Austria’s biggest banks were put under review for a possible downgrade by Standard & Poor’s Ratings Service as the government’s plan to bail in bondholders of a nationalized bank reverberates through the sector.
S&P today placed the ratings of seven banks including Erste Group Bank AG, Raiffeisen Zentralbank AG, Raiffeisen Bank International AG and UniCredit Bank Austria AG on CreditWatch negative. It said it may downgrade the banks within three months if it thinks that government support for Austria-based lenders weakens or if industry risks rise.
Austria’s Finance Minister Michael Spindelegger is due to present legislation tomorrow that will force losses on holders of 900 million euros ($1.22 billion) of subordinated debt of nationalized Hypo Alpe-Adria-Bank International AG. The act will effectively renege a guarantee for those bonds given by the province of Carinthia, implying that a fully state-owned bank chooses not to pay some of its debt.
“The proposed law indicates increasing uncertainty of potential extraordinary state support for the banking sector in times of stress,” S&P said in a statement. “This extraordinary development, which was not our base-case expectation, may trigger a lowering of our ratings on Austrian banks.”
Spindelegger in March ended weeks of suspense and ruled out insolvency for Hypo Alpe, sparing holders of about 11 billion euros of senior bonds from taking losses. He promised instead to tap other sources for sharing the costs to shut down Hypo Alpe, including junior bonds and former owners.
“We would likely downgrade the banks and grandfathered instruments if the law is enacted as currently under discussion,” S&P said.
State-owned bad bank KA Finanz AG, Oberoesterreichische Landesbank AG and Hypo NOE Gruppe Bank AG were also put under review. The ratings of these government-related banks are currently lifted by as much as four levels because of the expected state support, while those of “highly systemically important” Erste, RZB, Raiffeisen Bank International and Bank Austria are boosted by two, S&P said.
As part of the law to wind down Hypo Alpe will focus on seeking a contribution from the state of Carinthia, several Austrian states were also put under review at S&P. Under Austrian rules, the provinces have the possibility to fund themselves through the Austrian Treasury.