...might soon prove a huge mistake. Adam Opel, a German carmaker, has been heading for government loan guarantees in order to close its current liquidity gap (although it has been officially declared that this step is only a precautionary step and not a sign of Opel's financial weakness). German government says ready to help Opel.
But what is most likely to happen when government steps in? Will this measure calm financial markets? In a multinational corporation like GM, with the firm internal use of funds being hardly controllable or at least observable by financial markets, it is most likely that headquarters will abuse any additional dollar raised externally. In particular, anyone who is providing fresh funds to GM (or guarantees newly issued debt) will have to face the risk of huge losses in the case of bankruptcy, because of funds having been invested into almost intangible assets. And this danger is real -- given the enormous liabilities which GM has for example vis-a-vis its pensioners. Any dollar that is used to meet the pensioners' demands, though it may help GM in the short-run, could not be recovered in the case of bankruptcy.
Hence, either Opel has to be spun off first, or there is a fair amount of risk that the government will throw its money away by guaranteeing Opel's debt.
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And what do you think of this: Wirtschaftsweiser Bofinger fordert Verstaatlichung von Opel? Is this the solution?
This proposal may have some merits. In particular it may actually help to deter other carmakers from approaching government. BUT: If the problem with Opel lies with the company, a free market exit must not be delayed. If the problem is just cyclical, expansionary fiscal and/or monetary policy is more appropriate. If the root cause is the financial crisis, government should help the banking system to get back in business but not to support borrowers directly.
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