Austrian banks including Erste Group Bank AG (EBS) and Raiffeisen Bank International AG (RBI) had their debt ratings cut by Moody’s Investors Service as the government forced losses on state-guaranteed bonds this month.
Moody’s cut by one level the debt ratings of 11 banks including the country’s biggest, Erste Group Bank AG, and third-biggest, Raiffeisen Bank International AG. It also cut to junk level the debt of state-owned Kommunalkredit Austria AG. Moody’s cited “the unprecedented nature” of the Austrian government’s draft law voiding 890 million euros ($1.2 billion) of bonds at Hypo Alpe-Adria-Bank International AG that were guaranteed by the province of Carinthia.
“Austrian authorities are now generally more willing to countenance bank resolutions in which losses may also be imposed on senior creditors,” the ratings company said in a statement.
Austria tested uncharted waters this month with a law that bypasses the Carinthia guarantee to force losses on investors in Hypo Alpe, a bank that has cost taxpayers billions to bail out. Finance Minister Michael Spindelegger in March ruled out its insolvency, sparing holders of about 11 billion euros of senior bonds.
Moody’s changed its assumption of state support for Erste, Raiffeisen, eight of the regional banks that own Raiffeisen, Hypo Tirol Bank AG and Vorarlberger Landes- und Hypothekenbank AG to “high” from “very high,” which resulted in the one-step downgrade for all of them. The outlook for all is negative.
Kommunalkredit, a state-owned bank that like Hypo Alpe is being wound down, was cut to Ba1 from Baa3 and in protest turned down the rating, saying Moody’s is wrong to assume that Hypo Alpe is a model rather than an exception.
Spindelegger said in a statement that bailing in investors is becoming a standard feature in European bank restructuring law and that Austria was bringing it forward for the “special case” of Hypo Alpe.
“The Austrian government has anticipated with the special law an European Union directive,” he said in a statement. “From 2016 at the latest, this isn’t the exception anymore, but the rule.”
Amid public anger over rescuing the bank, Spindelegger promised in March to tap other sources for sharing the cost of shutting down Hypo Alpe, including junior securities and former owners.
“Breaking this taboo is an unforgivable mistake,” Willibald Cernko, the head of the Austrian Bankers’ Association and chief executive officer of UniCredit Bank Austria AG, said this week. “It may cause substantial collateral damage,” he said, asking the government to reconsider the draft law.
Bank Austria, which is fully owned by Italy’s UniCredit SpA (UCG), as well as Bawag PSK Bank AG, owned by U.S. investors, didn’t have their ratings cut because the likelihood of state support for them was already lower due to their foreign ownership, Moody’s said.
Hypo Alpe’s subordinated bonds that are subject to the government-imposed bail-in, were cut to C, the rating company’s level used for defaulted debt. Those junior bonds not subject to the bail-in were cut to Ca, while its senior bonds were reduced to Caa1.
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