The Austrian government debt agency’s two-year old foray into subprime investments has turned into a political hot potato and sparked an increasingly heated debate between the Social Democrats and conservatives, caught in an uneasy but coalition government without viable alternative.

Austria’s audit court last week revealed that the agency, which in its staid day job issues government bonds and makes sure state coffers are full when they need to be, started to moonlight on money markets in 2002 to earn a little extra money on the side.

Its cash position ballooned from an average 4.5 billion euros in 2002 to a peak of 26.8 billion euros in October 2007. This level “was not only determined by economic necessities, but was also meant to generate additional revenues,” the audit court said in its report.

Sure enough, as much as 10.8 billion euros went into asset-backed commercial paper (ABCP), a class of structured investments that became disreputable when the subprime crisis broke out in 2007. Luckily, the debt agency got away only slightly bruised, with up to 380 million euros in possible losses from those investments.

Even though the loss looks manageable (it equals 0.13 percent of Austria’s GDP), and no rules seem to have broken, two former and the current finance minister – all conservatives – as well as the agency itself find itself at the centre of a debate seeking someone to blame.

The conservatives were caught slightly wrong-footed. Still basking in election successes based on voters’ perception that they, rather than the Social Democrats, were the safe pair of hands to steer the country through the economic crisis, they suddenly faced charges of gambling away taxpayers’ money.

Karl-Heinz Grasser, under whose reign as finance minister the agency’s side business started, and whose life after politics mainly consisted of modelling and launching an ill-fated joint venture with coffee-roasting heir and banker Julius Meinl, said the losses didn’t happen under him – dodging the question why the side business was started in the first place.

His successor Wilhelm Molterer – one of the possible Austrian candidates for European Commissioner – said he stopped the investment when the losses occurred – leaving unanswered why he presided over the greatest expansion of the play money purse. And incumbent Josef Proell, who took office only in 2008, had no convincing explanation why he didn’t mention the losses when he answered a parliamentary inquiry about the agency’s investment policy earlier this year.

The opportunity to milk the incident has not been lost on Social Democrat Chancellor Werner Faymann. “If more than 300 million euros in tax money are at risk you cannot pretend this is business as usual, everything’s alright. This is an insult for taxpayers,” he told Austrian radio. Faymann has summoned Proell, central bank governor Ewald Nowotny – who had to cut short his holiday – and the audit court head to discuss the case next Friday before the occasion to present himself as the true guardian of taxpayers’ money goes away.

Photos: 1) Chairman of Meinl Power Management Karl-Heinz Grasser listens during a news conference in Vienna July 1, 2008. REUTERS/Heinz-Peter Bader. 2) Austrian Finance Minister Wilhelm Molterer addresses a news conference in Vienna April 12, 2007. “Holen Sie sich Ihr Geld zurueck” reads “Retrieve your money”. REUTERS/Heinz-Peter Bader