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Austria Takes Volksbank Stake, Defying Downgrade Treat

Austria bailed out Oesterreichische Volksbanken AG (VBPS) for a third time since 2008, losing most of its money from an earlier rescue and providing more cash two weeks after announcing pension cuts and tax increases to fight deficits.

The government, which was warned that more bailouts may put its credit rating at risk, will become Volksbanken’s second- biggest shareholder after it injects 250 million euros ($335 million), the Vienna-based firm said yesterday in a statement. The state will write off as much as 70 percent of an earlier 1 billion-euro capital infusion to help erase losses accumulated at the bank, according to the statement.

“The purpose of those measures is the restoration and the rebuilding of Volksbanken,” the lender, Austria’s fourth- biggest, said in the statement. “This creates the basis for a sustainable, stable future.”

Austria announced pension cuts, tax increases and a public sector hiring freeze Feb. 10 to lower its deficit by 26.5 billion euros over five years. The country is fighting to keep its top debt grade, which ratings firms such as Standard & Poor’s say is most threatened by the potential for another round of state aid for the nation’s banks.

Volksbanken, whose Kommunalkredit unit was the first Austrian bank to be taken over by the state in 2008, and Hypo Alpe-Adria-Bank International AG are the institutions that have most damaged the nation’s budget.

40 Percent Stake

The new cash injection, following a capital reduction of as much as 70 percent to erase Volksbanken’s accumulated losses, probably will give taxpayers a 40 percent stake in the lender, according to two people with knowledge of the plan who spoke on condition of anonymity because talks are still under way.

A group of 62 regional cooperative lenders will provide at least 230 million euros and remain the majority shareholder in Volksbanken, according to the statement. The regional banks unanimously approved the plan at a meeting in the Austrian capital. The stakes of other shareholders, including DZ Bank (DZBK), Raiffeisen Zentralbank Oesterreich AG (RZBOPA) and Munich Re, will be diluted in the process.

Austria rescued Volksbanken in 2009 with 1 billion euros of so-called participation capital, which carried no voting rights. That will be cut to 300 million euros because of the capital reduction, according to the statement. Austria also is granting the lender a 100 million-euro asset guarantee for a 10 percent annual fee.

‘Ensure the Repayment’

The regional lenders “will ensure the repayment” of the remaining participation capital and the payment of the asset- guarantee fee, Volksbanken said. The deal comes after the finance ministry over the weekend rejected a previous plan proposed by the regional banks, according to four people with knowledge of those talks among Volksbanken, its owners and the finance ministry.

That plan, which would have created a so-called bad bank, would have exposed the state and other shareholders to unprofitable businesses. The regional lenders also wouldn’t have shared enough losses, said the people, who declined to be identified because the talks were private.

The regional banks owned 61 percent of Volksbanken before the restructuring, while DZ Bank owned 23 percent, Raiffeisen Zentralbank Oesterreich AG, 6 percent, and Munich Re, 9 percent. Volksbanken didn’t provide a breakdown of the stakes after the capital cut.

DZ Bank will take over 400 million euros of Volksbanken’s German loan book, while RZB will seek to help Volksbanken sell a 5 percent stake in RZB to other RZB shareholders, according to the statement.

Cross-Guarantee Pact

Volksbanken and the regional lenders, under the new shareholder structure, will keep developing their plan to create a cross-guarantee pact, according to the statement. That means the company would keep offering support, such as liquidity management, for the regional owners and wind down all business that isn’t part of that function, corresponding to about half of its assets.

The government taking a stake will “help to stabilize this bank and prepare for an orderly restructuring,” Austrian central bank Governor Ewald Nowotny told journalists in London. “However, it is not a permanent move and will merely help with the restructuring.”

S&P and Moody’s Investors Service warned Austria this year that its financial-services industry is the main threat to the nation’s credit rating. S&P cut its rating to AA+ Jan. 13 because of the banks’ links to Italy and Hungary. Moody’s said earlier this month that it may lower Austria’s Aaa grade if the country disburses more aid to banks, which the ratings company called a “contingent liability.”

Banking-Tax Boost

Austria will boost its banking tax to finance the bailout, Harald Waiglein, a finance ministry spokesman, said in a phone interview from Vienna. The Alpine republic will post a 700 million-euro writedown on the participation capital, he said.

Austria already is saddled with bad assets Volksbanken ran up through 2008 in its municipal-lending unit, Kommunalkredit, which it co-owned with Dexia SA, the Belgian bank being broken up in the wake of losses. Kommunalkredit was part of an expansion during which Volksbanken relied on wholesale funding to boost its balance sheet fivefold from 2000 to 2007.

The government took over Kommunalkredit to avoid a collapse of the wholesale-funded lender after the bankruptcy of Lehman Brothers Holdings Inc. The risky Kommunalkredit assets absorbed by the state include credit-default swaps written for about 10 billion euros of debt, including Greek government bonds.

Volksbanken has posted writedowns on Greece’s debt and on bad loans in Romania, driving its net loss to 689 million euros in the first nine months of 2011.

The state gained the right to take over Volksbanken after the lender failed to repay part of that aid and because it hasn’t paid a dividend on it. Finance Minister Maria Fekter had previously said that her desire to exercise that right was “limited.”

To contact the reporters on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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