US government bails out of GM Chrysler merger

Today’s understanding of free market capitalism apparently revolves around the idea that the bigger you are, the more funds you’re entitled to receive from the government. General Motors and Chrysler pushed the boundaries of this normal social conduct to the unheard of territory when they asked the US government to fund their merger.

What GM asked for was essentially federal funds to kill off Chrysler while Cerberus, Chrysler owners, asked for federal money to walk off without losses and the blame. Washington was put into a lose-lose situation with pretty much only one logical option left – they had to play the role of federal Pontius Pilate, wash their hands and leave GM and Cerberus to their own devices. The problem is there are none.

There seems to be the general consensus that the merger would mean axing almost entire Chrysler line-up in all divisions – Chrysler, Jeep and Dodge. That would in turn result in closing plants and massive layoffs. Then there are dealerships, parts manufacturers and pretty much everybody whose livelihood depends on car manufacturing. Even coffee shops and fast-food restaurants in areas around closed factories are going out of business.

Unless the US and global economies make a miraculous recovery in the next few month, US car manufacturers will have to downscale. Which is a process that’s already underway and is both irreversible and unavoidable no matter in what shape and form the help arrives. Even nationalization of Detroit (yes, it has been suggested) wouldn’t change a thing. It simply doesn’t make sense to manufacture cars that nobody would buy.

(Written for World Business Press Online)

Flaherty, mk II

Canada’s finance minister Jim Flaherty continued his Copernican shift, or a 180 degree pirouette, on his stance on budget deficit. This time though, he’s nearly finished. A brief recap.

Exactly a week ago, Flaherty, while commenting on Ontario’s planned budget deficit, said there would be no deficit, no even a temporary one. On Friday, with the news that the August budget was indeed in a deficit, Flaherty said with confidence that, overall, the budget would end up in “modest” surplus. On Sunday, the minister refused to “categorically rule out a deficit” and added that the government would run a deficit “if it were responsible thing to do in a critical situation in Canada”.

On Wednesday, October 29, he said that “misguided attempts to balance the books” in the global economic downturn might lead into “long term damage”. In other words, “surplus at any price” is not an option. It’s still long way to March 2009 and with markets and currencies behaving unpredictably even in their best moments, predictions are bound to change overtime. Still economists predict 5-10 billion deficit for 2009-2010 year. Still, Flaherty was adamant that deficits will not be part of “structural framework” and will be treated more as a necessary evil rather than a regular fiscal policy instrument.

It’s not only economic reality that drives Flaherty to shift his position. Politics plays it’s role too. For one, election campaign promises will have to be treated as luxuries. Two, admitting the possibility of a deficit and attributing it to the global markets meltdown will ease off potential attacks of the opposition. Local commentators point out that it was the Conservative party that accused its opponents of proposing economic plans that would inevitably lead to deficits. Under current circumstances, any government would be forced to run deficit, still, any ammunition is good ammunition when for the opposition parties.

But whatever is the main motif behind Flaherty’s shift, it’s with all probability the only sensible short-term option that would work for Canada in the long run.

(Written for World Business Press Online)

Chrysler euthanasia sponsor wanted

Rumours surrounding merger between General Motors and Chrysler intensified after reports that both manufacturers asked US government for a special package to support the deal. The details as to how advanced are negotiations were ranging from “asked for” to reports that the US Treasury Department is already actively looking for the best way how to make the merger possible.

Whether GM and Chrysler asked for $5 or $10 billion is important only when related to a $25-billion loan for the Big 3 (or Big 2.8) already approved a signed few weeks ago. It went unnoticed at that time because it was first OKed amid discussion about a $750 billion Wall Street rescue package.

The important thing in the GM-Chrysler merger story is logic behind the idea.

A merger/takeover between two prosperous manufacturers, one big and one small, would make sense. A merger/takeover between a prosperous and a failing would make sense. But a merger between two companies on the verge of bankruptcy? Not so much. Governments do play their role in operations like this and it comes in many forms and shapes. A legislature tweak here, a tax relief there. All for the sake of national interests.

Of course, keeping about 70,000 Chrysler and 350,000 GM employees at work is important, but it’s extremely unlikely that they will all keep their jobs. Both Chrysler and GM (and Ford, for that matter) have announced massive job cuts in the past few weeks. Then there are the overlaps in their model line-ups. On Monday, Autoblog compared competing models and concluded that only 2 Chrysler models would survive the merger. Or, shall we say, euthanasia? Even if GM decided to axe more Chevrolet and less Chrysler models, it wouldn’t change much in terms of workforce losses.

