The Hypo Alpe Adria scandal, which threatens to bankrupt the Austrian province of Carinthia, started about two decades ago. Back in 1992 the small provincial bank had a balance sheet total of ÖS 26 billion (Austrian schillings), equivalent to €1.89bn, but was about to become a major player in the Balkans thanks to the burning ambition of the local political elites and greedy, supposedly smart bankers. Prior to the financial crisis all almost went well.
The rapid growth of the bank in the 1990s and early 2000s was only possible thanks to an old practice: the €40 billion guarantees by the province of Carinthia for any losses made by the bank. Back then, this was a well-practiced custom not only in Austria but also in Germany with their Landesbanken (many of which had to be nationalised and saved by the taxpayer even before the financial crisis hit the continent).
Of course none of these provincial politicians ever thought the guarantees might once become due.
But then things started to go wrong. In 2006 the bank suffered massive losses of €300 million because of swap deals. It was put under bank supervision by the Austrian National Bank, the Financial Market Supervisory Authority and the Government of Carinthia.
In 2007 the Bayrische Landesbanken bought the majority of shares from the province of Carinthia in a deal that seemed favorable for both sides. The shareholders of Bayrische Landesbanken and insurance company Grazer Wechselseitige neglected previous losses (mainly in the Balkans, due to heavy corruption and theft), while voters in Austria´s most southern province were all of a sudden confronted with the possibility that their guarantees might become realisable.
In 2008 and 2009 Hypo Alpe Adria continued to be a major problem for the taxpayer. When the Bayrische Landesbanken refused to recapitalize it, the bank received €900m taxpayers’ money, despite being rated as “not distressed” by the National Bank of Austria in a questionable audit. On 14 December 2009, Austria´s Federal Minister of Finance nationalised Hypo Alpe Adria, which once was worth billions, for €1 per shareholder, in addition to payments of €825 million to Bavaria, €200 million to Carinthia, and €30 million to the Grazer Wechselseitige. Ever since then, the nationalised Hypo has been causing more and more trouble, enduring corruption scandals involving former management, mismanagement, and political intervention.
Today, now that all these scandals have become public, after years of inquiries and with three burnt Federal Ministers of Finance being forced to leave office, the guarantees by the Government of Carinthia have shrunk to €11bn.
Insolvency would have been the best option to avoid burning more taxpayers’ money. However, for this to happen politicians from all parties, not just in Carinthia but also the coalition government in Vienna, would have had to admit that huge mistakes had been made due to poor economic reasoning, prolonging and negating inconvenient problems, rather than solving them. So we ended up with bailouts of €5.5 billion.
Instead of allowing Hypo to declare insolvency last spring, the government in Vienna painted an apocalyptic picture of what would happen if it were allowed to go bankrupt: the province of Carinthia itself would go bust, its hospitals, schools and kindergartens would close. And even worse (it was claimed), an uncontrollable chain reaction would threaten the stability of the regional banking system with unforeseeable economic consequences.
But there is no reason why banks or regional authorities shouldn’t go bankrupt. There are numerous international examples which confirm that, with resolution, a sustained turnaround is possible and the taxpayers will be less burdened. When it came to Hypo Alpe Adria, these arguments were never heard.
So instead of letting the bank fail, Hypo was placed directly under federal government control (in a holding organisation called Anstaltslösung, or bad banks). But the decision ignored economic reality: the Ministry of Finance estimated that Hypo’s insolvency would cost the Austrian taxpayers €5.3bn less than the Anstaltslösung option. Ironically, the Austrian government has historically always argued against financial speculation, but in the end it produced a bail-out for national and international investors out of thin air, a decision which is likely to be the worst and most expensive solution for the taxpayer.
Earlier this month, the Financial Markets Authority (FMA) decided to take care of the winding up of the bank themselves and permitted Heta Asset Resolution AG, the successor company of the Hypo-Alpe-Adria-Bank, to suspend servicing creditors. This decision is basically insolvency in instalments. Nobody dares to admit that Hypo is de facto bankrupt, as this would mean accepting that Carinthia has to take responsibility for its contingent liability. In addition, the assets of Heta have been drastically revised downwards by €5.1 billion, to €7.7 billion. After subtracting the equity capital, at least €4 billion is missing. How is it possible that a black hole of this size appears which nobody knew about in August when the half-year balance sheets were published? The standard excuse — the surprising decision of the Swiss National Bank to abolish its exchange peg to the euro – cannot be the only explanation.
Heta’s liabilities (for example repaying of mortgage bonds or promissory notes) amount to €10 billion in total and would have been due in 2017. The FMA based its decision not to fill Heta´s black hole with taxpayers’ money on the new law for winding up and restructuring banks (BaSAG). It puts an EU-guideline in practice: the creditors, e.g. pension funds and insurances, should pay instead of taxpayers. In future negotiations, they should be convinced to waive a part of their claims.
The government now has the opportunity to find a mutual solution for a debt cut because all payments are waived until May 2016. The creditors have no other choice but to take legal action. Countless legal proceedings, which will last for years, are inevitable. The Bavarian regional bank will be under pressure as they invested €2.5 billion euros in Hypo.
Yet the most important legal question is if this is a case of a legal insolvency or not. If it is, the sale of Hypo Alpe Adria SEE Holding, Hypo’s former Southeastern-European network, to the US-fund Advent International for a total of €200 million would be endangered.
Last month, the rating agency Fitch reduced Austria’s creditworthiness to AA+. The primary reason was that Austria’s banks in Eastern Europe are exposed to high risk and the increased indebtedness of the Austrian government. In the second quarter of 2014, national debt came to 82.6 percent of GDP. We don’t know exactly how Hypo will affect this figure but sovereign debt could soon exceed 87 percent of GDP.
Austrian taxpayers have had to pay more than €5.5 billion to rescue Hypo. The announcement that no more money will be needed is the first piece of positive news on Hypo that Austrians have heard for years. But as positive as it sounds for taxpayers, it has negative consequences for the financial centre of Vienna and for the creditworthiness of Austria.
Nobody who considers the Hypo a bottomless pit will be surprised if taxpayers will have to pay again.