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10 March 2014

FT: Austria warns costs of bank bailout rising


Austria's central bank governor has warned that attempts to wind down regional lender Hypo Alpe-Adria could cost a further €3.6 billion this year, potentially pushing the national budget deficit above the key 3 per cent limit.

A task force set up to advise how to deal with the stricken lender backed setting up a bad bank, rejecting the other option of letting Hypo go bust that has set investors on edge in recent weeks. The wind-down vehicle would take on €17.8 billion of Hypo’s remaining assets – thus pushing public debt up 6 percentage points to 80 per cent of national output, Ewald Nowotny, head of Austria’s central bank (ÖNB), and chairman of the Hypo task force, told Austrian state television on Sunday. Mr Nowotny warned that setting up the bad bank could give rise to extra costs this year that could increase Austria’s budget deficit by 1.2 percentage points, potentially taking it over the limit allowed by the EU.

Michael Spindelegger, the Austrian finance minister, has repeatedly refused to rule out letting Hypo go bust. On Sunday, in response to Mr Nowotny’s recommendation, the finance minister reiterated that there could be “no taboos” in how to deal with Hypo, adding that he and the prime minister, Werner Faymann, would reach a final decision by the end of March.

Carinthia has an annual budget of just €2 billion and would be bankrupted by the guarantees – an event for which Austria has no legal framework. Whether or not, and how quickly, the Austrian government would step in and assume Carinthia’s liabilities is a matter of fierce debate. Mr Nowotny has warned that this uncertainty could be disastrous for Austria’s international reputation, and the ÖNB has calculated that the cost of a disorderly insolvency could be €15 billion to €16 billion in the first instance, and higher still if the impact on other banks and state-owned companies is taken into account.

Other observers point out that allowing Carinthia to go bankrupt could even help the government in the long run. “If Carinthia created a precedent for an Austrian state going bankrupt, it could actually reduce the country’s spreads, as it would show that the government was not automatically on the hook for the debts of individual provinces", says Josef Christl, a consultant and former executive director of the ÖNB.

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On 18 March, Chancellor Werner Faymann said the not-yet-quantifiable damage incurred by Hypo Alpe Adria was due to the "political madness" of the Carinthian FPÖ, which has assumed a commitment with liabilities over €20 billion, a burden which the country could never have carried. He further stated: "Together with domestic and foreign experts, the Hypo Task Force has examined all possible solutions in order to minimise harm to the bank and the Austrian economy. The clear statement is: We will not expose the Carinthian citizens to such an insolveny. Such a 'solution' would compromise on the provision of heating assistance, housing assistance, health care, care of people in need and investment in the country. That is not happening with us", Faymann said, also pointing out that a bankruptcy would affect Austria's very good financial standing.

Vice Chancellor and Finance Minister Michael Spindelegger reported on the greatest care with which the task force had searched for the best way to resolve the bank, keeping in mind the interests of Austria, the taxpayer and the business location. The government's decision was taken on 14 March, and Spindelegger said that he had also looked into the possibility of insolvency, as proposed by some experts, the media and the opposition, but had ruled it out because of the incalculable risks associated.

Official press release (in German) © Austrian Parliament



© Financial Times


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