A bit of backstory - most of Austrian and German lands have state controlled banks, Landesbanken. Since the land debts are guaranteed by central government, these lands could raise money on the same terms as respective countries, that is, until now. Bavarian/Carynthian controlled HAA Bank financed its operations using funds raised by both lands - but as Carynthia stopped being able to service debt, they asked Austrian government for help. Austria, hearing demand for nearly 11 billion Euro, just shown middle finger to creditors and went back on its promises, starting talking about haircut by rapid liquidation of the bank and settling for fraction of debts.Holders of Bonds Linked to Hypo Alpe-Adria-Bank Face Steep Losses
Even if guaranteed by the Carinthia regional government, Austria’s finance minister said Monday.
A new plan to wind down the remnants of nationalized Hypo Alpe-Adria-Bank International AG will see owners of the banks’ debts take steep losses—even if they carry guarantees from the regional government of Carinthia, Austria’s finance minister said Monday.
Austria’s banking regulator said Sunday that all payments on old Hypo debts would be halted until May 2016, giving officials time to come up with a plan to shut down the nationalized bank without any further costs to taxpayers. In addition to debt carrying regional guarantees, the moratorium also affects senior bonds issued by Hypo, which, thanks to their privileged place in the pecking order of creditors, had so far been spared.
The announcement marks the latest instance of a European government taking a more aggressive course when it comes to sharing the cost of failing banks with investors. The Austrian government has already spent some €5.55 billion ($6.23 billion) on propping up Hypo since it ran into trouble in 2008 and late last year set up a “bad bank,” known as Heta Asset Resolution AG, that was meant to sell off its remaining assets.
“The government won’t pay another euro in taxpayer money into Heta,” Austrian Finance Minister Hans Jörg Schelling told ORF radio Monday.
Mr. Schelling said that the federal government in Vienna won’t take on liability for guarantees issued by the regional government of Carinthia, Hypo’s home province. “Everyone who bought a bond should have known that there is a risk to any bond, no matter where you buy it,” he said.
Regional banks in Austria and neighboring Germany have greatly benefited from guarantees on their debts by their home governments. Although these guarantees were banned by the European Union more than a decade ago, long transition periods mean that a large amount of protected debts remains in the market.
Austria’s banking regulator Finanzmarkt Aufsicht, or FMA, said Sunday that some €11 billion in Hypo debt is affected by the moratorium, along with some unquantified obligations to BayernLB, the Bavarian bank that owned Hypo before it was nationalized in 2009, and other creditors. In total, Carinthia’s government still guarantees around €10 billion of old Hypo debts, the FMA said.
The affected bonds dropped sharply Monday morning, with prices falling below half of face value.
“There will be a hit on bondholders and it may be substantial,” said Roger Francis, a credit strategist at Mizuho International. Mr. Francis reckons bondholders could face losses around 40% or more.
Mr. Schelling said it was too early to say what kind of “haircut” will be applied to the old Hypo bonds, but pointed to Monday’s drop in market prices as an indication.
The decision to halt debt payments came after a review of Heta’s holdings revealed a capital shortfall of €4 billion to €7.6 billion. When Heta was set up last fall, its assets had been valued at €18 billion.
“We were very surprised by this dimension,” Klaus Kumpfmüller, the head of FMA, told ORF radio. “We are now of course trying to figure out where this difference [in valuation] came from, how it could happen that within a few months such an additional [financing] need would be created.”
Last year, the Austrian government already voided regional guarantees on some €890 million in subordinated Hypo bonds and said it wouldn’t repay a €800 million loan from BayernLB—a move that has triggered a number of lawsuits. Mr. Schelling said that the wind-down of Heta announced Sunday would happen under new EU rules that make it easier for governments to impose losses on private investors without sending the bank into full insolvency.
“We feel that we are on the safe side” legally, said Mr. Schelling.
A spokeswoman for the European Commission, which oversees the implementation of the new bank-resolution rules, said officials in Brussels were monitoring the developments in Vienna and were in close contact with Austrian authorities. The EU-wide resolution rules don’t foresee imposing losses on senior bondholders until 2016 and don’t include bad banks, although national governments are free to be more aggressive.
Until now, senior bondholders have taken losses during the resolution of some smaller lenders in Denmark and during the winding down and merger of two Cypriot banks in 2012. Austria would be the first country to hit senior debts under the new EU-wide rules. A first €25 million slice of debt affected by the moratorium would have been due Monday.
Now, where things get interesting - since whole financial system of both Austria and Germany is based on state to lands guarantees, and one just pulled out of it, investors might start selling obligations of the other banks - and Landesbanken happen to be far too big to be propped up by their lands alone. If that happens, either Germans will need to find several dozen billion Euro to provide liquidity to them instead, or they follow the Austrian lead and haircut anyone owning debt in one of them if it collapses, by definition defaulting of debt and becoming 'bankrupt' state too. What will be interesting to see soon is Bavarian/German reaction to Austrian pull out.
Of course, no one will fault the government that decided to stop wasting taxpayer money on private, badly run enterprises, but it will be interesting to see what excuses will be used after 5 years of high-horseism and bashing Greeks "debts must be paid, haircut is evil" to justify it
