1 Bank To Go Under in Austria

Thursday, February 19, 2009

As the Austrian banking industry finds itself at the center of the financial world's attention those up high in command at the domestic level hastily draw a plan for the survival of the bigger part of it. It is a gargantuan task that cannot get around the necessity to shrink the industry which had grown mushroom-like since the 1990s.
These days Austrian market participants got wet armpits about a recent Moody's report that drove the Vienna Stock Exchange to new 5-year lows at the beginning of the week. Moody's had said that bad loans in Central Eastern Europe (CEE) are likely to affect the ratings of their foreign parent companies negatively. According to today's release from the Austrian central bank Austrian banks hold a total of 20% of the Eurozone's whole exposure in CEE. This is more than 70% of Austria's GDP. The Prudent Investor had first reported about potential problems 14 months ago,
To understand the Austrian banking sector one has to know about the political influence. Erste Bank, Raiffeisen International, Raiffeisen Zentralbank and Volksbanken are considered to be strongholds of the conservative Volkspartei, aka the blacks. Unicredit Austria, Austria's largest bank, and BAWAG, formerly owned by the Austrian Trade Union Congress, are the leftovers of the Social Democratic Party's, aka the reds, banking imperium. The two parties currently form the coalition that rules Austria since 2004.
Following these lines to the top of Austria's banking crisis committee one arrives at its 2 chief commanders. The blacks have nominated former central bank governor Klaus Liebscher. The reds put former central bank CEO Adolf Wala in charge.
As it is clear to all Austrian bank observers that the sheer size of Austria's exposure in CEE, must lead to the drop out of one of the top 5 contenders in the CEE race that started in the early 1990s, shortly after the fall of the iron curtain that had cordoned off CEE before.
Wala, always considered a good red party soldier, spent most of his career in the Austrian central bank. Black Liebscher, the former governor, can look back at a long career in the Raiffeisen sector and was considered a hawk on the ECB governing board.
Current central bank governor Ewald Novotny, still holds the official line that Austria's banking sector will survive as a whole. But Novotny's reminder of today that 75% of the exposure is within the European Union leaves one with the reciprocal conclusion that 25% of the exposure of probably more than €230 billion lies with Russian and Romanian counterparties.
Novotny's predecessors have to come up with a rescue plan that finds the support of the EU as this tiny country in the Alps and its 8 million inhabitants will not be able to shoulder a rescue package potentially worth €100 billion in freshly created fiat money.
Only problem is that the EU has shown Austria a cold shoulder after a second class delegation ridiculed itself at meetings in Brussels as the country represented itself with a freshly baked finance state secretary who worked the sports agenda before. Austria's vice chancellor and finance minister Josef Proell had not been able to travel to Brussels because of a party meeting. This guy sure knows how to set priorities. I mean, it was only a meeting about €100 billion they don't have.
The self-denial that everything can remain as it was before the credit crunch, will not last much longer. As this blogger can reveal so far top secret drafts for the restructuring of the banking sector see one bank go under in order to save the others.
As I don't want to risk any libel suit it is not possible to name the institution.
I therefore invite readers to follow my hypothetical thoughts. As Wala is red he will support the two red banks Unicredit and Bawag. Former Raiffeisen CEO Liebscher will most likely have a big ear for the problems of his former employer RZB and Raffeisen International. The race between Erste Bank and Volksbanken for public funds will probably be decided in favor of Volksbanken who have a smaller exposure in CEE than the other bank.
The decision against one bank will also foot on personal sympathies and aversions in the closely knit local banking scene. Both Wala and Liebscher prefer old-style banking to the flamboyant style of Erste Bank CEO Andreas Treichl who had engineered an expansion at breakneck speed and became best paid CEO in 2006 with a compensation package worth more than €5 million p.a. According to his own words he had invested most of this in Erste Bank shares which have lost almost 90% of their value.
The Austrian banking scene is indeed in for tectonic shifts, it appears.

