Cash for clunkers - the party's over

The most reasonable assumption about the 'car scrappage' scheme in the UK, known as 'cash for clunkers' in the USA, 'Umweltprämie' in Germany and something completely unintelligible in France was that it would lead to people buying their next car earlier than they otherwise would have done, so while it may boost sales in the short term, we'd expect sales in the following months to be even lower than they otherwise would have been.

The US scheme ended at the end of August 2009. To the best of my knowledge, nobody expects them to start it again (if people did, that would depress sales in the interim period even further).

And, lo and behold, while there were about 500,000 more sales in the two months July and August compared to average monthly sales of about 800,000 in the first six months of 2009 (rough figures taken from this chart), sales in September 2009 were reported to be down by 26% compared to September 2008 and down by 38% compared August 2009 (taking a simple average of the figures in this article), which means sales were about 750,000, which is in fact only 50,000 less than the average for the first six months of 2009 (again, we have to assume that monthly sales would have been 800,000 in the absence of the scheme).

This is a smaller fall than I would have expected, but it is then wide open to debate by how many months sales were shifted forward; if sales stick at 750,000 for the next ten months, then you could argue that this is an overall shortfall of 500,000, but as we will never know what sales would have been etc etc.

So I'll call this one a goalless draw, for now.

Cash for clunkers (2)

The $1 billion cash-for-clunkers scheme was introduced on 1 July 2009 and ran for seven weeks until 24 August 2009 (although it may well be revived). Did the 'Car allowance rebate scheme' (acronym CARS*, natch) increase overall sales or merely accelerate them, thus leading to an even sharper drop in sales in the months after the scheme ends?

* UPDATE - that CARS link is now defunct. Somebody from Parts Catalog asked me if I could put a link to their website instead. So I did :-)

Matthew has put together a chart, which seems pretty conclusive to me:

The internet never forgets ...

Re Pavlov's Cat's comment here.

I think this is the previous example to which he refers.

Ford Motor Company of Detroit: You rock!

From today's FT:

Ford Motor will cut its debt by almost 40 per cent through a debt-for-equity swap, further distancing itself from its ailing Detroit rivals General Motors and Chrysler.

Ford, which appeared to be the weakest of the Detroit carmakers up to about a year ago, said Monday that holders of $4.3bn of senior convertible notes, or 88 per cent of the total, had taken up its shares-and-cash offer. In addition, its financing arm, Ford Credit, has bought back $3.4bn of its parent’s unsecured non-convertible notes. Ford Credit previously took over $2.2bn of Ford’s term loans at a sizeable discount*.

The deals will cut the carmaker’s debt from $25.8bn to $15.9bn, and lighten interest payments by $500m a year, based on current interest rates.

GM and Chrysler have been unable to agree on debt-for-equity swaps with their lenders – unsecured bondholders in GM’s case and banks in Chrysler’s. Their dire financial condition has prevented them from offering as much cash as Ford. Furthermore, the prospect of bankruptcy clouds the value of their equity.

Unlike GM and Chrysler, Ford has also nailed down a deal with the United Auto Workers union to accept shares rather than cash for up to half the carmaker’s contributions to a new union-managed healthcare fund**. In contrast to the $17.4bn in government aid advanced to its rivals, Ford has managed to remain afloat without direct help from Washington.

Even so, Pete Hastings, bond analyst at Morgan Keegan, warned that the response was by no means a vote of confidence in the carmaker. "Ford benefits from bond investors turning in their bonds rather than saying: 'I think I will be better off two years from now'," Mr Hastings said. "Rather than take that risk, [investors] are taking their money now."

So yet again, debt-for-equity swaps are shown to be a superior alternative to government bail-outs; either the underlying business has some value, however minimal (in which case it is worth preserving, the only question is how this should be divvied up between shareholders and bondholders) or it doesn't (in which case there's no point bailing it out with taxpayers' money).

Armed with such examples, all we need to do is to educate the general public that banks could sort themselves out in this manner as well.

* The discount appears to be about sixty per cent of face value. According to CityAM, Ford used $2.4 billion cash and 468 million shares (worth about $1.8 billion) to buy $9.9 billion of debt, i.e. Ford's debt was worth about 40 cents in the dollar.

** I love the idea of paying off the unions with shares. Ultimately, the business would become a sort of worker-owned co-operative, it'd be interesting to see whether it fared better or worse than other manfacturers.