Austria Takes Volksbank Stake, Defying Downgrade Treat

Chancellor Werner Faymann
Chancellor Werner Faymann told reporters in Vienna, The taxpayer wont pay for this crisis. Photographer: Jock Fistick/Bloomberg

Austria plans to put most of the burden of bailing out Oesterreichische Volksbanken AG on the country’s other lenders, raising its banking tax by 25 percent to backstop the national budget and credit rating.

“The taxpayer won’t pay for this crisis,” Chancellor Werner Faymann told reporters after a government meeting in Vienna today, a day after the country announced its third bailout of Austria’s fourth-biggest lender since 2008. “This will be financed by the banking sector and through measures relating to the owners.”

Austria, which has been warned that more bailouts may put its credit rating at risk, will become Volksbanken’s second-biggest shareholder with a stake of as much as 49 percent after it injects 250 million euros ($335 million). At the same time, it 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 a statement released yesterday.

The bailout comes weeks after the government announced pension cuts, tax increases and a public-sector hiring freeze to lower its deficit by 26.5 billion euros over five years. Austria 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 aid for the nation’s banks.

“I think it’s a fair contribution by the banks,” junior Finance Minister Andreas Schieder said today. “What was important for us is that our budget deficit plan remains intact, and we don’t need to use the tax base for the rescue.”

Not on Taxpayer’s Bill

The increased bank tax will raise 125 million euros per year, or 750 million euros in total, until 2017, when Austria aims to sell its stake in Volksbanken again. Raiffeisen Bank International AG, the country’s third-largest lender, said its tax bill will probably rise to about 100 million euros a year. Erste Group Bank AG and UniCredit Bank Austria AG, the biggest and second-biggest, declined to comment.

Shares of Erste fell 0.5 percent to 18.055 euros at the 5:30 p.m. close of Vienna trading. Raiffeisen shares advanced 1.5 percent to 26.707 euros.

To stick to its budget plan for this year, the government needs to balance the 700 million-euro writedown. On top of the first 125 million euros from the higher bank levy, the state plans to recoup 220 million euros from Volksbanken’s owners this year, Faymann said, without elaborating.

S&P Anticipated Bailout

The country will also change the way in which it taxes pension funds to bring forward 400 million euros in revenue to 2012 in exchange for lower revenue in future years, a spokesman for the finance ministry said. Together the measures will make sure Austria’s budget deficit stays below 3 percent this year, the spokesman said.

S&P cut Austria to AA+ Jan. 13, while Moody’s Investors Service said earlier this month that it may lower Austria’s Aaa grade if the country disburses more aid to banks.

“We were more or less expecting Austria having to inject additional capital into one of its banks, so there was a buffer in our Jan. 13 downgrade,” said Alois Strasser, who is in charge of Austria for S&P. “Volksbanken’s bailout is covered by the last downgrade.” An additional cut would be triggered by a downturn in the economies most linked to Austria, such as Italy or Hungary, Strasser said.

Cooperatives’ Stake

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 been the biggest burden to the national budget. Faymann said Volksbanken’s majority shareholders, a group of 62 regional cooperative lenders, will have to share the bailout’s pain.

The regional shareholders’ investments will be mostly erased by the capital reduction, and they will have to inject fresh funds of at least 230 million euros to remain majority shareholders in Volksbanken, according to the statement. The state will keep the option to take over a majority stake, Vice Chancellor Michael Spindelegger said.

Austria also is granting the lender a 100 million-euro asset guarantee for a 10 percent annual fee. The regional banks unanimously approved the plan at a meeting in the Austrian capital yesterday. The stakes of other shareholders, including DZ Bank, Raiffeisen Zentralbank Oesterreich AG and Munich Re, will be diluted in the process.

Cross-Guarantee Pact

Under the changed ownership, Volksbanken and the regional lenders will pursue their plan to create a cross-guarantee pact, according to the statement. The regional banks, some of which were founded by craftsmen and small manufacturers as early as 1851, are in turn owned by more than 500,000 members in a structure similar to credit unions, building societies or mutual savings banks in other countries.

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 holders after the transaction.

While DZ Bank and RZB won’t inject fresh money, DZ Bank will take over 400 million euros of Volksbanken’s German loan book while RZB seeks to help Volksbanken sell its 5 percent stake in RZB to other RZB shareholders. RZB will also provide an additional 500 million euros in liquidity, and DZ Bank and Munich Re will keep its funding lines unchanged.

Bankruptcy Discussed

Chancellor Faymann said the state would have had to come up with as much as 13 billion euros for risks including the nation’s deposit insurance in case of a Volksbanken failure. A bankruptcy for Volksbanken “wasn’t impossible in the last few nights,” the finance ministry’s Schieder said.

The state gained the right to take over Volksbanken after the lender failed to repay part of government aid and pay dividends. Volksbanken, whose money-losing businesses are rooted in an era in which it relied on wholesale funding to boost its balance sheet fivefold from 2000 to 2007, saddled Austria with bad assets in its municipal-lending unit, Kommunalkredit.

The government took over Kommunalkredit to avoid a collapse in the wake of the bankruptcy of Lehman Brothers Holdings Inc. The Kommunalkredit assets absorbed by the state include credit-default swaps written for about 10 billion euros of debt, including Greek government bonds. Its wind-down offshoot KA Finanz may yet need more state aid because of the Greek bond swap, KA Finanz has said.

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