WORLD EXCLUSIVE SCOOP: Gold Strikes Historic Levels in Most Currencies

Tuesday, February 17, 2009

With all equities markets deep in the red MSM and bloggers have missed out on this easy scoop for several weeks: Gold currently strikes new all-time highs in most currencies. This sensational news, omitted in all those media that are normally quick to recommend this or that paper "asset", which in the end is always only somebody else's obligation, can be revealed at this blog exclusively, a Google news search shows. ;-)
Gold traded for more than €771 and GBP 682 in the first time in history.
The strong rise in the price of gold to new historic records in most countries except the USA is a logical reaction to the credit and solvency crisis that engulfs the globe as investors, nervous about a total market fallout, flee all paper promises and seek a truly safe haven.
Gold has never lost its value in more than 3,500 years whereas no fiat currency became older than a human's lifespan so far. Check out its resistance against inflation here.

GRAPH: Gold priced in Euro has been on a tear since late November. It also outpaced all other asset classes. Chart courtesy of Stockcharts.com
I have been recommending investments in gold and mining shares since 2005. Licking my wounds from last year's biggest and longest decline in this equity sector in 80 years I will at least have a story to tell to my grandchildren.
But the fundamental outlook has only worsened in the past 4 years. Having correctly called for a sharp economic downturn in the USA since 2005 I nevertheless failed to recognize the dramatic situation in the Eurozone and the recent hard landing of China. This global worsening only underscores the value of holding the only asset that is not someone else's obligation. The Euro is as doomed as are Federal Reserve Notes and nobody outside the UK cares about Sterling anymore.
We are about to witness the era of busted major fiat currencies that will go the way out as did all unbacked fiat curencies in the past 1,000 years.
The Chinese tried it in the 11th century and it ended in a revolt.
The same happened in France in the 18th century where it gave birth to the republic.
The decline of the Austro-Hungarian empire in WWI came on the heels of hyper inflation and
Germany's fate could have taken another turn in the 1920s, if it were not for hyper inflation that paved the way for Adolf Hitler.
Unfortunately we could end up as it happened in past crises: Everybody will be a millionaire beggar.

Friday the 13th

Friday, February 13, 2009

Superstitious natures may take it as an omen. All others are invited to see at a glance how bad the economic situation is in Europe. On this Friday the 13th Eurostat released that GDP shrank in both the Eurozone and the EU27 in Q4/08 by 1.5% QOQ (quarter-on-quarter.) In comparison to Q4/07 GDP shrank by 1.2% in the Eurozone and by 1.1% in the EU27. Bloomberg was quick to point out that these Q4 figures are the worst in 13 years, and sensed
"compounding pressure on the European Central Bank (ECB) to reduce interest rates to the lowest ever next month."
Germany, traditionally the economic engine of Europe, fared even worse with a contraction of 2.1% QOQ whereas Latvia nosedived 10.5% in a comparison with Q4/07. 
Only Slovakia, Cyprus and Greece recorded marginal growth rates in comparison to Q3/07.
These news come on the heels of yesterday's negative industrial production figures for last December where only Lithuania escaped the negative trend. Industrial production declined by 2.6% MOM in the Eurozone and by 2.3% in the EU27. Slovakia's economy may be in for a hard landing, continuing its strongly accelerating decline with a negative figure of 12.4% (-7.7%) MOM.
A temporary ceasefire on the inflation front helps further the arguments for another interest rate cut in the Eurozone. According to Eurostat's flash estimate from January 30 Eurozone inflation declined to 1.1% (1.6%) in January.
Wage-Price Spiral Has Begun
But the broader trend signals newly emerging threats to price stability. The OECD said today in a press release that unit labour costs were on the rise in both the OECD and the Euro areas.
Unit labour costs in industry rose 1.0% quarter-on-quarter in the OECD area in the third quarter of 2008 (0.8% in second quarter) and resulting in a year-on-year growth rate of 2.6%. Italy maintained the highest growth rate in industry among the major seven economies with 2.1% growth in the third quarter, accumulating to 7.8% on an annual basis. German industry unit labour costs rose 0.5% in the third quarter of 2008 from 0.2% in the second quarter and giving a relatively modest 0.7% annual increase. 
Unit labour costs in market services in the major seven economies grew by 0.5% in the third quarter of 2008 (1.9% on an annual basis), reversing the decelerating trend of the two previous quarters. Higher growth rates in unit labour costs for market services were recorded in the OECD area and the Euro area in the third quarter of 2008 compared to the second quarter. In the Euro area they rose in the third quarter by 1.0% and 3.9%, on a quarterly and an annual basis respectively.
Find a full table of unit labor costs here. At first sight it appears that second round effects, as higher wages are labeled by the ECB, may begin to hound the central bank in the near future.
Summarizing an overall decline in economic activity in Europe it will be difficult for the ECB to maintain positive real rates in a world of zero interest rate policies. The ECB's main interest rate was lowered by 50 basis points to 2% on January 21. ECB governors are likely to surrender to political pressure at the next meeting in the hope to kickstart the European economy with another rate cut at their next meeting on March 5.
Monetary developments leave more room to maneuver for the ECB. According to the latest weekly financial statement the balance sheet of the ECB has shrunken to €1.893 trillion after hitting the €2 trillion mark late last year.

