Saturday

16th Dec 2017

Banking debacle sees Austria worry about its financial reputation

  • Austrian tax-payers are angry about the long-running and expensive Hypo bank saga (Photo: Dmitry Shakin)

The resolution of Austria’s now state-owned Hypo Alpe Adria bank will start in September and is expected to cause a stir both at home and abroad.

It’s the next step in what has been a lengthy and bitter process.

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The bank, originating in Austria’s southern-most province, Carinthia, became state property in 2009 at enormous cost to Austrian taxpayers.

As far back as 2004, there were allegations of lax bank inspections, dubious property sales and even money laundering. The claims were repeated in a 2007 report by Austria’s national bank.

In 2006 it emerged that Hypo Alpe Adria’s management had manipulated the bank’s balance sheets to cover up losses in risk-trading. A year later the bank had to once again admit enormous losses in risk trading due to the global financial crisis.

Political ties and insider trading

During the crisis, Hypo Alpe Adria – with close ties to the Carinthian government that was then led by the controversial right-wing populist Joerg Haider – was sold to the Bavarian state bank, Bayern Landesbank, in 2007.

Three years later the first allegations surfaced that the deal amounted to insider trading. And the issue started to turn political – it was claimed the deal brought Haider’s Alliance for the future of Austria (BZOe), as well as the Carinthian People’s Party (OeVP), illegal party funding worth millions of euros.

A further political twist came with the bank's emergency nationalisation in 2009. Its massive and rapid expansion both at home and in the Balkans landed it in hot water when the financial crisis hit.

In November 2009, Hypo Alpe Adria announced that it was assuming a loss of more than €1 billion.

This led the bank’s then owner, Bayern Landesbank, to urge the Austrian government to invest in Hypo after Austria had already given Hypo €900 million in 2008 through its so-called “bank aid”.

In December 2009, after highly tense negotiations between Bayern Landesbank and the Austrian government, Hypo Alpe Adria was sold to the Austrian state for the symbolic sum of €4.

The nationalisation process was neither considered a 'win' for Bayern Landesbank nor for the Austrian government, as Austria had to agree to maintain liabilities and the Bavarian bank agreed to give Hypo Alpe Adria a significant loan. The deal has since been deemed problematic if not outright disadvantageous for both sides.

Since then the troubled bank has never been far from the news.

The Austrian government has dragged its feet over what to do next while legal proceedings concerning former Hypo officials and Carinthian politicians are moving at snail’s pace.

Constitutional change for Hypo’s resolution

Now, in 2014, the Austrian government has decided to turn Hypo Alpe Adria into a bad bank. Parliament hearings on the so-called 'Hypo law' took place earlier this month.

In essence it bypasses a guarantee by the province of Carinthia and forces losses on investors. It is expected to trigger a flood of lawsuits, both at home and abroad.

The government drew up the law to ensure that not just taxpayers have to bear the cost of winding down the bank – a first for debt markets.

But many politicians fear it will damage Austria’s reputation as a stable financial market.

Even members of the government coalition’s parties have expressed their discomfort with the new rules.

Former finance minister Maria Fekter – who was responsible for Austria’s handling of the bank from 2011 to 2013 – called the law “an intrusion of constitutional legality”. She said the lender should have been left to go bankrupt.

However the current finance minister and vice-chancellor Michael Spindelegger, who argues that bailing in investors is becoming a standard feature in European bank restructuring law, says that the bad bank solution is the cheapest option for Austrian taxpayers.

But what the exact cost will be is unclear.

By spring this year, Austrian media had put the bank's cost to the public at €19 billion. This is equivalent to the cost of state-funded pensions for one year, or to 30 years of state-funding to the University of Vienna, the country’s largest educational institution.

And while the resolution itself is a costly venture, critics also say that politicians’ slow response has added to the bill. Marianne Kager, a commentator at Die Presse newspaper, suggested that former finance minister Fekter’s unwillingness to turn Hypo Alpe Adria into a bad bank has cost taxpayers €2 billion.

While the state has become caught up in the bank debacle, it remains difficult for the public to get information on the exact amount of money propping up the bank, why so much is needed and who is overseeing the process.

A public petition calling for a commission of enquiry has already gained around 40,000 supporters, but politicians of all colours appear hesitant to shine light on the facts, thus giving the impression that all political parties are somehow involved in the issue.

Meanwhile the ‘Hypo Law’ is already having consequences.

Eleven Austrian banks have been downgraded by ratings agencies while four provinces – Vienna; Lower Austria; Styria; and Burgenland – are set to be downgraded as soon as the law comes into effect, possibly in August.

These downgrades do not make for nice headlines for Austria. And what is more, the Hypo Alpe Adria case seems far from being resolved, which is a bitter pill to swallow for its owners – the Austrian people.

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MEPs on Tuesday signed off on the creation of a new authority and fund for failing banks – a missing element to the so-called banking union aimed at minimising the public cost of future financial crises.

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