At the moment, it looks as if GM were only after Chrysler’s cash because, frankly, there’s not much of anything else, and is seeking government’s (taxpayers’) money to offset expenses of effectively shutting Chrysler down. Chrysler itself has nothing to lose or gain. Meanwhile, Chrysler’s owner, Cerberus, is desperately trying to sell Chrysler while there’s still something to be sold. Last week, Daimler, previous owner of Chrysler, declared that the value of its 19% share in Chrysler is worth $0. For the US Treasury, it’s an exercise in damage limitation. But unlike helping financial institutions, puring money into US car manufacturers’ accounts means bailing out companies that failed long before the global market crunch.

(Written for World Business Press Online)

Flaherty in Copernican shift

Canada’s finance minister Jim Flaherty has been reversing from his long-standing views on budget deficit faster than a getaway stunt driver. Last Wednesday, while commenting on Ontario’s planned budget deficit, Flaherty said there will be no deficit, no even a temporary one. On Friday, he was hit by a news that the August budget was indeed in a deficit but that didn’t crack Flaherty’s confidence as he went on to say that overall, the budget would end up in “modest” surplus.

Come Sunday, and Jim Flaherty is doing a U-turn again as he refused to “categorically rule out a deficit”. Speaking for the Canadian public broadcaster CBC, Flaherty said that the government would run a deficit “if it were responsible thing to do in a critical situation in Canada”. He went on to say that a significant worldwide recession would be such a thing. Which is exactly the world is spiralling towards.

Fortunately, Flaherty seems to realize that cutting spending just to keep the budget in black is not an option. Luxuries promised during election campaign will have to wait. Which will not make much of a difference since the Conservatives’ promises, such as diesel tax cut, were more-less teasers that wouldn’t harm public finances. There’s still “a budget reluctance”, but the sooner the government braces Canadian finances for the impact the better.

This may be tough though. To add insult to an injury, the Canadian dollar has fallen to its lowest level since September 2004 to 77.59 US cents. This, among other import-export and tax revenue related issues, means that Canadians no longer need to complain about price imparity brought in by more than a year of dollar parity.

(Written for World Business Press Online)

Running a deficit versus being run by a deficit

Canadian no-deficit mantra has come to an temporary end after the Finance Department reported a $1.7 billion budget deficit in August. Which is, in a rather tragic way, funny, since only on Wednesday Canada’s Finance Minister Jim Flaherty said there will be no deficit, not even a temporary one.

Still, it’s not the end of the world as the budget still ends up in an overall $1.2 billion surplus for the first five months of the current fiscal year. By the way, Canadian fiscal year runs with a modified post colonial wisdom from April 1 to March 31, unlike the British financial year that starts on April 6 and ends on April 5.

Last year’s August budget was $100 million in the red with a 5-month surplus of $6.6 billion. The thing is that unlike the last year, the cushion is much smaller, the deficit much bigger, Canadian dollar 20% bellow the parity with its US counterpart and global financial circumstances somewhat different. Last year mortgage crisis and its international consequences were a mere turbulence compared to the current mayhem.

Keeping with the official party line, Canadian Finance Minister Jim Flaherty assured his compatriots that the government will still run a modest surplus. The thing is that Flaherty is convinced that running deficit, even under current circumstances, is a bad thing. Again, ideology beats the realpolitik.

Flaherty and his mates need to realize that running a deficit is not a bad thing. It’s much better option than letting a deficit to run government’s finances.

(Written for World Business Press Online)

Crisis? What crisis?

Canada seems to have found the way how to avoid recession. Verbally and on political level. Because while the leaders firmly believe, at least publicly, that Canadian economy and banking system are indefinitely more secure than any other major world economy’s, actions they undertake tend to prove that it is inevitably vulnerable as every other economy. But in Canada, recession is still a question of politics, not of question of economics.

First, there’s a issue of budget deficit. In Canada, this word is frowned upon to such an extent, that merely suggesting running a deficit qualifies as the eighth deadly sin. Running a deficit means skipping purgatory and ending up in the political hell. Apparently, Canadian governments have only one budgetary objective – keep the surplus no matter the consequences. But then, Ontario announced on Wednesday that it would run a $500 million deficit in the fiscal year 2008-2009. Which, given that both Ontario spending and revenues are in the region of $96 billion, is really a proverbial drop in the sea.