Austria: In the Eye of the Storm

Thursday, February 12, 2009

Ending my blogging hiatus with the first sunrays engulfing Vienna I am stupefied by the perpetual barrage of bad news from all over the world while maybe residing in the eye of the European financial storm.
As it turns out, Austrian banks appear to be the worst hit from the economic fallout in the young EU members east of here. Sobering up from a financial recolonization of regions that were last part of the Austrian empire that disintegrated in 1918, all major Austrian banks now have to come to terms with the new reality of pushing a cart laden with bad loans. Outstanding loans in Eastern Europe held by Austrian banks sum up to more than 70% of Austria's GDP of roughly €284 billion. For a comparison: (in German) Austria's public debt stands at a relatively moderate 58% of GDP. The average debt ratio for Eurozone members stands at 66%.
This may change drastically. Austrian politicians have repeatedly said to guarantee up to €100 billion in bank obligations, but negotiations have stalled. Banks are picky about the terms for their lifelines. IMHO it will take only a few more months and capital starved credit institutions will have to accept any deal the state may offer then.
Such measures are designed to balloon Austria's debt to GDP ratio to 66%, considering only a €15 billion recapitalization as the government debt committee calculated last December. It then recommended to prioritize the bailout of the banking sector.
As the bailout will probably cost at least double of that, worsening the debt ratio, profligate actions by bankers may cost Austria its coveted AAA rating that helped keeping refinancing costs at the level of Eurozone benchmark Germany in the past decades. Austria had withdrawn a bond issue in 2008 as investors were asking for higher yields.
Click here for a graph depicting Austria's extraordinary exposure to Eastern Europe.
Speculations gone bad are hitting home everywhere meanwhile. Local thrifts made headlines in 2008 with losses eradicating their capital base and communities face huge losses from their investments too. Add this to declining tax revenues due to a nosedive of the economy and the thin layer of prosperity disappears rapidly as my research on the ground shows.
GRAPH: The Vienna Stock Exchange mirrors the change of sentiment. Leaving most other developed markets in the dust in the first seven years of this decade it has declined 75% from the top seen in 2007. Graph courtesy of Yahoo.
Austria's two major listed banks, Erste Bank and Raiffeisen International have declined even more, signalling that the worst is yet to come. Austria's biggest bank, Unicredit, belongs to the Italian parent Unicredit.
Austria had averted the bankruptcy of Constantia Privatbank last year. This year, it installed a state commissary at Medici Privatbank which had invested most of its funds with record Ponzi scheme master Berhard Madoff.
UPDATE: Ambrose Evans-Pritchard and Bruno Waterfield describe the bigger picture of Europe's bank rescue here.

Wikinvest Wire