Banking Brawl Austria after Bavarian Billions

The Republic of Austria is suing the German state-owned bank BayernLB for €3.5 billion over issues related to the troubled financial institution Hypo Alpe Adria.
Hans-Jörg Schelling walking tall for Austria.

The holidays are coming, but some Bavarian bankers and Austrian politicians are unlikely to be trading Christmas cards this year.

Austria and BayernLB are fighting over billions in the battle over the tainted legacy of Hypo Alpe Adria and a Yuletide settlement appears to out of the question.

On Friday, Austrian Finance Minister Hans-Jörg Schelling held a press conference in Vienna to announce the Alpine country plans to sue Bavarian-owned BayernLB for €3.5 billion ($4.3 billion).

It was a tit-for-tat response following just a few days after BayernLB brought a suit against the Austrian government claiming €2.3 billion damages.

But legal wrangling aside, the saga involving Hypo Alpe Adria has been a disaster for both parties.

In 2007, just before the outbreak of the global financial crisis, BayernLB acquired the Austrian bank for €1.6 billion. Shortly thereafter, BayernLB was no longer been able to carry Hypo Alpe Adria’s losses, so it sold the bank to the Austrian government in 2009.

But even under the direction of Austrian officials, the bank also proved to be a bottomless pit. The southeastern European part of the business was slated to be sold off and the rest wound down. BayernLB is insisting that it loaned €2.3 billion available to its then subsidiary. Hypo Alpe Adria was still servicing this debt until the end of 2012, but then ceased making payments.

An independent audit by the previous Austrian government at the time had showed serious errors had been made.

Austria, on the other hand, based its suit on the fact that, at the time of the sale to the government, BayernLB did “not disclose the catastrophic economic situation at Hypo Alpe Adria,” and even before the nationalization “illegally withdrew €600 million in desperately needed liquidity.”

However, an independent audit by the previous Austrian government at the time had showed serious errors had been made. Thus, the government reportedly negotiated the nationalization of the bank in 2009 without adequate information.

After numerous negotiations with the Bavarian state finance minister failed to produce a compromise, “the lawsuit is now the next step to seek what is rightfully ours,” said Austrian Finance Minister Schelling. He said it was an issue of protecting the Austrian taxpayers’ money.

“BayernLB sees no cause for concern about such a lawsuit,” said a bank spokesman.

But there can be no talk about calmness at the house of Bavarian state Finance Minister Markus Söder.

“The approach taken by the Austrian finance minister is most unserious, in both the way it is communicated and the content,” a spokeswoman for the Bavarian state finance ministry told Handelsblatt. She said she saw no basis for a settlement if Austria refuses to pay one cent to BayernLB, of which 75 percent belongs to Bavaria.

Despite the legally tricky situation, BayernLB has still not made any provisions for the possible financial gap. Auditors apparently haven’t yet seen a reason for that.

 

Frank Drost is a Berlin correspondent covering the area where banks and politics collide. To contact him: [email protected]