However, the plan was slammed immediately from all political quarters followed by “We? Never!” proclamations. Political rhetorics is winning over economy and that is always dangerous, especially in circumstances of global economic downturn. The underlying message that Canadian economists try to pass on to the government is that a deficit is necessary to keep the economy going during, or on the brink of, recession. “Government debt plays a useful role in the economy in terms of financing some of the long run infrastructure investments you have to make and in terms of lubricating a financial sector. These days, there’s nothing investors love more than the good, stable government bond to put their money into,” said Jim Stanford, Canadian Auto Workers Union economist, for the CBC.

Political leaders, especially the Conservatives, could have been more prone to listen but they’re too busy repeating pre-election mantra that Canada is on its way to avoid recession. Even the Bank of Canada’s report, grim as it may be, failed to call the spade a spade by projecting dubious zero percent growth for the next quarter. That, with current quarter contraction being 0.4%, means that Canada will not face recession which is defined as two consecutive month of declines. What’s more, according to the Bank, recovery will start in 2010. That, from purely political point of view, bears all characteristics of, well, political rather than economic prediction.

Meanwhile, economists such as BMO Capital Markets chief economist Sherry Cooper, predict that the recession is unavoidable. Canadian economy depends on the US economy, which already is undergoing recession. Housing market in Canada is slowing down significantly, as is consumer spending. Canadian dollar fell to less than 80 cents US, and falling oil prices provide for even gloomier background.

On Thursday, Canadian finance minister Jim Flaherty announced new measures to ease up bank-to-bank borrowing. According to the press release, “the Canadian Lenders Assurance Facility will provide insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. This initiative will help to secure access to longer-term funds so that Canadian financial institutions can continue lending to consumers, home buyers and businesses in Canada.” Earlier this month Ottawa announced a takeover of a $25 billion takeover of bank-held mortgages.

It’s not that the government fails to react, although, all measures were announced only after the US and European Union countries adopted similar programs. The potentially damaging issue is that political needs (election), flawed political ideas (no deficit no matter what) and ideology stand in the way of absolutely vital measures that need to be implemented to help Canadian economy during global financial turmoil.

(Written for World Business Press Online)

Chrysler rumours signal end of Big 3

Chrysler is the smallest part of what used to be know as the Big Three of US car manufacturers. They are, more often than not, referred to as Not-So-Big 2.8, the moniker that is the result of slow sales, record losses and turbulent, and more recently colorful, Chrysler’s history.

Chrysler, the smallest of the Big 2.8, was bailed out in 1979, at that time a $1.5 billion government money was packaged as a “loan guarantee”. Chrysler reinvented itself in the 1990s, producing “cab-forward” cars that were, unlike GM and Ford offerings, on par with European and Japanese cars, even BBC Top Gear’s Jeremy Clarkson admitted that. In 1998, Chrysler was purchased by Daimler-Benz, forming DaimlerChrysler AG. Officially a merger, take-over in real life, Chrysler’s models shared many parts with the previous generation Mercedes cars, which, at that time, were renowned for substandard reliability and built quality. Chrysler fortunes faltered again and Daimler sold 80.1% to Cerberus, a private equity group, in 2007.

Now, Daimler has troubles on its own. Mercedes COO Rainer Schmückle said recently that Mercedes is in a “full-blown sales crisis” and Daimler Trucks announced 2300 layoffs of in its Ontario and Oregon plants. Ontario Sterling Truck plant closure will mean 1300 jobless in St. Thomas, with population of 36,000.

Back to Chrysler. News channels have been aflush with speculations about its future in the past week or so. They’ve had one in thing of common, though – Chrysler will not stay with Cerberus. Chrysler is, apparently, in merger-takeover talks with General Motors. The story got complicated with the back-story about talks between GM and Cerberus concerning the GMAC Financial Services. Cerberus owns 51%, GM 49%.

It’s hard to imagine, as most industry insiders say, that GM would retain Chrysler’s dealership network and production facilities. Even though some models may be retained, with great many overlaps and markets’ downturn, its, again, hard to imagine that both GM’s and Chrysler’s lineups will survive unaffected.

