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The United States third largest carmaker, Chrysler LLC, has filed for Chapter 11 bankruptcy protection and announced that it will enter into an immediate alliance with Italian carmaker Fiat SpA.

At the same time a spokesman for Chrysler Group Australia has indicated that the bankruptcy filing will have no effect on the company’s operations in Australia.

Under the terms of the Chapter 11 bankruptcy filing in the US, Chrysler will be allowed to “trade out” of its current financial situation and be protected from legal action by its creditors.

The company also earlier sealed a deal with the powerful United Auto Workers union that will see the union become a major shareholder in the Chrysler/Fiat organisation.

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The deal with Fiat, described as “industry changing” comes after weeks of negotiations that saw Chrysler failed to gain full support from its lenders to avoid the first-ever bankruptcy filing by a major US carmaker.

Chrysler Australia’s Public Relations Manager, Jerry Stamoulis, told CarAdvice; “Chrysler Australia and New Zealand are not part of any bankruptcy filling.

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“Chrysler Australia and New Zealand continues to market, sell and service Chrysler Jeep and Dodge vehicles and also honour the warranties of our vehicles.

He said, “It should be noted that we continue to market, sell and service our vehicles in all our markets, Chrysler and Fiat have signed an agreement in principle to establish a global strategic alliance to form a vibrant new company and Chrysler’s operations outside of the US are not part of any bankruptcy filling.”

Mr Stamoulis added that Section 363 of the Bankruptcy Code, should allow a leaner, new company to emerge in a matter of 30 to 60 days.

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The move was hailed by President Barack Obama as a critical step in saving 30,000 jobs at Chrysler, majority-owned by Cerberus Capital Group, and hundreds of thousands more jobs at affiliated suppliers and dealers.

At the same time, Chrysler entered an expected alliance with Fiat SpA, in which the Italian carmaker was given an initial stake of 20 per cent.

The deal will allow Fiat to own up to 35 per cent as it makes investments in U.S. operations and small-car technology for Chrysler.

Reuters newsagency says that over time, Fiat could eventually own 51 per cent after Chrysler has repaid its loans to the US Treasury.

2011 Jeep Grand Cherokee

Chrysler has struggled in recent years to compete, hurt by its near total reliance on the US market, poor quality and a truck and SUV-dominated vehicle line-up with the lowest combined fuel economy of any major carmaker.

Founded in 1925 by Walter P. Chrysler, three years later the company laid the cornerstone for the Chrysler Building, briefly the world’s tallest building and still a landmark on the Manhattan skyline.

The Chapter 11 filing, in US Bankruptcy Court in Manhattan, has implications for the entire industry, including Chrysler’s rivals and suppliers.

As part of the filing, the US government will provide up to US$3.5 billion in debtor-in-possession financing and up to US$4.5 billion in exit financing. President Obama said he hopes the entire process will take only 30 to 60 days.

Some of Chrysler’s 3600 US dealers are expected to close, and Chrysler Financial will stop providing loans for new cars and trucks. Instead, General Motors Corp’s financing arm, GMAC, will provide loans to Chrysler dealers and customers.

Judge Arthur Gonzalez, the same jurist who oversaw the Enron and WorldCom bankruptcies, will oversee the legal proceedings.

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In addition to Fiat’s ownership stake, US officials expect Chrysler to be 55 per cent owned by the UAWs’ healthcare trust fund while the US and Canadian governments hold a combined stake of 10 per cent.

Chrysler has three manufacturing plants in Canada and had to reach agreements with its unions there and the Canadian government under the restructuring.

The carmaker is not filing for bankruptcy in Canada, but the Canadian government, along with the province of Ontario, said they will provide US$2.42 billion in financing to help the company restructure.

The bankruptcy signals that President Obama is prepared to play hardball with holdout lenders rather than knuckle under to their demands and will likely set the tone for similar discussions with bondholders of General Motors, which is now on the clock to restructure its operations by the end of May.

Chrysler Chief Executive Robert Nardelli will leave the carmaker following the emergence from bankruptcy. The US government will place six members on the new company’s board and Fiat will appoint three.

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The bankruptcy filing did not stall the Fiat deal and Chrysler has been seeking a rescue deal from the Italian company while also trying to finalise its debt agreement.

“It’s a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry,” President Obama said.

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“Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry,” he said in a fulsome endorsement of the merger.

While Chrysler may have been among the car industry’s laggards, its plight reflects a slump in demand facing an industry whose US$2.6 trillion annual revenue is equivalent to the GDP of France and which employs more than nine million people.

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