Chrysler Deal Moves

WASHINGTON - Chrysler's path to recovery cleared a major roadblock ahead of Thursday night's government-imposed deadline when the struggling automaker's largest bondholders agreed Tuesday to significantly reduce its debt.

That deal and the expectation that the United Auto Workers will ratify a labor pact Wednesday increase the likelihood that Italian automaker Fiat will buy Chrysler and save it from financial collapse.

But even if Fiat takes over, Chrysler might still enter government-backed bankruptcy to resolve some of its toughest outstanding issues, including a sharp reduction of its 3,300 U.S. dealers. Negotiations continue involving members of President Barack Obama's auto task force, Fiat and a host of parties as they try to steer clear of bankruptcy, which could scare away car buyers.

The Treasury Department reached a preliminary deal Tuesday with the four entities that hold about 70 percent of Chrysler's debt - Citigroup, Goldman Sachs, JP Morgan Chase and Morgan Stanley. The deal calls for all of Chrysler's bondholders to swap the $6.8 billion they are collectively owed for $2 billion in cash when a Fiat deal closes, according to the person familiar with the talks.