Here’s an interesting story out of Austria on Wednesday.
Via Reuters:
VIENNA, July 15 (Reuters) - Austria’s government debt agency is facing up to 380 million euros ($534 million) in losses from as much as 10.8 billion euros it invested in subprime debt-based structured investments, Austria’s audit court said on Wednesday.
The audit court said that the Austrian Federal Financing Agency (AFFA) — which manages the Austrian government’s debt — had between 2002 and 2007 raised its cash position by more than five times, peaking at 26.8 billion euros in October 2007. It took on more short-term debt than it needed to redeem bonds and have a cash reserve for emergencies, with the goal to raise additional revenues on the market, the audit court said.
The audit court said that during its review, AFFA justified the cash position by saying it periodically needs to build up buffers to redeem bonds. But the court said this was not a sufficient explanation for the continuous rise in this period. “The audit court remarked critically that the level of the cash position was not only determined by economic necessities, but was also meant to generate additional revenues,” the audit court said in a report.
AFFA head Martha Oberndorfer told Reuters that the agency had invested at the time in asset-backed commercial paper (ABCP) with the highest possible rating. Of its peak 10.8 billion euros investment, only 691 million euros went sour in 2007. After partial redemptions and restructuring measures, the amount at risk from those investments was now around 380 million euros, said Oberndorfer, who took office in 2008.
The debt was restructured in a way that does not add to Austria’s deficit. She added that no legal rules were broken in building up the cash position, which at the time was only restricted by the cost of holding cash raised at long-term rates in short-term paper. This restriction became irrelevant in 2007, when some short-term paper yielded more than long-term debt cost.
While it’s a small comfort they managed to minimise the losses on their subprime flutter to €380m from €691m, it’s still somewhat disconcerting they only realised the potential negative consequences of their investment as late as October 2007.
By this time even Wikipedia had subprime down as a fully blown crisis.
Related link:
The hills are alive with the sound of Austrian bond auctions - FT Alphaville