Still, there’s one concrete information among rumours. Renault/Nissan is also in the play, in fact, it apparently made an offer to 20% of Chrysler. Earlier speculations indicated that Renault is interested in Chrysler’s Jeep brand. However, since Nissan is more than capable of producing more than capable off-road vehicles, it may be all about the name. Renault Wrangler anyone? According to Detroit News, Nissan will have to foot the bill, because Renault is in a $5 billion debt. That would be, by a little stretch of imagination, a takeover of an American manufacturer by a Japanese company. Still, Renault will first make sure that issue of remaining share in Chrysler is solved before it moves in.

Meanwhile, Cerberus may be playing field trying to get the best possible offer for Chrysler. Whatever the outcome will be, it’s not an easy game, Chrysler has been on life support for a while now and Cerberus is offering a dying animal on a volatile market. And whichever of the possible transactions goes ahead, there will be no Big Three or 2.8 anymore.

(Written for World Business Press Online)

Canada’s democratic deficit

Not counting in seven million votes cast legally by eligible voters would send any election monitoring body, be it the OSCE, Council of Europe or Transparency International, spinning with anger and sending protest notes and demarches to the guilty government. Still, it’s an election reality in all first-past-the-post systems such as United Kingdom or Canada, and it goes unanswered.

According to Fair Vote Canada, more than seven million votes simply did not count in October 14 election. The grim fact is that only votes for the winning candidates matter. Even grimmer fact is that with more than two candidates in a riding, it’s often more than half of the votes that do not count. Which is exactly what happened – 13.7 million Canadians voted, more than half of them didn’t have to bother. With historic low turnout of 59.1% that means that only about one third of Canadians had their say in deciding their country’s future. In Gatineau, 71% of voters were “orphaned”.

Under proportional representation, the 40^th Canadian parliament would have 117 Conservative MPs (not 143), 81 Liberals (not 76), 57 New Democrats (instead of 37), 28 Bloc Quebecois deputies (not 50) and Green Party would have 23 MPs – it has none despite attracting more than 940 thousand votes or 6.8% of popular vote.

Sure, one can object that this is just a play with numbers, a specific point of view, perhaps distorted to the same measure as the first-past-the-post system election results, and finally, that the rules are the same for everybody. Yes, they are. 1.7 million conservative voters lost their vote as did 2.1 million liberal voters. Green Party lost badly and their leader Elisabeth May, who featured prominently at the Tuesday Fair Vote Canada press conference, even organized a virtual Green Party caucus meeting in front of the House of Commons featuring 23 people posing as Green MPs who were not elected due to the first-past-the-post system.

But any party can found themselves on the receiving end of current rules, the Conservatives had, at one point, only two (that’s 2) MPs. The problem is that Canada and Canadians are always on the receiving end of the system which has little to no sense in a multiple-party political environment. Even in a bi-party scenario, it’s possible that a single party would gain 100% of parliament chairs by winning by a single vote in each riding/constituency. And it wouldn’t be the public who would speak, since the actual difference in votes would be 308 – which is the number of ridings. That is not democratic by any standard.

The only answer to the Canadian democratic deficit is introduction of proportional voting system. Whether this will be done through a reform of the Senate or a complete overhaul of the election law in Canada is subject to discussion. As both Larry Gordon, the executive director of Fair Vote Canada, and Elisabeth May told me, there’s no single proportionate system they’re now looking for as an example that may be implemented in Canada. The idea allows for wide degree of maneuvering and adjusting for the specifics of the country. For example, it would make political parties more nationwide and decrease secessionist tendencies whether from Quebec or western provinces.

As for the level of support, it’s kind of given that the Green Party, New Democrats and Liberals would support the idea, especially after the latest election results. But the situation can reverse in four years and even the Conservatives should have no other than purely political reasons to oppose the reform. As Elisabeth May pointed out, Conservative leader Stephen Harper once wrote an article advocating proportionate representation. Probably the most difficult task will be to persuade Canadians who, as is the Fair Vote Canada plan, should make the decision in a referendum. British Columbia will vote on electoral reform in May 2009 – the reform would introduce proportional voting. Results of the referendum (which will be subjected to the “super majority” to become binding) will indicate whether Canada is ready to adopt modern democratic voting system which ensures that all votes do count.

(Written for World Business Press Online)

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