Austria Keeps Debt Plans as Bank Bailouts Raise Spending

Austria sees no need to change its debt issuance program and is sticking to its plan to stay below the European Union’s deficit ceiling this year even as it injects cash into Oesterreichische Volksbanken AG and KA Finanz.

The Alpine republic, which has been warned that more bank bailouts may put its credit rating at risk, will raise tax revenue this year to offset the new cash injections as well as a writedown on previous bank aid. The country intends to lower the deficit to 3 percent of gross domestic product and won’t need to sell more bonds to raise the cash, according to Austrian officials.

“I don’t see a need to change the range we announced in December,” said Martha Oberndorfer, head of the Austrian Federal Financing Agency, referring to the agency’s plan to issue 27 billion euros to 30 billion euros ($35 billion to $39 billion) of debt this year, of which 20 billion euros to 24 billion euros will be government bonds.

The austerity plan approved by Austria’s government today was thrown into disarray last week when the state-backed rescue of Volksbanken created an unanticipated budget gap. Austria will write off 70 percent of 1 billion euros it previously injected into the lender, and provide 250 million euros of additional funds. Under European budget rules, the writedown weighs on Austria’s budget deficit this year, while the new cash only affects the debt level.

‘Worst Possible Times’

“This rescue act was really painful and came at the worst possible time, in the middle of the budget consolidation talks,” Finance Minister Maria Fekter told journalists yesterday. The entire package foresees 27.9 billion euros in tax hikes and spending cuts over five years to balance Austria’s budget by 2016, from a deficit of 3.3 percent of GDP in 2011, and lower its debt level to 70 percent from 72 percent.

The Volksbanken bailout came on top of already budgeted new capital of as much as 600 million euros for nationalized KA Finanz related to Greece’s debt swap. Depending on how that swap is executed, there is an additional risk of 400 million euros on KA Finanz, Fekter said. The lender, in which Austria warehouses risky assets of Kommunalkredit Austria AG, will also get 1.1 billion euros next year when a debt warrant Austria guaranteed expires, according to the ministry.

Austria added a bank tax increase of 25 percent to the package, raising an additional 128 million euros annually from this year until 2016 to transfer part of the costs to the banking industry. The government is also changing the tax rules for pension funds in a way that the ministry expects will bring forward revenue of 900 million euros to this year, at the expense of lowering revenue in future years, Fekter said.

She wanted to “make clear to the market that if we’re stabilizing the financial sector, it will have to contribute,” Fekter said.

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