A heap of Hypo for Austria | FT Alphaville

A heap of Hypo for Austria

There’s been something of a major bailout in Austria on Monday morning. Hypo Group Alpe Adria, the struggling Austrian lender part-owned by Germany’s Bavarian state, has been nationalised.

For those unfamiliar with the story, Hypo Group announced in November that it was set to make an annual loss of “significantly more than €1bn ($1.5bn)” this year due to loan losses and writedowns across its investment portfolios.

The thing is, Hypo — being 67 per cent owned by Bavarian state lender Bayerische Landesbank — was at risk of passing its problems onto a municipal and sovereign level. Hence we saw the involvement of Jean-Claude Trichet in the weekend’s rescue talks, according to Reuters.

A failure of Hypo was also likely to have major consequences on former Yugoslavian countries the bank was invested in.

As Reuters reported on Monday:

VIENNA, Dec 14 (Reuters) – Austria nationalised Hypo Group Alpe Adria on Monday to avert a bank collapse that could have undermined trust in banks in eastern Europe and cast doubt over Austria’s and Germany’s backing of state-owned lenders.

Austria is taking over 100 percent of Hypo from BayernLB, insurer Grawe and the Austrian state of Carinthia, after shareholders agreed to inject around 1 billion euros ($1.5 billion) in capital, Finance Minister Josef Proell said.

“The risk situation of this bank has created an enormous threat to Austria in the past days,” Proell said on Monday after a weekend of crisis talks with his counterpart from the German state of Bavaria, Georg Fahrenschon, and the other shareholders. “We jointly could avert this threat,” he told journalists in a news conference Monday morning.

Proell said European Central Bank President Jean-Claude Trichet had been involved in the talks over the weekend. The owners will give away their stakes in Hypo to Austria and provide an additional round of capital.

BayernLB, which is owned by Bavaria, will give an additional 825 million euros in capital, and leave 3 billion euros of liquidity in the bank. “With (this rescue) the risk of an insolvency, with all the negative consequences for the bank’s customers, has been averted,” Austrian central bank chief Ewald Nowotny said in a statement. He said the rescue had also avoided “a massive risk to the entire Austrian economy at a critical point,” and said the bank must urgently restructure because of its important role in Austria and Southern Europe.

Bayern LB, said it would sell its 67 percent stake in the bank for one euro. It was the second nationalisation of an Austrian bank during the global financial crisis after Austria bailed out troubled municipality lender Kommunalkredit last year. Hypo, Austria’s sixth-biggest bank, which is also a major lender in the former Yugoslavia, is creaking under up to 1.7 billion euros ($2.5 billion) of writedowns and loan losses which threatened to wipe out a large part of its capital.

All of which sounds pretty worrisome.

BNP Paribas analysts on Monday were concerned the bailout could have repercussions for the euro, especially given the pressure the eurozone was already under on account of Greece‘s deteriorating fiscal position.

As they wrote:

Austria nationalising Hypo Group Alpe Adria highlights the fundamental weakness of EMU’s banking system. Bayern LB will have to write down its stake in Hypo Adria to zero increasing the hole in its balance sheet by another EUR3bln. We remain convinced that European banks will have to repatriate funds ahead of the fiscal year end, but once this operation is complete the EUR will suffer. With interest we have followed the recent speech of ECB’s Trichet, suggesting that if banks would not use their profits to bolster their equity base it could case the next crisis. The weak equity position of banks explains weak lending in Europe which itself suggests Europe will become an economic under performer.

In other words, watch this space.

Related links:
Austrian banking industry’s problem child awaits a cash injection
– FT
Austria Agrees to Nationalization of Hypo Alpe-Adria
– Bloomberg