Nov. 3 (Bloomberg) -- Austria agreed to buy Kommunalkredit Austria AG from Oesterreichische Volksbanken AG and Dexia SA in the first bank nationalization since the government announced a rescue package for the finance industry.

Austria will pay 1 euro ($1.27) for Dexia's 49 percent stake and the same amount for Volksbanken's 50.78 percent holding in the municipal lender, the Finance Ministry said today. Austrian municipalities will keep their 0.22 percent interest.

The Vienna-based bank failed when it was forced to refinance itself in the interbank lending market, which froze in the wake of the global credit crisis. Under Austria's 100 billion-euro rescue package for the banking system, the state-assets agency can spend 15 billion euros on equity stakes in troubled lenders.

``The state aims to maintain and strengthen Kommunalkredit's important role as the institution financing municipalities and infrastructure projects,'' the ministry said.

The injection of government funds into the country's eighth- biggest bank will boost Kommunalkredit's Tier 1 ratio, a measure of financial strength, to ``8 to 9 percent,'' the lender said.

Erste Group Bank AG, Austria's biggest publicly traded lender, last week became the country's first bank to get government funds, receiving 2.7 billion euros.

Dexia and Volksbanken are converting some of their debt in Kommunalkredit into non-voting equity. Kommunalkredit will give the two banks a fixed annual interest payment of 8 percent on their investments for at least five years. Volksbanken's debt amounts to 173 million euros, while Dexia has 200 million euros.

Bond Repayments

Dexia, the Franco-Belgian lender, said it will incur an estimated loss of 105 million euros on the nationalization of the Austrian lender.

Kommunalkredit is due to repay bonds amounting to 737 million euros in 2008 and 3.66 billion euros next year, according to Bloomberg data. The bank's bonds total 16.5 billion euros.

The lender may have 200 million euros at risk in Iceland, Der Standard newspaper reported on Oct. 28. The bank will have to write off 70 percent of its Iceland risk, the Vienna-based newspaper reported, without saying where it got the information.

Dexia has taken over Kommunalkredit's 49 percent stake in Dexia Kommunalkredit Bank AG, which managed Dexia and Kommunalkredit's activities in eastern Europe for 1 euro, the statement said.

Volksbanken, Austria's fourth-biggest lender, said in a separate statement it planned to raise capital from existing investors to increase its Tier 1 ratio to 9 percent. The Vienna- based bank also is ``studying'' the government's bailout package, it added.

The package, passed on Oct. 21, also set up a clearing house to guarantee the value of illiquid bank assets.

To contact the reporter on this story: Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

Last Updated: November 3, 2008 10:34 EST