Austrian Government Nationalizes First Bank - Trichet Involved

Monday, December 14, 2009

The wheels are coming off the Austrian banking cart. On Monday morning Austria's red-eyed conservative Finance Minister Josef Pröll was happy to present a solution for ailing Carinthian Hypo Alpe Adria Bank AG whose main shareholder has been German Bayerische Landesbank.
According to his statements - a webcast (German language) is available here - Austria will take over 100% ownership of the bank that had helped the late right-wing governor of Carinthia, Jörg Haider, to finance his populist measures in Austria's most indebted province. The complete deal has a volume of €4.5 billion, counting all equity and liquidity injections.
While the finance minister was keen to point out that the damage for Austrian taxpayers may be less than the €1,800 per capita figure splashed on tabloid papers this morning, it cannot be yet said how big the damage will actually be.
According to Pröll the former owners Bayerische Landesbank, Carinthia and Austrian Insurer Grazer Wechselseitige will inject altogether €1.5 billion in equity together with the Austrian government. Bayern LB took the biggest hit in negotiations that also involved telephone conversations with ECB President Jean-Claude Trichet and promised to prop up the bank with €825 million equity and more than €3 billion in liquidity. The Austrian government will provide €450 million, the province of Carinthia will have to inject €200 million and Grazer Wechselseitige €30 million.
The salvaging package also includes further liquidity injections by Carinthia to the tune of €227 million and €100 million from Grawe. Austria's big 4 commercial banks, Unicredit, Raiffeisen, Erste Group and Cerberus-owned Bawag will contribute €500 million in liquidity to keep the bank as a going concern. Bayern LB's venture into Austria will have cost the bank a total of €2.3 billion, Austrian business daily Wirtschaftsblatt reported.
Hypo Alpe Adria has a long history of failed speculations and a mediocre loan portfolio.
Its takeover by the government for a symbolic €3 from its former owners was hailed as the best possible outcome for Hypo Alpe Adria and its clients but opens the question how Austria will manage the future of its other ailing banks who may be hit by huge loan losses after trying to financially recolonize those countries that once belonged to the Austrian empire in Central Eastern Europe. Bloomberg reported earlier this year that Austrian banks may face a fallout of up to €165 billion. This equals more than € 20,000 for every one of Austria's more than 8 million inhabitants.
Hypo Alpe Adria is certainly one of the smaller problems that the Austrian government faces. Both exchange listed banks, Erste Group and Raiffeisen still have to come forward and announce their East European subsidiary losses which had so far been hidden under Austrian accounting rules that allow banks to keep asset prices at the purchase level as long as they are part of the fixed assets of a bank. While both banks share price has risen manifold this year industry insiders doubt that this appreciation in value may be sustainable as all loan problems in Central Eastern Europe (CEE) are still around and the banks begin to face accumulating problems in Austria too, where the traditional homebuilder society is on the verge of crumbling due to wage raises below true inflation and skyrocketing unemployment.
I stay with my opinion that the worst has yet to come for the Austrian banking sector - and this will be inevitable. Austrian banks provided CEE residents with consumer loans that will be difficult to recover. Several CEE countries are drafting legislation that will tilt protection in favour of borrowers and any further deterioriation in economic circumstances is likely to provoke more voter-friendly laws. One CEE country recently changed laws that way that mortgages have to be adjusted to the equity value of the respective property. This move is deisgned to saddle banks with losses incurred by irresponsible lenders and borrowers who tried to defy economic reality past the point where they got their BMW X5 delivered.

1 comment

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10 August, 2012 00:06

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