TORONTO AND OTTAWA — Canadian governments could be staring at an auto bailout bill of between $15-billion (U.S.) and $25-billion, based on one estimate of the cost of keeping the Detroit Three car makers out of bankruptcy protection in the United States.
As the White House said yesterday it was still looking at the options for a bailout, Moody's Investors Service Inc. said that preventing a collapse of the major Detroit auto makers during the next two years could cost Washington between $75-billion and $125-billion.
Ottawa and Ontario said last week that their commitment to Canadian units of the Detroit Three will be approximately 20 per cent of what the U.S. government provides, a number that matches those subsidiaries' shares of their parent companies' annual North American vehicle production. So the cost to the two governments could soar dramatically if they adhere to that promise, first outlined on Friday by federal Industry Minister Tony Clement.
Since then, new cries for financial assistance and stimulus packages running into the tens of billions of dollars have landed on Ottawa's doorstep from several sectors of the economy.
The White House said it's still studying options, but will require concessions from all stakeholders.
Ontario Finance Minister Dwight Duncan reiterated yesterday that Canada's contribution to the auto industry rescue will be proportional.
“We are taking a proportional share right now,” Mr. Duncan told reporters.
“I think we need to be there to protect the footprint of our industry. If we lose those jobs, if the industry leaves Ontario and … survives in the United States, that would have a devastating impact on our economy.”
He said he had not read the Moody's report. But another report commissioned by the Ontario government outlined a doomsday scenario in the event the Detroit Three collapsed.
The Ontario Manufacturing Council study released yesterday said 517,000 jobs in Canada would disappear within five years if the Detroit Three went out of business. That dire prediction could make it easier to sell a multibillion-dollar bailout to taxpayers.
Economic Development Minister Michael Bryant said that “the demise of auto in Canada is the economic equivalent of a nuclear freeze, with catastrophic effects that would knock us into a deep recession.”
While Ontario is home to the Canadian units of General Motors Corp., Chrysler LLC and Ford Motor Co., it also houses major assembly operations of Toyota Motor Corp. and Honda Motor Co. Ltd., which have been expanding in the province.
Ontario is already heading into its first deficit in five years. Mr. Duncan acknowledged that the $500-million deficit he has projected for fiscal 2009 is out of date because the figures do not include auto sector assistance.
A federal official said Ottawa expects the auto companies to come with another round of requests in the new year – that the current assistance is a stop-gap measure to allow them to reach a longer-term solution with the incoming Democratic administration, a so-called “bridge to Obama.”
However, he said, the companies have indicated to Congress that a $34-billion (U.S.) assistance package would be enough to allow them to complete their restructuring and compete in the smaller marketplace that is expected for the next several years.
He said the two levels of government are committed to maintaining 20 per cent of the three Detroit companies' current production, and to do so, will need to contribute 20 per cent of whatever the U.S. government provides.
“It's 20 per cent of what [the Americans] come up with,” the federal source said.
“We're going to be there when President Bush makes his call, and we're going to be there again when the new administration concludes its deal. We're looking at this being not a one-time thing.”
The Bush administration has said it will keep the Detroit Three afloat with an emergency rescue package of about $15-billion that will allow Chrysler and GM to survive until president-elect Barack Obama takes office in late January.
The most likely scenario, Moody's said, is a so-called prepackaged bankruptcy filing that involves Washington providing debtor-in-possession financing and co-ordinating broad agreement among stakeholders on ways to restructure the companies.
The rating agency pegs the chances of that scenario at 70 per cent.
Mark Zandi, author of the Moody's report, said his figures are based on U.S. vehicle sales of 11 million next year, 13.2 million in 2010 and 15 million in 2011, all substantially lower than the average of roughly 17 million from 1999 to 2006.
If the Detroit Three continue to hold about 50 per cent of the market, the cost of keeping them solvent will be about $75-billion, he said. If their share falls to about 40 per cent, the cost will soar to $125-billion.
© The Globe and Mail
