Austria warns costs of bank bail-out rising

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March 10, 2014 2:35 pm
Austria warns costs of bank bail-out rising
By James Shotter in Vienna
Austria’s central bank governor has warned attempts to wind down regional lender Hypo AlpeAdria could cost a further €3.6bn this year, potentially pushing the national budget deficit above
the key 3 per cent limit.
©Bloomberg
Austrian central bank governor Ewald Nowotny
For the past two months, Austria has been gripped by the question of how to deal with the small
regional bank from Carinthia, which had to be nationalised during the financial crisis after a
breakneck expansion into the Balkans ended in disaster, and which has so far devoured €4.8bn
in state aid.
Over the weekend, a task force set up to advise how to deal with the stricken lender backed setting up a bad bank, rejecting the other
option of letting Hypo go bust that has set investors on edge in recent weeks.
The wind-down vehicle would take on €17.8bn of Hypo’s remaining assets – thus pushing public debt up 6 percentage points to 80 per
cent of national output, Ewald Nowotny, head of Austria’s central bank (ÖNB), and chairman of the Hypo task force, told Austrian state
television on Sunday.
Both Fitch and Moody’s, the rating agencies, have previously said that the establishment of a bad bank would not imperil Austria’s
triple A rating. However, Mr Nowotny warned that setting up the bad bank could give rise to extra costs this year that could increase
Austria’s budget deficit by 1.2 percentage points, taking it over the limit allowed by the EU.
A bad bank would also have further complications. Under an agreement struck in 2009, Bayerische Landesbank, the German bank,
which owned Hypo before it was nationalised and still has €2.3bn of liquidity in the Austrian lender, has to agree to any changes in
Hypo’s situation that would leave it worse off.
Michael Spindelegger, the Austrian finance minister, has repeatedly refused to rule out letting Hypo go bust. On Sunday, in response to
Mr Nowotny’s recommendation, the finance minister reiterated that there could be “no taboos” in how to deal with Hypo, adding that
he and the prime minister, Werner Faymann, would reach a final decision by the end of March.
The problem with an insolvency is that it would trigger about €12bn in loan guarantees given to the bank by the regional government of
Carinthia, where Hypo is based, when Jörg Haider, the late far-right politician, was provincial governor.
Carinthia has an annual budget of just €2bn and would be bankrupted by the guarantees – an event for which Austria has no legal
framework. Whether or not, and how quickly, the Austrian government would step in and assume Carinthia’s liabilities is a matter of
fierce debate.
The important thing
is that the government
learns something from
this whole mess and
reduces this imbalance.
But there is no sign of
that yet
Mr Nowotny has warned that this uncertainty could be disastrous for Austria’s international reputation, and
the ÖNB has calculated that the cost of a disorderly insolvency could be €15bn to €16bn in the first instance,
and higher still if the impact on other banks and state-owned companies is taken into account.
Proponents of an insolvency see things rather differently. Werner Kogler, the Green party’s finance
spokesman, says the uncertainty generated by an insolvency would be enough to persuade Hypo bondholders
to take haircuts, significantly reducing the cost to the state. “The court proceedings around an insolvency
could take years,” he says.
- Franz Schellhorn, head of
Other observers point out that allowing Carinthia to go bankrupt could even help the government in the long
run. “If Carinthia created a precedent for an Austrian state going bankrupt, it could actually reduce the
country’s spreads, as it would show that the government was not automatically on the hook for the debts of
individual provinces,” says Josef Christl, a consultant and former executive director of the ÖNB.
Agenda Austria, a think-tank
Part of the reason Hypo was able to expand so quickly – and so carelessly – was the guarantees given by Carinthia, which the province
was able to make without seeking permission from – or even informing – the federal government.
Although such guarantees can no longer be given, their role in the Hypo debacle has thrown into sharp relief one of the central
paradoxes in Austria’s political system: the provinces have great autonomy in spending, but the federal government has to bring in
almost all of the revenues.
If any good is to come out of the Hypo affair, says Franz Schellhorn, head of Agenda Austria, a Vienna-based think-tank, Austria’s
federal system must be overhauled so that municipalities and provinces have to raise more revenues themselves.
“The important thing is that the government learns something from this whole mess and reduces this imbalance. But there is no sign of
that yet,” he says. “One side collects revenues, the other side spends. It’s an open invitation to moral hazard.”
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