Chrysler to file for bankruptcy as creditors balk

WASHINGTON (AFP) - - Chrysler will file for bankruptcy protection after major creditors balked at a deal to reduce a big part of the ailing automaker's debt, a White House official said Thursday.

The official said the expected court filing would not deter the administration from supporting Chrysler as it seeks to emerge from restructuring in the court process under Chapter 11 of the bankruptcy code.

President Barack Obama was to make a statement on the auto industry at midday (1600 GMT), the official added.

A bankruptcy filing would place the struggling number-three US automaker in the hands of a bankruptcy judge, although the company would likely get further government aid to restructure its operations.

The Obama administration, which has given Chrysler and its larger rival General Motors emergency loans, is also expected to help broker a deal that would give Italian maker Fiat a stake in Chrysler in exchange for small-car technology.

The news came after the United Auto Workers (UAW) union members approved an agreement to accept stock in place of cash obligations to the union's retiree funds.

But the automaker's other creditors failed to approve a tentative deal to restructure some 6.9 billion dollars in debt, the US official said.

"The administration went into yesterday afternoon with the full support of Chrysler's key stakeholders, including the UAW and the largest creditors. That support remains," the official said.

But a tentative deal with major banks and hedge funds failed to win approval even after Treasury officials sweetened the offer, the official said.

"The remaining creditors were provided a final opportunity to approve an increased offer of 2.25 billion dollars," with a deadline of 6:00 pm (2200 GMT) Wednesday.

"While the administration was willing to give the holdout creditors a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success," said the official.

The breakdown of talks "does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward," the official added.

Obama suggested in a televised news conference Wednesday that even if Chrysler were forced into the bankruptcy courts, a quick restructuring could be achieved.

Earlier Thursday in Milan, a newspaper report said Chrysler and Fiat had signed a definitive alliance.

Under a preliminary deal signed in January, Fiat initially would take a 20 percent stake which would then rise to 35 percent and could eventually reach 51 percent.

Obama's auto task force had given Chrysler a deadline of midnight Thursday to come up with a viable plan to continue getting government aid. This was expected to include a deal with Fiat and concessions from creditors and the UAW.

Chrysler also struck a deal with Daimler AG in which the German automaker renounced its 19.9 percent stake in the US firm and agreed to pay 600 million dollars in pension costs.

Obama has evoked the possibility of a "quick rinse" bankruptcy supported by government financing, yet some analysts have been skeptical, saying the courts must consider the rights of all creditors.

Some analysts have predicted Chrysler may not be able to emerge successfully from Chapter 11, but that pieces of the company might be sold off to Fiat or others and the rest liquidated.

Douglas McIntyre at 24/7 Wall Street said Chrysler and possibly GM may undergo a painful court process that harms their prospects.

"The government has misjudged the stomach that the bondholders have for risk," he said.

"In the process, Chrysler and GM may enter a bankruptcy process that could last for months and may compromise any chance that the two firms will emerge strengthened."