit company partner with Fiat by Thursday as a condition for funding.
The Canadian government, along with the province of Ontario, will provide $2.42 billion in financing to assist with the restructuring process. Under the terms of the deal, Canada will take a 2 percent stake in the revamped Chrysler and will have one director on its nine-member board.
The deal also launches a restructuring of Canada's massive auto sector, and may form the blueprint for a similar arrangement with struggling General Motors Corp.
"This decision is not a perfect decision, but one that will ensure a viable Chrysler, and ultimately be a part of a viable auto sector coming out of the recession, which Canada must have," Prime Minister Stephen Harper told a news conference.
The political and economic costs of an auto industry collapse in Canada would be exorbitant, and Harper said it would mean half a million jobs losses overnight.
Ontario produces more vehicles per capita than any other jurisdiction in the world, and is also home to plants owned by GM, Ford, Toyota and Honda.
Chrysler's minivan is just one of the many well known vehicles built in the province.
Speaking at a news conference Harper, flanked by Ontario Premier Dalton McGuinty, said the fates of the Canadian and U.S. auto industries were inseparable.
Chrysler's Chapter 11 bankruptcy filing in the United States has implications for the entire industry -- including the company's rivals and parts suppliers.
As part of the filing, the U.S. government will provide up to $3.5 billion in debtor-in-possession (DIP) financing and up to $4.5 billion in exit financing. Washington hopes the entire process will take only 30 to 60 days.
Canada hopes the aid will allow Chrysler to survive, albeit as a smaller company.
"Let's not give the impression that everything is being saved ... These will be smaller companies with less employment," said Harper.
Ontario's McGuinty said the number of Chrysler jobs that will stay in Canada is impossible to guarantee, and would depend on the automaker's future performance.
"This is a measured success," he said. "We think we've done everything we possibly can to put this on a solid footing on a go-forward basis."
Chrysler currently employs about 9,000 people in Canada -- about 8,400 unionized -- at plants in Windsor, Brampton and Toronto, all in Ontario.
The Chrysler agreement includes clauses that guarantee the company maintains 20 percent of its North American manufacturing footprint and investment in Canada and opens new export avenues through Fiat's operations in Europe.
Harper and McGuinty said the deal was only possible due to concessions from the powerful Canadian Auto Workers union.
At a brief press conference on Thursday, CAW President Ken Lewenza gave his thanks to both levels of government -- and to union members "for their incredible sacrifices and for their trust in their union."
The union agreed on Sunday to cut its labor costs by C$19 ($16) per hour.
Washington will appoint four independent directors to the board of the new company and will hold an 8 percent stake.
Ottawa, which said it has no intention of staying in the auto business, can unload its 2 percent stake in the new Chrysler starting in January 2013, or could sell the stake to Fiat any time before that.
The government also said Fiat will have the right of first refusal to buy Canada's stake.
Auto suppliers will be protected under planned debtor-in-possession financing while Chrysler is under bankruptcy protection, officials said.
Under the deal, the Ontario provincial government provides one-third of the collective Canadian financing for Chrysler and takes one-third of the 2 percent stake.
Additional reporting by David Ljunggren, Randall Palmer and Wojtek Dabrowski; editing by Rob Wilson