We often talk in these pages about the difficult situation facing Europe’s southern countries, but the financial crisis is also affecting countries that are considered sound and that have a good reputation. This is the case with Austria, facing difficulties with its banking sector.
One bank in particular is getting the government’s attention : Hypo Alpe Adria (HAA). In the 2000’s the bank went on an acquisition and expansion spree, notably toward the Balkans. Its balance sheet then exploded eight-fold in less than a decade to reach 40 billion euros in 2009. Since HAA was backed by both Carinthia Land and Bayern LB, a german regional bank owned by Bavaria, it seems the leaders lost all common sense in regard to risk management. Another example of capitalism gone bad by public intervention, or better yet, crony capitalism.
As could be expected, with the 2008 crisis, the bank went into default. And the costs have been heavy : As of now, Vienna has spent 5.5 billion euros to prevent HAA’s bankruptcy and has to add to that 4 billion euros just to pay for its losses and to cover its re-financement needs for this year. And this is far from over. These amounts are starting to seriously eat into the federal State’s budget capacities, which is looking for solutions to limit the losses (it has already reduced the education budget, which has been very badly perceived by the population).
Within this restructuration, in order to keep its costs down, the government has decided for a very risky and new measure... plain default, just like a country from South America! In fact, those who bought HAA secondary products, or non-priority debt, will see their claims simply and purely canceled... But the problem is that those claims were guaranteed by the Carinthia Land; it doesn’t matter... the federal State will just pass a law to effectively cancel this guarantee. Just like in Argentina! And, just like in Argentina, creditors will likely sue the State, considering that Austria has reneged on its promises.
With this situation, the reputation of Vienna’s banking sector is in jeopardy. Standard & Poor’s has already placed Vienna’s financial institutions under negative surveillance following this decision. The government keeps repeating that this is an exceptional case but, in reality, the whole of the austrian banking system is ailing. Austrian banks have assets totalling 1,090 billion euros, or close to three times the country’s GDP (335 billion euros), and they have a ton of exposure in the Balkans, Russia and Ukraine, the latter virtually bankrupt...
However the case may be, we are witness to the fact that rules can change in a heartbeat in times of crisis. What is happening in Austria isn’t as bad as what happened in Cyprus, surely, and the depositors are not involved this time, but just the fact that a State can decide to forgo its engagements should be cause for worry.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.