It was a truly unexpected turn of events. Austria and Bavaria, the two neighbors that have argued bitterly for many months over who should foot the bill for a major bank failure on their patches, have finally reached a settlement.
The Austrian government, after months of refusing, will now pay some of the bill stemming from the collapse of Hypo Alpe Adria, an Austrian bank that was once owned by Bavaria’s state-backed BayernLB and has been the biggest banking headache for Austria since the 2008 financial crisis.
The Austrian government will transfer €1.23 billion, or €1.36 billion, to the state of Bavaria. That’s about 45 percent of what BayernLB had demanded back in debts owed – but it’s better than nothing. The settlement brings to an end a raft of lawsuits and counter lawsuits demanding money in the case.
The settlement ends a long-running feud that had boiled over into a diplomatic crisis between Germany and Austria. Hypo's bankruptcy had also threatened to put a major hole in the balance sheets of a number of other German banks that had loaned Hypo Alpe Adria money, including Commerzbank, and even led to the bankruptcy of one other German bank, Düsselhyp.
Hypo Alpe Adria, an Austrian bank that was once owned by Bavaria’s state-backed BayernLB, has been the biggest banking headache for Austria since the 2008 financial crisis.
Many banks will no doubt be looking at Tuesday’s settlement closely – holding out hope that this opens the door for a settlement of their own cases too. This hope was fueled by Austria’s finance minister, Hans Jörg Schelling, who said the settlement was reached to avoid “years of expensive court cases with an uncertain result.”
The deal allows BayernLB chief executive Jörg Riegler to set aside one of the biggest problems that had been facing Germany’s second largest state-owned bank, which like many state-owned banks in Germany ran into trouble in the 2008 financial crisis and has struggled to remain above water since.
But BayernLB, which is majority-owned by the state of Bavaria, is not out of hot water just yet. The bank still owed the state €5 billion in bailout funds it received after 2008.
The long-running case stems from money that BayernLB loaned its one-time subsidiary Hype Alpe Adria. BayernLB took over Hypo Alpe Adria back in 2007, but the acquisition soon proved a costly one. Both banks ran into trouble as the mortgage crisis in the United States engulfed the globe.
BayernLB sought a bailout from Bavaria, and transferred some €2.75 billion to its Austrian subsidiary before selling the bank back to the Austrian government for €1 in 2009. It was money that BayernLB insisted should be paid back, but Austria refused, arguing the bailout amounted to a restocking of capital rather than a loan.
For Austria, the settlement marks a sudden change of heart. Even after an initial court ruling had gone in Bavaria’s favor, Hypo Alpe Adria’s successor – the bad bank Heta Asset Resolution charged with winding down its assets – vowed to appeal and continue fighting.
The Austrian government had also backed Hypo. It passed a law that allowed the state of Corinthia not to foot the bill for Hypo’s collapse, despite the Austrian state having actually guaranteed the bank’s debt.
Austria's refusal to pay was also viewed as setting a dangerous precedent for state-backed banks in Europe, many of which rely on guarantees from their state owners in case of a crisis.
In the end, it seems the damage to Austria’s reputation may have simply been too large. “This is above all about strengthening confidence and stability in international financial markets,” Mr. Schelling, Austria's finance minister, said.
Kerstin Leitel covers banks and insurance companies for Handelsblatt in Munich. Christopher Cermak contributed to this story. To contact the author: [email protected]