Insurers pull cover from GM and Ford suppliers

Troubled US carmakers General Motors and Ford Motor have been given a potentially devastating vote of no confidence by three big European credit insurers, which have removed cover from their suppliers.

The withdrawal of credit insurance - which covered suppliers against the risk of the car companies' failing – has previously hastened the demise of a string of European companies, with suppliers to retailers and construction companies finding cover increasingly hard to come by.

Euler Hermes, Atradius or Coface, which control more than 80 per cent of the world's credit insurance market, are refusing to write policies for suppliers trading with GM or Ford on credit. GM and Ford are two of the biggest groups ever to be blacklisted. The cut-off of cover will primarily affect the companies' large operations in Europe, where the insurers do the bulk of their business. US suppliers largely operate without insurance.

Ford and GM will be two of the largest companies to have seen their coverage terminated this way.

Euler Hermes has gradually reduced cover for suppliers trading with the two companies over the past three to six months, the insurer confirmed on Thursday.

Without credit cover, suppliers can choose to trade uninsured, cease trading, or demand payment up front – none of them appealing scenarios.

Withdrawal of insurance cover tends to be a last resort, and is done because a company has stopped providing insurers with enough information to analyse their credit risk, or because their risk profile has deteriorated.

The move leaves three possible scenarios: GM and Ford can start paying upfront for goods; they can hope their suppliers will trade uninsured; or they could be unable to buy the parts they need for car production.
The insurers have risk assessors working closely with the companies and are party to details not released to the market.

Even if the carmakers can keep the supply chain working, the refusal to provide cover will further weaken investor confidence.

GM last week said it might run out of the money needed to operate its business by early next year, and Ford revealed it had burned through $7.7bn in the latest quarter, twice the rate in the first half. Detroit's three carmakers are lobbying the US Congress for bail-out funds to help them survive the downturn.

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