NEW YORK (Reuters) - American International Group’s deal with the government is a bankruptcy liquidation in all but name, and the $85 billion it has borrowed may not be enough extra money to pay off all its obligations, particularly in its derivatives books.

AIG had $971.7 billion of liabilities at the end of June, but a subsidiary also has about $447 billion of credit derivatives on its books. That compares with a little more than $1 trillion of assets.

There is a real question mark around the credit derivatives. The $447 billion is the amount of principal the company has protected, but how that translates to actual losses is difficult to forecast without detail about the real risk.

But even if AIG does not ultimately make payouts on the credit default contracts, it could have to post more collateral and write down the derivatives as markets gyrate. Financial companies have continually underestimated their potential risk during the credit crisis, and this time may not be different.

“There is substantial risk in that credit derivatives book,” said Sean Egan, co-founder of rating agency Egan-Jones Rating Co. AIG declined to comment.

The government has a major role in AIG’s operations now -- it essentially named a new chief executive, Edward Liddy, and owns nearly 80 percent of the company’s stock.

But the government is widely expected to sell off AIG’s assets to get its money back, rather than aggressively pursue new business, because the United States’ main priority is to get its money back, rather than to maximize profit for shareholders, experts said.

“I can’t imagine they’ll be in business creation mode,” said Dan Alpert, a banker at Westwood Capital in New York.

Customers, meanwhile, are likely to try to reduce their business with AIG. Worried clients in Singapore thronged the office of an AIG unit earlier this week to try to redeem their policies. Press reports said the same happened elsewhere in Asia, one of AIG’s most important markets.

“To say that confidence has been shaken is an understatement. In the insurance business, trust is of the utmost importance,” said Walter Todd, portfolio manager at Greenwood Capital Associates in Greenwood, South Carolina.

In other words, AIG can’t grow out of its problems, and will in fact likely be forced to shrink. But selling off assets to meet obligations is difficult when most other financial institutions around the world are reducing the assets, depressing valuations.

When it’s all said and done, AIG might not have enough assets to meet its obligations, which is why the company’s corporate bonds are trading at less than 50 cents on the dollar, analysts said.

“Attorneys will spend the next five years sorting through this mess,” said Egan-Jones’ Egan.