A Billion Here, A Billion There …
We always wondered a bit why the Austrian government was so eager to adopt the EU’s bail-in law (a.k.a. the Bank Recovery and Resolution Directive) one year earlier than demanded by the EU Commission. What was the rush? Well, now we know. Last year, the decision to wind down the former Hypo Alpe Adria (HAA) “in an orderly manner” helped push Austria’s government debt above 87% of GDP – a level perilously close to what has so far in many cases proved to be the point of no return.
Heta Asset Resolution, formerly Hypo Alpe Adria International: The situation is hopeless, but it isn’t serious …
Image credit: fmh
This decision was not exactly unanimously welcomed in Austria, but the government found itself between a rock and a hard place. Credit rating agencies are busy downgrading banks across euro-land, as government support assumptions are revised in light of the EU’s bail-in directive. Austria’s banks however have come under special scrutiny. This has of course absolutely nothing to do with the country’s government sometimes appearing to be sympathetic to evil Uncle Vlad in Moscow (it signed the South Stream agreement and occasionally one of its representatives will bemoan the utter uselessness of the sanctions regime). Honni soit qui mal y pense!
5-year CDS spreads on two large Austrian banks: Erste Group, one of the better run outfits (its management e.g. had the eminently good sense to sell its Ukraine business in 2012) and Raiffeisen, the international arm of which has recently been under great pressure as large losses in its Eastern European divisions have piled up. The market may actually be a bit too sanguine about the latter
There are in fact more than enough legitimate reasons to be wary of the creditworthiness of some of Austria’s banks. Among the reasons why they have suffered especially from the credit agencies’ wrath is their large exposure to Central and Eastern Europe (great during boom times, but a millstone in times of crisis), as well as the shenanigans surrounding the aforementioned HAA.
The HAA problem in a nutshell: the state of Carinthia, one of Austria’s federal provinces, had liberally garnished the bank’s bonds with deficiency guarantees. Both its senior debt and a portion of its subordinated debt was thus immunized against default – or so it seemed. Unfortunately, Carinthia never had the money to actually pay out on its guarantees, which amount to a multiple of its annual budget. The credit rating agencies complained that since the guarantor was evidently unable to pay, they would very closely scrutinize how the federal government handled the question of these guarantees.