Austria Must Act to Avoid Hypo Alpe Capital Call, Nowotny Says

Austria must split off the bad assets of Hypo Alpe-Adria-Bank International AG by the end of March or face another capital injection for the nationalized lender, the central bank governor said.

“We need a quick solution, in this quarter,” Ewald Nowotny, the head of Austria’s central bank, told journalists in Vienna today. “If that doesn’t happen, there’s the risk that there will be more capital needs,” he said. “It remains a risk for the budget.”

Austria’s government, which spent 4.8 billion euros ($6.5 billion) of taxpayer money on Hypo Alpe since its bailout, will soon decide on how to set up a “bad bank” for the lender, Finance Minister Michael Spindelegger told journalists in Brussels yesterday. The choice is between a vehicle that’s wholly state-owned or one that brings other banks on board, Hypo Alpe Chairman Klaus Liebscher has said.

Four years after Hypo Alpe’s rescue, Austria is still debating who should carry the cost of the bank’s ill-fated transformation from a provincial lender into a financier for the former Yugoslavia. The government has dismissed plans to require bondholders to take losses, leaving taxpayers with 18 billion euros of problem assets, including delinquent property loans and seized collateral ranging from Adriatic hotels and shopping malls to yachts and cars.

The liabilities of a state-owned bad bank, like Germany’s FMS Wertmanagement AoeR, would be added to the Austrian government’s debt, pushing it beyond 80 percent of gross domestic product.

‘Budget Cosmetics’

Setting up a vehicle majority-owned by Austrian banks, similar to Ireland’s National Asset Management Agency, would avoid that complication, according to the European Union’s Maastricht debt rules.

“What’s important is to keep the actual costs as low as possible,” Nowotny said. “This shouldn’t be just budget cosmetics to the tune of the Maastricht rules.”

The wind-down vehicle shouldn’t have a banking license and should be separated from units that are to be sold, Nowotny said. Without a license, the bad-asset unit would be freed from capital requirements that the central bank would otherwise be forced to impose, he said.

“The longer I postpone this move, the higher the additional capital requirements will be,” Nowotny said.

The six Austrian lenders that will be supervised by the European Central Bank and are undergoing its asset quality review have already cut assets and raised capital in preparation for the exam and won’t need state aid, Nowotny said. That includes Oesterreichische Volksbanken AG, he said, denying a report in Austrian daily WirtschaftsBlatt yesterday that the partly nationalized lender may need as much as 200 million euros of aid.

“I don’t think the issue will come up,” he said.

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