Austria Must Rein in Provinces to Stabilize Debt, Monitor Says

Austria needs to rein in the financial power of its provinces to ensure that off-balance- sheet debt doesn’t damage the country’s credibility, a state- sponsored monitoring group said.

Austria’s nine provinces need more financial oversight and less leeway to offer debt guarantees, Bernhard Felderer, the State Debt Commission’s president, told a news conference in Vienna today.

“They have speculated with taxpayer funds, and that shouldn’t be possible in the future,” Felderer said. “We cannot rule out the possibility that there will be other cases.”

The country of 8.5 million people has been probing how local and regional officials handle tax revenue distributed by the federal government. Earlier this month, the province of Salzburg disclosed it lost as much as 340 million euros ($450 million) on more than 250 off-book derivative instruments. Other provinces and cities in Carinthia, Lower Austria and Upper Austria have also been stung with foreign-currency losses and bad-loan guarantees.

“We have a long list,” Felderer said. “We need a new law that regulates these cases.”

Austria’s government will introduce draft legislation to limit the provinces’ ability to access low-interest funds from the Federal Financing Agency unless oversight and transparency is improved, Finance Minister Maria Fekter said last week.

Salzburg Losses

A civil servant in Salzburg’s finance department invested in high-risk derivatives since 2001 and hid the losses from her superiors, auditors and banks advising the province. The disclosure caused the provincial finance chief, David Brenner, to resign and resulted in a call for new elections by the conservative People’s Party.

Austrian municipalities have as much as 20 billion euros in off-balance-sheet debt that isn’t fully recognized in official statistics, the debt commission warned in July. The liabilities, owed by entities operating public transportation, utilities, theaters, museums and hospitals, aren’t counted toward Austria’s public debt and are not completely disclosed.

The country should establish an independent body of financial experts that can dispense advice to its regions, Felderer said. Transparency on community and provincial finances must also be increased, he said.

To contact the reporter on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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