Potential GM bankruptcy catastrophic for US economy

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WASHINGTON, Dec 13 (Reuters): A General Motors bankruptcy would push the US economy deeper into recession and cause a labour market catastrophe, highlighting why the government has signaled it could step in to prevent an outright collapse. The embattled No. 1 US automaker was still facing the possibility of a bankruptcy filing on Friday after lawmakers rejected a $14 billion bailout proposal late on Thursday.
Analysts said the ripple effects of such a chain of events would be felt far and wide.
"It would significantly intensify the recession, it would make it deeper and it could also prolong it," said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.
"There will be massive job losses not only directly related to the auto makers, but also their suppliers. It would exacerbate the existing financial and some of the ongoing credit problems as well."
Faced with that kind of scenario, the White House said on Friday it was ready to use part of the $700 billion Wall Street bailout fund to keep to auto companies afloat, reversing its previous position.
The worst financial crisis since the Great Depression has left the U.S. economy mired in a recession since December 2007, claiming nearly 2 million jobs so far. Analysts said this could worsen if the troubled auto makers do not get financial help.
"The lost GM output could easily lower GDP growth over a quarter by four percentage points or more. It would a stunning blow to the U.S. economy," said Cary Leahey, senior managing director at Decision Economics in New York.
GM and Chrysler urgently need a bridging loan while Ford Motor Co's financial position is not as dire. Analysts said Chrysler's fortunes were closely tied to those of GM and would also be unable to avoid bankruptcy without loans now.
"If GM went down and Ford is still standing, it would still take time for Ford to ramp up their production to fill up the gap," Leahey said.
Motor vehicles and parts contributed $440.4 billion to the U.S. economy, unadjusted for inflation, in 2007, according to government data, roughly 3.2 percent of GDP.
As well as the United States, GM operates in countries around the world, so job losses could spread far and wide.