Sad affairs have been heating up in the tiny Alpine
republic in the center of the European Union. While Austria experiences
record unemployment at record growth rates and tax revenues
have fallen behind optimistic projections, the looming bankruptcy of a
mid-sized regional bank, Hypo Group Alpe Adria (HGAA), may propel the country to the disdained
position of being the catalyst for a new round of bank failures due to
interwoven banks risks on both the domestic and the international level.
Austrian politicians are up in arms since a third-party expert opinion that
recommends to wind down the bank at a cost of €18 billion has been leaked to
the media, but keep on marching on the most fatal route that will not
dissolve the problems: They keep flogging the dead horse HGAA with taxpayer's
millions in a monthly money injection routine that has cost so far around
€4.5 billion.
Current talks involving politicians appear to be more adequately suited for
the Vienna opera house, but not for a rolling high finance train wreck that
needs more than monthy band aids.
On Monday Austrian financial market authority FMA publicly said what the
official Austria never wanted to hear as it is now confronted with a widening
public discussion on a problem it had surrealstically
hoped to brush under the carpet. FMA head Harald Ettl warned that any further delay would make the – in
this blogger's humble opinion doomed HGAA – an incalculable risk and that
Austria should consider no option as a taboo anymore.
Nothing could be more true. An unorderly liquidation
of HGAA will not only push Austria from the throne of the best economy in the
Eurozone, pushing its public debt to GDP ratio well over 100%, but will also
have continent wide reverberations.
Bad Bank Idea Stopped In its Tracks by RBI
The
governments preferred solution, a bad bank for HGAA with the other Austrian
banks as shareholders was stopped in its tracks on Monday. Raiffeisenbank International (RBI) CEO Karl Sevelda ruled out his participation in such a special
purpose vehicle, claiming his shareholders will vote "no" on this
issue. RBI is laden down with its own problems like a 3-digit billion
exposure to ailing Central Easter Europe's countries where it had applied an
aggressive "growth before everything else" strategy that is now
becoming a boomerang due to to mounting bad loans.
The government was desperate to push through such a bad bank scenario as this
would have helped to avoid a rapid expansion in public debts. Without a bad
bank HGAA's debts would trigger guarantees from the owner, the province of
Carinthia. As Carinthia is technically bankrupt itself this would lead to
triggering state guarantees as Austrian laws do not provide for the
bankruptcy of a province.
The FMA's comments on HGAA will at least have one effect: Fingerpointing
between those responsible for the whole mess has already begun. Austria's
central bank, which issued a "no problem" expertise about HGAA at
the beginning of the financial crisis in 2008, is more focussed
on avoiding investor litigation that could hit the institution based on this
old "expertise."
So where do we go from here? As a dyed in the wool Austrian it can be assumed
that the Austrian grand coalition, under fire from all sides since its
formation last November because it has only come up with new tax ideas but no
sizable savings in its expenditures, will apply the ostrich strategy once
more.
Alas, this time the government may not find the time to sip coffee and push
the debt wagon further as the EU is watching developments closely. On Monday
Daniele Nouy, head of the newly formed EU banking
authority EBA warned in an interview with the Financial Times, that it may
not be appropriate to merge very sick banks with their not so sick
counterparts. While not naming HGAA directly Nouy
said, "we have to accept, that some banks
will disappear."
Austria's banking woes look eerily similar to the failure of Creditanstalt in 1931 that was the fuse for the last
European Kondratieff winter. For those sticking with K-cycles this may not be
a good outlook. 83 years later such an event is more than overdue in Europe
and given Europe's overall outlook it does not take much anymore to set the
Great EU Chaos into full fledged motion.
