Austria and Bavaria are stepping up a legal battle over who will foot the bill for billions of euros of losses at Hypo Alpe-Adria-Bank International AG, three years after the two made a deal to avert its collapse.
Austria’s statute of limitations means the government has until today to sue Bavaria for duping it into an agreement to buy Hypo Alpe for one euro, signed in Vienna in the early hours of Dec. 14, 2009. Hypo Alpe is also due to decide whether to stop honoring 2.35 billion euros ($3 billion) that Bayerische Landesbank, owned by the Bavarian state, lent it prior to the sale. Bavarian Finance Minister Markus Soeder has said he’ll demand immediate repayment in that case.
Hypo Alpe and BayernLB are among Europe’s most expensive bank failures, piling up as much as 14 billion euros in bailout costs for taxpayers in Austria and Bavaria. Executives and politicians behind the banks’ demise are either retired, dismissed or dead, leaving Hypo Alpe with soured loans in the former Yugoslavia and BayernLB with Icelandic debt and non- performing asset-backed securities.
“I’m having a little bit of a deja vu experience,” Rolf Holub, who led a parliament investigation of the bank in its home province, southern Austrian Carinthia, said in an interview yesterday. “Each time Hypo Alpe gets a new owner, the new owner says after a while that he couldn’t possibly have known the bank was in such bad shape.”
Austria is considering suing Bavaria after setting aside 1.5 billion euros of taxpayer cash and guarantees this year to prop up Hypo Alpe, and another 700 million euros for 2013. Daniela Kinz, spokeswoman for Austria’s Finance Ministry declined to comment on whether the government would proceed with the lawsuit. BayernLB, meanwhile, has started to pay down the Bavarian state aid it received.
In a separate legal move for repayment, Austrian authorities are arguing that BayernLB awarded Hypo Alpe the loans to keep it afloat even when it thought it would default. Under Austria’s insolvency laws, similar to U.S. and German rules, the lending may qualify as “substituting equity” and become subordinated to other liabilities. This would allow Hypo Alpe to stop paying interest or principal on the borrowing.
“Starting with the summer of 2012, the Republic of Austria has obtained evidence that suggests the loans are to be qualified as equity-substitute,” according to a lawsuit the Austrian government brought in the European Union General Court in Luxembourg in September. The Austrian bank has hired lawyers to advise it on the loans from BayernLB and will decide today whether it needs to repay them, said Nikola Donig, a spokesman for Hypo Alpe.
Bavaria’s Finance Minister Markus Soeder, after a hastily arranged meeting in October with Maria Fekter, his opposite number in Vienna, said BayernLB would call in the loans immediately should Hypo Alpe halt payment.
Most of the borrowing matures at the end of 2013 or in 2014, according to Hypo Alpe.
Hypo Alpe expanded rapidly in the 2000s, when it was owned by Austria’s Carinthia province, which was led by the late populist politician Joerg Haider. It became one of the biggest banks in the former Yugoslavia, with its assets almost quadrupling to 43.3 billion euros in the five years to 2008. The growth was fueled by as much as 25 billion euros in wholesale funding guaranteed by Carinthia, which has a 2 billion-euro budget.
BayernLB bought its initial 50 percent stake in Hypo Alpe for 1.63 billion euros in 2007 from Carinthia, insurer Grazer Wechselseitige and a group of investors led by Tilo Berlin, Hypo Alpe’s former chief executive officer. After nationalization, its losses were 3.7 billion euros.
Austrian taxpayers have subsidized Hypo Alpe with 1.26 billion euros in capital and a 200 million-euro asset guarantee. Carinthia’s guarantees and those of the federal government still total 16.7 billion euros. The bank sold another 1 billion euros of subordinated debt backed by Austria this month.
Several courts in Germany and Austria are already dealing with cases related to the bank’s failure. BayernLB is itself suing one of Hypo Alpe’s former owners in Austria for tricking it into its 2007 purchase of the lender. The company also accused former chief executive Werner Schmidt and seven other executives as well as Kurt Faltlhauser, a former Bavarian finance minister, of ignoring warnings about the viability of the purchase.
Hypo Alpe’s former CEOs Wolfgang Kulterer and Tilo Berlin as well as other executives have been charged in several separate cases by Austrian authorities. They all denied wrongdoing. Haider died in a 2008 car crash.
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