Financial Regulatory Forum

Austria nationalises Hypo to avoid bank’s collapse

By Reuters Staff
December 14, 2009

By Christian Gutlederer and Peter Maushagen

VIENNA/MUNICH, Dec 14 (Reuters) – Austria nationalised Hypo Group Alpe Adria on Monday to avoid a collapse that could have undermined trust in banks in eastern Europe and cast doubt over Austria’s and Germany’s backing of state-owned lenders.

Austria is taking full control of the ailing bank after a high-stakes gamble over the weekend that soured German-Austrian relations and required interventions by the presidents of the European Central Bank and the Bundesbank to be resolved.

German state bank BayernLB, Austrian insurer Grawe and the Austrian region of Carinthia are to give away their stakes for a nominal amount, while injecting around 1 billion euros ($1.5 billion) of capital, Finance Minister Josef Proell said.

Austria will inject up to 450 million euros itself and will have to clean up Hypo’s books on its own, facing further losses in the process, but authorities said the damage from an insolvency would have been much bigger.

“The risk situation of this bank has created an enormous threat to Austria in the past days,” Proell said on Monday after a weekend of crisis talks that ended only shortly before Hypo branches were due to open on Monday.

The deal averted the threat of collapse that could have caused a run not only on Hypo and not only in Austria, but also on other banks in Croatia, Serbia or Bosnia, where Hypo and several Austrian peers are major retail banks.

Austrian central bank Governor Ewald Nowotny, who said he asked ECB President Jean-Claude Trichet and Bundesbank’s Axel Weber to put pressure on German and Austrian decisionmakers, said he was aware that the bailout created moral hazard.

“Yes, that’s a problem,” he conceded in a news conference presenting his central bank’s financial stability report, which happened to coincide with the Hypo bailout. “But an insolvecy scenario would have had massive implications for the Austrian economy, Austrian banks, and the Austrian public sector.”

Nowotny criticised BayernLB’s abandoning Hypo, saying it was obviously caused by domestic politics in the German state of Bavaria, BayernLB’s owner, whose Premier Horst Seehofer had been pushing to sever the bank’s ties to Hypo.

FINAL ROUND OF CAPITAL

Hypo, Austria’s No.6 bank and a major lender in the Balkans, is creaking under up to 1.7 billion euros of writedowns and loan losses which threatened to wipe out a large part of its capital.

BayernLB will provide a final 825 million euros in capital to Hypo by swapping part of the 4 billion euros in liquidity it has put in the bank into capital. Grawe and Carinthia will between them come up with 230 million euros.

BayernLB said the deal would result in a full 2.3 billion euros writedown of its 67 percent Hypo stake, but said it did not need additional capital to shoulder the loss.

Hypo’s breakneck expansion in the Balkans, over which the late Carinthian Governor Joerg Haider presided before his state sold the bank to BayernLB, makes it a special case.

But Hypo’s troubles nevertheless highlight the pitfalls of banking in Europe’s emerging countries, in which the other big Austrian banks are all major players, even though the top trio is expected to remain profitable this year and next.

The Austrian central bank said on Monday the country’s banks faced another 10 billion euros in writedowns over the next two years, much of it in eastern Europe, in its baseline scenario, and another 10 billion euros in a stress scenario.

“There is still considerable need for loan loss provisions, both in Austria and in (emerging Europe),” the central bank’s top bank supervisor Andreas Ittner said.

“Our stress tests show that there is the need to improve the capital situation in the medium term.”

The fallout of a possible Hypo insolvency convinced the biggest banks — Unicredit Bank Austria, Raiffeisen Zentralbank and Erste Group Bank — to chime in with 500 million euros in liquidity for Hypo.

Hypo’s is the second nationalisation of an Austrian bank during the financial crisis after Austria bailed out troubled municipality lender Kommunalkredit last year when it almost defaulted because of toxic Iceland and structured debt assets.

(Additional reporting by Boris Groendahl; writing by Boris Groendahl and Sylvia Westall; Editing by Hans Peters and Greg Mahlich) ($1=.6733 euros) ((boris.groendahl@reuters.com; +43 1 53112-258; Reuters Messaging: boris.groendahl.reuters.com@reuters.net))

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