Chrysler And The Cratering Credit Rating Of Fiat

by John Berlau on November 2, 2012 · 2 comments

in Bailout Watch, Economy, Features

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My piece yesterday in The Daily Caller, “The Real Fiat Scandal,” spotlights the real threat to Chrysler’s prospects in the immediate and long term: Fiat’s cratering credit rating caused by its bloated workforce in Italy and sinking auto demand in Europe due to the European fiscal crisis. As Barron’s put it in a headline, “This time, Chrysler could bail out Fiat.”

Actually, as I write with former CEI Research Associate Mark Beatty in the piece, Fiat didn’t contribute much of anything to Chrysler’s bailout “last time.” “In the 2009 deal overseen by the Obama administration’s auto task force, Fiat paid no money to acquire its initial 20 percent stake in Chrysler — only contributing some of its intellectual property, instead.” But even here, Fiat “made Chrysler profitable again not by producing more of Fiat’s mini-cars, as the Obama administration urged it to do, but rather by doubling down on Chrysler’s most ‘environmentally incorrect’ light trucks and sport-utility vehicles, such as the Jeep Grand Cherokee and Dodge Durango.”

But the woes of Chrysler’s Italian parent cast a big shadow over its prospects stateside, regardless of where its plants are built and/or relocated (which as we know has been an issue in political news recently). As we write, “Moody’s had downgraded Fiat’s credit rating to “junk” even before the Obama administration arranged for it to acquire a Chrysler stake, and last month Moody’s gave Fiat another downgrade that the Financial Times described as even ‘further into ‘junk’ territory.’” Due to antiquated Italian labor laws, Fiat keeps 63,000 workers on its payroll in its home country. These costs are almost certainly putting a crimp on the company expanding or even maintaining Chrysler’s operations in America.

As we conclude, in a “traditional court-approved bankruptcy,” which still was an option even with government guarantees – and as Hans Bader points out on OpenMarket, “Romney was also not a free-market purist when it came to the auto industry” but wanted traditional bankruptcy before the government gave the companies any money – ”investors and workers would have had the opportunity to ask questions about Fiat’s financial viability,” and a bankruptcy judge may have even blocked the merger due to Fiat’s first credit downgrade in 2009.

That Chrysler’s workers’ fate is now directly tied to a company engulfed in the European fiscal crisis is an unfortunate consequence of a politicized bankruptcy process — as are the thousands of jobs lost at dealerships that were unnecessarily closed, which I have written about previously here and in National Review Online.

Tony November 3, 2012 at 8:05 am

Wow, what a short memory you have John Berlau. In 2009 Chrysler was a bankrupt business with nowhere to go, with a work force that awaited imminent unemployment. They were heading the same way as the UK car manufacturer Rover. Rover had no FIAT to take on the reigns, they went bust with tens of thousands of unemployed and now the only proof they ever existed, is that one line of vehicle Land Rover managed to be salvaged. FIAT did what nobody else wanted to do, they took on the responsibility of the whole operation. Now that Chrysler has made a major recovery, paid back its Government loans and increased work force, production and even tripled production of some lines, the likes of you belly ache that FIAT now own it. Ask the employees of Chrysler and all the other American businesses affiliated to their production and sales, whether they preferred to suffer the same fate as Rover or what they have today?

John Berlau November 5, 2012 at 5:00 pm

Tony,

It’s you who appears to have the faulty memory. Rover was in fact acquired by another firm: Leyland Motors in 1968. The firm was then nationalized in 1975 by the British government.

We’ll never know if Fiat did what “nobody else wanted to do” because a proper bankruptcy proceeding was never allowed to ask that question. It seems like a lot of firms would have taken the offer to get 20 percent of a major automaker for FREE, and then acquire majority control for one-tenth of the government support in bailouts. And some of these contenders may not have had cratering credit ratings that threaten Chrysler’s future.

By the way, both Chrysler and GM are still billions of dollar short of paying the government back. See this entry from Politifact http://www.politifact.com/truth-o-meter/statements/2012/mar/21/barack-obama/president-barack-obama-campaign-video-says-auto-co/

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