STANDARD & POOR’S yesterday threatened to reduce the credit rating of General Motors to junk status, pushing the financial reputation of America’s largest carmaker to the edge of the precipice.

The rating agency, which had already relegated GM’s debt to the bottom of the investment ladder, yesterday increased its negative stance when GM cut its 2005 profit forecast by 80 per cent and said that it would suffer a loss in the first quarter.

A fall to junk status would be a blow for GM because it would increase its borrowing costs. It would also have wider implications for financial markets because of the size of GM’s outstanding debt.

Late last year GM owed more than $300 billion (£155 billion) and had $120 billion in outstanding bonds. It represents 3 per cent of European bond indices, but a relegation would force many fund managers to dump its bonds because they no longer met their investment criteria.

Evidence of a substantial cashflow drain — GM is expecting an outflow of $2 billion this year — caused S&P to signal a possible downgrade. “We now view the rating as tenuous,” said Scott Prinzen, an S&P analyst. “The rating could be lowered at any point if we came to doubt that GM was on a trajectory to improving its financial performance.”

S&P rates GM’s long-term debt at BBB-, the lowest investment grade. Moody’s, the rival rating agency, yesterday said that it would downgrade GM to one notch above junk status.

Strong hints that worse is to come shook bond markets worldwide, sending investors fleeing to the safety of US government stock, and the yield on GM’s benchmark 2033 long bond soared to a 4.71 per cent premium over Treasuries. The exceptionally higher yield, which reflects the extra risk for an investor compared with government bonds, heightens expectation of GM’s imminent relegation to junk-bond status. GM’s yield currently exceeds that of typical emerging market government bonds.

Shares in GM slid 12 per cent yesterday as the carmaker confessed to its worsening plight. The company, which boasts famous US brands such as Buick, Chevrolet and Cadillac, is caught in a pincer between rising raw material costs and pricing pressure from Japanese rivals. Moreover, GM is burdened with large pension and health liabilities; the company is the biggest private health provider in the US and hundreds of thousands of US pensioners rely on monthly cheques from the motor group.

Bond analysts question whether the riskier high-yield market, relatively undeveloped in Europe, has enough investors to accommodate an issuer of the size of GM. Its main rival, Ford, yesterday said that its earnings would come in at the lower end of expectation. The debt rating of the number two US carmaker is also hovering above junk status.

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