Failed State The Lasting Legacy of Austria's Bad Bank

A legacy of the financial crisis is threatening to plunge one of Austria's provinces into bankruptcy. Creditors have rejected a deal and are demanding the state of Carinthia pay almost €11 billion in bonds related to the former Hypo Alpe Adria bank.
General view of the headquarters of defunct Austrian lender Hypo Alpe Adria.

Austria has done its best to avoid the prospect, but it may now be unavoidable. Eight years after the global financial crisis, one of the country's states is still feeling the ripple effects, and veering closer and closer to bankruptcy.

The Austrian province of Carinthia moved one step closer to insolvency after a majority of creditors of the Austrian bad bank Heta, formerly Hypo Alpe-Adria, rejected its offer to buy back its bonds at a discounted 75 percent of their initial value, according to a spokesperson for one of the main creditor groups.

The deadline to accept the offer expired on Friday. The fact that a majority of creditors favored rejecting the offer was officially announced on Monday.

That is bad news for the Carinthia state administration, which had guaranteed Hype Alpe Adria's bonds, worth nearly €11 billion ($12.3 billion). The state has said it cannot afford to pay those guarantees in full.

The structurally-weak Austrian state, which only has an annual budget of around €2 billion, indeed does not look like it's in a position to fully pay off the bonds. The provincial government in Klagenfurt is now facing the imminent threat of insolvency unless a new deal can be negotiated.

Hypo Alpe Adria, which was subsidized by the right-wing Jörg Haider during his tenure as governor, ran into trouble after speculating on risky investments in the Balkans and ran up billions in losses. Unnamed spokeswoman for Ad-Hoc creditors group.

The Carinthian state government was to convene later Monday for a crisis meeting to discuss how to proceed. Creditor groups have signaled their willingness to discuss possible solutions, despite their rejection of the buyback offer.

“It's still not too late to reach an agreement,” said creditor representative Klaus Wiener, chief economist at the General Association of German Insurers, on Sunday.

A spokeswoman for the Ad-Hoc Group, a collection of major creditors that is demanding back more than €5 billion, said the offer from Carinthia was too low, and shareholders believed the province could in fact pay more.

“It's our opinion that Carinthia can manage more financially than it says,” she said.

Ad-Hoc Group includes major creditors like Germany's Commerzbank, HSH Nordbank and the Allianz-owned fund manager PIMCO.

Hypo Alpe Adria, which was subsidized by the right-wing Jörg Haider during his tenure as governor, ran into trouble after speculating on risky investments in the Balkans and ran up billions in losses. Previously a subsidiary of the Bavarian state-backed bank BayernLB, the institution was nationalized by the Austrian government in 2009 and is now being wound down. A 'bad bank' called Heta Asset Resolution was formed to liquidate the institution.

Austria has done its best to prevent things from reaching this point, even going as far as decreeing that Corinthia was not liable for the bank and issuing a "debt moratorium." It was a controversial move that had rattled many other state-backed banks both in Austria and Germany, and which was eventually striken down by the courts.

Now, Austria may have to find another means of keeping Carinthia above water, fearing that the federal government's own sovereign debt rating might suffer if it allows one of its own states to go under.

For now, regulators have simply tried to buy time. The Austrian Financial Market Authority has suspended all interest payments until the end of May. There is still a chance creditors agree to a haircut by then.

If both sides cannot reach some kind of agreement, the courts might also serve as a delaying tactic. Creditors are expected to file a lawsuit against Carinthia to make it meet its guarantees: a process that promises to be long and expensive. 


Hans-Peter Siebenhaar is Handelsblatt's correspondent in Vienna. To contact the author: [email protected]