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.


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