First real-sector casualties are the US auto giants

The US automotive industry appears to be among the first major real-sector victims of the global financial crisis that broke loose a few months ago.

General Motors (GM), Ford and Chrysler yesterday sought a combined US$25-billion (Bt876 billion) bail-out package from the US Congress, as the outgoing Bush administration was reluctant to respond to their request.

Initially, there were efforts to get the money for the auto giants from the $700-billion rescue package approved earlier for the financial sector, but such a move is unlikely to be successful at this stage.

Proponents of the auto bail-out plan have suggested that the Big-Three carmakers and related industries are too big to be let go, as millions of American jobs are at stake.

On the other hand, opponents are of the opinion that no taxpayer money should be used to prop up failed companies.

According to the website of GM, one of the world's biggest auto-makers, which is seeking a big chunk of the proposed $25-billion package, the risks of failing to provide loans to the ailing US auto sector are enormous. First, nearly 3 million jobs could be lost in the first year, with another 2.5 million to follow over the next two years.

Second, personal income in the US would drop by more than $150.7 billion in the first year.

Third, the cost to local, state and federal governments could reach $156.4 billion over three years in lost taxes, and unemployment and healthcare assistance.

Fourth, domestic auto production could drop to zero due to the bankruptcies of numerous suppliers in the auto sector.

GM and the likes have complained that the US financial meltdown and subsequent credit crisis are hurting the auto industry in many ways.

For example, carmakers cannot get loans to restructure and to produce new advanced-technology vehicles, while suppliers and dealers are facing a similar fate.

According to Bloomberg, GM needs $10 billion to $12 billion, while Ford needs $7 billion to $8 billion and Chrysler is seeking $7 billion.

Chrysler burned $3 billion in cash in the third quarter and had $6.1 billion remaining at the end of the period, said its top management.

GM earlier this month warned it could run out of cash by the

middle of 2009 if sales fail to turn around or it fails to add capital.

A first-quarter 2009 bankruptcy of the auto-makers could cause US gross domestic product to shrink by at least 4 per cent as US auto production would slide by 30 to 35 per cent, according to an analysis released by Deutsche Bank economist Joseph LaVorgna.

Unemployment would jump to between 8 per cent and 8.25 per cent, the analysis showed, from the current 6.5 per cent.

Stephen S Roach, chairman of Morgan Stanley Asia, said in Bangkok last month that the real sectors of the US economy would be hit hard soon after the financial crisis broke loose.

This means there would be massive consolidation of consumption, home-building and other real sectors of the economy.

As of October 31, Roach noted that we had seen only 20 per cent of this second order of impacts caused by the financial crisis, which started more than a year ago.

In his taxonomy of the crisis, the first order of impacts lies in the contagion of cross-financial products, including derivatives and structured products.

The outcomes are de-risking and de-leveraging as have been seen around the world over the past months.

About 65 per cent of this is now behind us, according to Roach.

In the second order of impacts, he said asset-dependent real economies would be hit, while the third order of impacts is waiting - with international trade and capital flows to be hit via cross-border linkages.