Chrysler may give union 55% stake instead of $10.6bn to provide healthcare after Obama administration piles pressure on carmaker

Chrysler's largest trade union could end up owning 55% of the ailing carmaker under a tentative deal intended to save the cash-strapped 84-year-old company from bankruptcy and possible liquidation.

With just 48 hours to go before a deadline set by the Obama administration to prove its viability, the third largest US motor manufacturer yesterday agreed the outlines of an arrangement to carve itself up between the union, the US government, lenders and its likely technology-sharing partner, Fiat.

Under the pact, the United Auto Workers Union would take a majority share in the company and would get a seat on the board – an unprecedented arrangement which would turn the firm effectively into an owner-operated enterprise.

In return for shares in Chrysler, the UAW will allow the company to cut by half the $10.6bn it is supposed to be investing in a union-run trust to provide healthcare for retired workers.

In a letter made public last night, the UAW's leadership asked members to accept changes to bonuses, overtime, job security agreements and health benefits. It warned that unless workers agreed, the US government would withdraw financial support and Chrysler faced "immediate liquidation".

"These modifications to our contract and to the [healthcare] trust are essential to securing federal loans to keep Chrysler in business so that we can keep manufacturing jobs here in the United States and, more importantly, live to fight another day," wrote the UAW's president, Ron Gettelfinger, and vice-president, General Holiefield.

The UAW revealed that Fiat is to get a 35% stake in return for a commitment to build a small car at Chrysler's US factories and market Chrysler's products in Europe. The US company, which owns brands including Dodge and Jeep, has suffered from its lack of expertise in smaller vehicles.

Chrysler's lenders, which include top banks such as JP Morgan and Citigroup, have been sticking points in achieving a deal, reluctant to take shares in the company to satisfy their $6.9bn of loans. In a breakthrough yesterday, several leading lenders accepted an arrangement under which they would write off more than two-thirds of the money they are owed, accepting just $2bn in cash. But 46 banks and hedge funds all need to agree to this.

The Obama administration wields influence with the banks because it has extended bail-out money to them under the treasury's Troubled Asset Relief Program and is thought to be using this as a bargaining chip.

The positive signs do not mean that the prospect of bankruptcy has evaporated. The treasury has been preparing a bankruptcy filing in case Chrysler fails to produce a viable plan on Thursday and some insiders suggest that this could still happen, with officials believing that the company can be better saved under court protection from its creditors.

The head of the Canadian Auto Workers Union, Ken Lewenza, said yesterday Fiat's boss, Sergio Marchionne, had told him that bankruptcy remained likely.

Lewenza told Reuters that Fiat's boss had warned him: "You know, Ken, a lot of things can happen in two days, but if I was a betting man, I would suggest Chrysler is going to fall into Chapter 11."

Majority ownership by a union would be a rarity for a major US corporation. The UAW is one of the nation's biggest and most powerful labour organisations - it represents 513,000 car workers and 570,000 retired employees.

Chrysler is owned by the private equity company Cerberus, which bought the carmaker from Germany's Daimler two years ago. Unable to stem losses, Cerberus has refused to sink any further money into Chrysler, prompting the US government to extend emergency loans of $4bn to the company at the beginning of the year.