It’s been a long and messy affair between Germany and Austria that has pitted bank against bank, government against government and taxpayer against taxpayer. But now, Bavarian state lender BayernLB may finally be forced to draw a line under one of its most disastrous Austrian banking investments.
After agonizing over the decision, Austrian President Heinz Fischer in August signed legislation that grants an unprecedented debt haircut to Hypo Alpe Adria, a crisis-ridden banking group bought by BayernLB in 2008 and sold to the Austrian government for one euro just one year later.
The law is designed to shield the Austrian taxpayer from footing the entire bill for Hypo, which is being liquidated, and will effectively force the German taxpayer to step up to the plate instead.
BayernLB, a troubled lender which received a €10 billion ($11.3 billion) bailout from the German state of Bavaria at the height of the financial crisis, may have to contribute at least €800 million toward winding down its former Austrian subsidiary.
The law is so controversial that it has been challenged in Austrian constitutional court. Even Mr. Fischer admitted there were "constitutional problems" with the legislation. For the first time in Europe, the law allows a bank to default on debt that had been guaranteed by the state.
The Bayerische Landesbank, or BayernLB, could face unpleasant consequences in the Austrian debt haircut. Insiders believe that the special law could force the German state-owned bank to finally write down its debt in the 2014 fiscal year.
Setting aside millions of euros now would be a tough blow to the Munich-based bank, which is already having a weak year, but could allow it to draw a line under the global financial crisis.
For months, BayernLB has been locked in a court battle with the now-nationalized Hypo over repayment of €2.3 billion in loans. Until now the German bank has stubbornly refused to even partially write down the debt stemming from the dispute.
With the Austrian action, this may now have to change.
"Any auditor will tell you that you have to create reserves," said an insider, who declined to be named. Another bank official noted, "the law is valid until a court decides otherwise."
Time is not on the side of BayernLB, which acquired Hypo shortly before the onset of the financial crisis. The longer Austria takes to repay Hypo's loans to BayernLB, the more alarming are the auditors' predictions.
Without setting aside reserves, "all parties involved are taking a large risk," said one auditor, who declined to be named because of his involvement in the case. He added that he saw no reason not to accept the law, even if it raised constitutional questions.
These concerns could prompt Johannes-Jörg Riegler, who took over as chief executive of BayernLB last spring, to err on the side of caution and take the loss when he issues his first annual report.
The bank, which will not disclose its full-year financial figures until the end of March, would not comment on the matter.
Setting aside millions of euros would be a blow to the Munich bank, which is having a weak year. The recognition of the losses could let it finally bring the dark chapter to an end.
The Bavarian bank is likely to post a loss for 2014, in part from the sale of troubled Hungarian unit MKB. The Bavarian bank has accumulated losses of more than €500 million in the first nine months of the year.
What makes the Austrian legislation so controversial is it would be the first time in Europe that investors didn't get repaid despite a state guarantee. Hypo Alpe Aldria, like BayernLB, was backed by the regional government.
The special law means certain creditors, as well as the former Bavarian parent, have to pay €1.7 billion in costs toward Hypo’s liquidation. Some €890 million in Hypo bonds, which were guaranteed by the Austrian state of Carinthia, would not be repaid. In addition to bondholders, BayernLB is being asked to pay a restructuring sum of €800 million.
Investors are protesting the law, which was pushed by former Austrian Finance Minister Michael Spindelegger, who resigned in August 2014.
In October, BayernLB filed a motion to repeal the law.
Two Vienna insurance companies, Vienna Insurance Group and Uniqua, also filed petitions, as did several banks, including regional Austrian bank Oberbank. The opposition in the Austrian parliament also filed a motion to repeal the law.
There is, however, a silver lining for BayernLB. The bank has already managed to shed two other problems from the financial crisis, selling a series of bad loans and its troubled Hungarian MKB subsidiary. Although writing off some Hypo debt would not end the controversy, it might calm the situation.
But that might not last long.
BayernLB is still required to repay €2.3 billion to the state of Bavaria, a condition imposed by the European Commission for allowing the 2008 bailout to move forward.
That would be much easier to repay if BayernLB emerged from its dispute with Hypo as a winner.
Elizabeth Atzler covers banks and the insurance industry for Handelsblatt in Frankfurt. Kerstin Leitel is Handelsblatt’s financial correspondent in Munich. Hans-Peter Siebenhaar covers Austrian politics and finance out of Vienna. Christopher Cermak, an editor with Handelsblatt Global Edition in Berlin, contributed to this story. To contact the authors: [email protected], [email protected] and [email protected]