Austrian Finance Minister Michael Spindelegger ended weeks of suspense and ruled out insolvency for nationalized Hypo Alpe-Adria-Bank International AG, sparing holders of 12.5 billion euros ($17 billion) of senior bonds.
Spindelegger, struggling to contain public anger about tax money going into the company, told journalists in Vienna today that a default of the debt-ridden bank was too risky to be tried. He had previously said there could be “no taboos” in finding ways to limit wind-down costs, unsettling some holders of Hypo Alpe’s senior bonds guaranteed by an Austrian province.
“There were many serious arguments for an insolvency,” Spindelegger said. “But at the end of the day the risks were not predictable.”
Faced with declining ratings in public opinion polls and opposition in parliament, Spindelegger and Chancellor Werner Faymann heeded the advice of the central bank and the financial regulator. Governor Ewald Nowotny and Hypo Alpe’s former Chairman Klaus Liebscher had warned them that forcing losses on guaranteed senior bondholders of a state-owned bank was more akin to Cyprus or Greece than to AAA-rated Austria.
Hypo Alpe’s Carinthia-guaranteed 4.375 percent bond maturing in 2017 rose 3.6 cents on the euro today and was quoted at 98.2 percent of face value, according to Bloomberg prices, its highest intraday level since Feb 4. The securities had dropped as low as 82.5 percent amid speculation over insolvency.
Austria will now follow a template proposed by a “task force” led by Nowotny, Spindelegger said. Hypo Alpe will sell its operating banks in ex-Yugoslavia, and will turn the rest of its assets into a vehicle without a banking license that will be wound down in the coming years.
The wind-down vehicle, or “bad bank,” will initially have 17.8 billion euros of assets that would be counted as Austrian state debt. That would drive up the nation’s debt by 6 percent of gross domestic product to about 80 percent, according to the task force’s plan. The vehicle won’t have an unlimited state guarantee, Nowotny said, a feature that sets it apart from German bad banks such as FMS Wertmanagement AoeR.
Dismantling will cost about 4 billion euros, which will have to be booked into this year’s budget, Nowotny said last week. That’s on top of 4.8 billion euros the state has already spent on the lender since nationalization in 2009.
While it keeps senior bondholders untouched, the government will seek a contribution to the costs from Hypo Alpe’s former owner, the province of Carinthia, Spindelegger said. He’s targeting “at least” about 500 million euros the province has remaining from a sale of its stake, he said.
“Carinthia has to take its responsibility,” he said. “They can’t just abscond.”
Austria will also start talks with Germany’s Bayerische Landesbank, another former Hypo Alpe owner, about a settlement of legal disputes over the Munich-based bank’s ill-fated purchase. The cases, pending in courts from Munich to Vienna and Klagenfurt, include one concerning 2.3 billion euros Hypo Alpe owes and refuses to repay to its former parent. BayernLB is suing other former holders saying it was duped into the deal.
Matthias Luecke, a spokesman for BayernLB, declined to comment on Spindelegger’s announcement.
Holders of hybrid capital in Hypo Alpe, including 1.14 billion euros of participation capital and 1.89 billion euros of subordinated debt, may also have to bear losses, Spindelegger said. This includes a 1 billion euro-bond issued in 2012 that’s guaranteed by the federal government.
The details of how creditors will take losses are still being discussed and specific legislation may be needed, Spindelegger said.
The popularity of the political parties of Spindelegger and Faymann, which govern in a coalition with a narrow majority since elections last year, has plummeted in opinion polls as the costs for Hypo Alpe dominated headlines this year.
Spindelegger’s conservatives would get 19 percent of the vote, while Faymann’s Social Democrats would get 22 percent, according to a survey published by Der Standard on March 11. That’s 5 percentage points less than each of them won in the election. The nationalist Freedom Party, whose late leader Joerg Haider was Carinthia governor and responsible for Hypo Alpe’s once rapid growth, would become the largest party with 27 percent of the vote, according to the poll.