Austria’s Greece? All Faith, No Credit

Austria’s refusal to honor state guarantees issued to Hypo Alpe Adria calls into question the backing of any state-funded bank in Europe. Bavaria’s finance minister is reminded of Greece: “We want our money back,” he says.
A Greek tragedy in the middle of Europe?


Like Greece before it, Austria’s banking crisis is quickly becoming Europe’s problem.

In a matter of weeks the case of Hypo Alpe Adria, a tiny state-backed troubled bank in the Austrian state of Carinthia and the country’s biggest casualty of the 2008 financial crisis, has threatened to spread like wildfire across the entire continent.

The latest crisis has been ignited by the Austrian government’s refusal to pay the bank’s €8 billion in debt. That amount might be seem small potatoes for the European Union's €14 trillion economy, but like Greece, it’s a matter of credibility.

Bankers, politicians and rating agencies fear that the Austrian debacle could set a precedent for the whole of Europe. The decision by Austria not to honor its commitments has seriously shaken the industry's faith in government guarantees, which are still relied on by across much of Europe's  banking sector.

Germany’s banking lobby has already called on Berlin to take up the matter with Vienna. Now, it looks like the European Commission in Brussels is getting involved.

Handelsblatt has learned that Jonathan Hill, the E.U.’s commissioner in charge of financial services, is looking into whether Austria has violated E.U. law. At issue is whether Austria can rightly refuse to pay off the debts of a state-backed bank.

People will be taking a very close look at both opportunities for recourse and the financial strength of individual states. Carola Schuler, Moody's Rating Agency

German banks are owed some €5.5 billion by the Austrian bank, but there is much more at stake than the billions in losses. On a broader level, the case raises questions about the value of government guarantees for banks that were once considered sacrosanct.

"The markets have to assume that Austria could suddenly pop up everywhere," said Liane Buchholz, head of the Association of German Public Banks. She calls the Hypo Alpe case an "act of expropriation" that "devalues" government guarantees.

Hypo, which is based in Klagenfurt in southern Austria, had operations in Austria, Slovenia, Hungary and the former Yugoslavia. The bank, which once belonged to German state bank BayernLB, nearly collapsed in 2009 during the global financial crisis and was nationalized by the Austrian government.

Earlier this year, the bank suspended all bond payments to creditors. The bad debt was unloaded into a bad bank called Heta Asset Resolution, which is charged with winding down the bank’s assets.

The stakes for other state-owned banks around the continent are high. State guarantees are common across much of Europe. The debts of many banks  are still underwritten by local communities and governments (see graphic).

The case weakens the "entire European banking market," said Michael Kemmer, general manager of the Association of German Banks.

The banking groups are receiving support from the German Finance Ministry. "We share the fears of the German credit sector that the Austrian special law will discriminate against individual creditors," said a ministry official in Berlin, noting that they had made their views known to the European Commission.

Markus Söder, a member of the conservative Christian Social Union (CSU) and finance minister of the State of Bavaria, feels reminded of the situation with Greece, where the European Union and Athens are at loggerheads over whether the government should honor its debts. "We want our money back," Mr. Söder said.

Like the case of Greece, it is the fear of a conflagration in Europe that is fueling the sharp criticism of Austria. Bankers argue that the situation is not so different from a government going bankrupt, and could have dire consequences for the European financial system if Austria follows through on its threat to cancel the debts of the bad bank.

Experts believe that this could seriously shake the markets' confidence in government guarantees. It could become considerably more expensive for partially state-owned banks to issue new debt, said Stefan Winter, chairman of the Frankfurt-based Association of Foreign Banks.

The Moody's rating agency warned that investors could very well begin to reassess just how strong the support by governments or regional administrative bodies actually is.

"People will be taking a very close look at both opportunities for recourse and the financial strength of individual states," said Carola Schuler, an analyst with Moody’s rating agency.

However, she noted, European settlement regulations are implemented differently in Germany than in Austria. According to Ms. Schuler, the government's guarantor liability is rated more highly in Germany.

BayernLB, the one-time owner of Austria's Hypo, is not the only bank hoping to get its money back. Souce: DDP


That hasn’t stopped Austria from facing sharp criticism, especially from associations and politicians, and a grim general mood reflected in drastic comparisons with other European countries.

"With this act of expropriation, wealthy Austria is joining the ranks of countries like Greece and Hungary," said Ms. Buchholz of the Association of German Public Banks.

Other bankers also haven’t shied away from making comparisons to national bankruptcies, and the effect they have had on a country.

"Argentina is a prime example of the long-term effects of decisions like these," said Mr. Kemmer of the national banking association, BdB. "The country is still involved in lawsuits today stemming from the 2001 debt haircut."

The extent of the banks' concern is evident in their willingness to sue.

FMS, another bad bank that arose out of the now-defunct WestLBand is owned by the German government, has filed a lawsuit against Heta in a Frankfurt court. It could also sue the Austrian government.

Mortgage bank Deutsche Pfandbriefbank also said it intends to sue, and other lenders are likewise considering legal action. Commerzbank is examining "business and legal options,"

BayernLB has also taken legal action. The Bavarian bank has the most to gain.

In his first public appearance, the new CEO of BayernLB spoke effusively about how well things were going for his bank – aside from the loss of a staggering €1.3 billion ($1.43 billion) stemming from the Austrian crisis. This is a disastrous figure for a public financial institution like Bayerische Landesbank, and a challenge for incoming CEO Johannes-Jörg Riegler.

Other German state-owned banks, like NordLB, HSH and Helaba, are also affected. Commerzbank, Germany's second-largest bank, could face as much as €400 million in write-offs. Düsseldorfer Hypothekenbank, a small bank, has already had to be saved from bankruptcy by a German rescue fund.

Even though a wave of lawsuits would undoubtedly increase pressure on the Austrian government, officials in Vienna seem unimpressed at the moment. On Wednesday, the Austrian Finance Ministry responded to the German banks' request for support from the European Commission by noting that it considered its decision to be in conformity with European regulations.


Elisabeth Atzler, Robert Landgraf, Kerstin Leitel, Donata Riedel, Hans-Peter Siebenhaar and Christopher Cermak contributed to this story. To contact the authors: [email protected], [email protected] and [email protected]