Chrysler declares itself bankrupt

• Hedge funds refuse to countenance $2bn payoff to settle debt
• Obama condemns actions of 'small group of speculators'
• 11th-hour Fiat deal fails to save carmaker

America's third-largest car manufacturer, Chrysler, has declared itself bankrupt after a handful of creditors withstood pressure from the Obama administration to forgive billions of dollars in debt, casting a cloud of uncertainty over tens of thousands of jobs at factories, suppliers and dealers.

After round-the-clock negotiations broke down, the 83-year-old Detroit ­carmaker put its future in the hands of the courts, despite an 11th-hour deal with Italy's Fiat to pool ­technology in building new vehicles.

Both the White House and Chrysler expressed hope for a "surgical" bankruptcy lasting 30 to 60 days, clearing the company's liabilities and allowing it to emerge in healthy shape. But legal experts questioned whether this will be achievable and factory workers expressed fear for their jobs.

Although unions and Chrysler's leading banks accepted a rescue package brokered by the US treasury to swap Chrysler's liabilities for shares in the business, a group of hedge and investment funds refused to countenance a clause in which Chrysler's $6.9bn (£4.6bn) of debt would be cancelled through a cash payment of just $2bn.

Speaking at the White House, President Barack Obama made clear his anger towards the hold-outs: "While many stakeholders made sacrifices and worked constructively, I have to tell you that some did not. A group of hedge funds and investment funds decided to hold out for an unjustified taxpayer bailout."

He said it was "unacceptable" for a "small group of speculators" to endanger Chrysler's future. But he expressed optimism that Chrysler, which makes brands including Jeep and Dodge, could be restructured through a bankruptcy filing: "This is not a sign of weakness, but rather one more step on a clearly charted path towards revival."

Chrysler employs 54,000 people, but tens of thousands more work for parts companies and in motor dealerships that depend on the firm for business. About 115,000 retired Chrysler workers depend on the company for healthcare and benefits.

Damage to brand
Renowned for popularising the ­minivan, and for its robust sports-utility vehicles and pick-up trucks, Chrysler has struggled even more than its loss-making competitors, General Motors and Ford, to adapt to demand for smaller, more fuel-efficient cars. The US economic downturn and the credit crunch, which has frozen banks' funding for car purchase loans, sealed its fate.

Chrysler's chief executive, Robert Nardelli, described bankruptcy as a "bittersweet moment", but insisted that a filing for chapter 11 protection would ultimately "breathe new life" into the company. "It's something that will allow us to emerge in a much leaner fashion," said Nardelli, who announced that he would step down when Chrysler emerges from bankruptcy. "We'll be able to leave some assets behind, some liabilities behind, some debt behind."

The US treasury, which has already provided $4bn of emergency loans to the car company, will extend up to $8bn of aid to help it through bankruptcy. Further money will come from the Canadian government.

Although the US government says it will stand behind Chrysler warranties, analysts fear that a stigma attached to bankruptcy will deter car buyers. Brian Bethune, US economist at IHS Global Insight, said: "Bankruptcy will damage the Chrysler brand and that is regrettable. The government has to think carefully about how long they can bleed Chrysler out."

Under the US government's preferred deal, the United Auto Workers union was to take a 55% stake in Chrysler in lieu of cash owed to a healthcare fund. Fiat was to receive 35% for lending its expertise on European-style smaller cars. The Italian manufacturer has committed to build a car at Chrysler's factories and to share distribution networks.

Top banks, including JP Morgan, Citigroup and Goldman Sachs, agreed to write off two-thirds of Chrysler's debt, but a minority of the 46 creditors refused, arguing that trade unions and taxpayers were getting preferential treatment for political motives.

In a statement, the hold-outs, who include Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital said that in its "earnest effort" to secure Chrysler's survival, the government "risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades".

On the factory floor, Chrysler's bankruptcy was greeted with despondency. George Windau, a millwright at the company's Jeep factory in Toledo, Ohio, said employees felt their sacrifices in wages and benefits had led to nothing.

"We feel very betrayed," said Windau. "We feel lied to and it goes without saying that we're nervous and upset. The main concern is for the retirees – they're the most vulnerable part of this situation."

A bankruptcy court can force creditors to accept a settlement. But a judge will be obliged to consider alternative proposals from stakeholders, risking a lengthy dispute. The court will also have the power to shred Chrysler's contractual commitments to suppliers and dealers.