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Austria Faces Bank Injection After ISDA Triggers Greek CDS

Austria is facing a capital injection of as much as 1 billion euros ($1.3 billion) into KA Finanz AG less than two weeks after bailing out Oesterreichische Volksbanken AG.

The International Swaps & Derivatives Association yesterday ruled that Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger default insurance payouts.

In a statement before ISDA’s decision, KA Finanz said it may have risk provisions of about 1 billion euros if credit-default swaps on Greece it has written are activated. That includes charges of 423.6 million euros on an assumed loss quota of 80 percent, it said.

KA Finanz is the so-called bad bank of Kommunalkredit Austria AG, which was nationalized in 2008 when it was owned by Volksbanken and Dexia SA. While Kommunalkredit continues as a municipal lender and has to be sold again by Austria by mid-2013, KA Finanz took on securities, loans and CDS that are not part of that main business and is winding down those assets.

Government Pledge

Austria has promised to keep KA Finanz’s capital ratio at 7 percent and Finance Minister Maria Fekter said on March 3 that the country may have to inject as much as 1 billion euros into KA Finanz to keep that pledge.

The Alpine republic also has nationalized Hypo Alpe-Adria-Bank International AG and on Feb. 27 announced that it would take a stake of as much as 49 percent in Volksbanken after injecting 250 million euros into the lender and writing off 700 million euros of previous state aid. Austria is boosting its banking tax to finance the Volksbanken bailout.

The government made provisions to potentially inject 600 million euros into KA Finanz, Fekter said on March 3.

Exactly how much KA Finanz will need is yet to be determined, Austrian Central Bank Governor Ewald Nowotny said in a radio interview with state broadcaster ORF today, adding that 1 billion euros would be a worst case.

Traders will hold an auction to settle the CDS on March 19, according to the ISDA.

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