Austria is ready to help engineer and fund a deal that defuses 10.2 billion euros ($11.4 billion) of debt owed by “bad bank” Heta Asset Resolution AG if an overwhelming majority of creditors signs up to it.
Finance Minister Hans Joerg Schelling said he’d support an agreement that avoids the insolvency of Carinthia, the southern province whose failed state bank Heta is winding down. It’s up to Carinthia, which guaranteed the debt, to initiate a deal and it will ultimately have to pay for it, Schelling said in an April 29 interview in Vienna.
“Carinthia would have to make an offer to creditors, and if that’s accepted I have told Carinthia we can talk about the financing,” Schelling said. “The federal government won’t make an offer itself. We’ll look at the deal and consider providing liquidity, which Carinthia would then owe to us.”
Heta, dealing with the remnants of failed Hypo Alpe-Adria-Bank International AG, is one of the most difficult issues Schelling inherited when he became minister eight months ago. It has contributed to Austria losing a second top credit rating, is threatening Carinthia with insolvency and keeps voter anger alive over the 5.5 billion euros injected into the bank since its rescue in 2009.
Schelling tried to turn the tables on March 1, when he declared an end to funding Heta after an audit revealed fresh writedowns on its nonperforming assets. The FMA supervisor took over Heta and ordered a 15-month debt moratorium to buy time while it figures out how much creditors will have to contribute to the wind-down under new bank-resolution rules.
Carinthia’s guarantees for its former bank complicate the bail-in. The FMA can force creditors to share Heta’s losses, but they can turn around and ask for compensation from Carinthia. The province of 556,000 has an annual budget of 2.4 billion euros and debt of 3.1 billion euros. Governor Peter Kaiser has said his province can’t shoulder the Heta guarantees.
“The FMA now needs to say what the haircut will be,” Schelling said. “Once that’s clear, you can start talks. You could say, as in similar cases, if 90 percent of the creditors agree to Carinthia’s offer and forgo legal claims and guarantees, we’ll solve the problem.”
Schelling declined to elaborate on what a realistic size for the debt cut would be. Heta’s most liquid securities, the 2 billion-euro 4.375 percent bond due 2017 and the 1.25 billion-euro 4.25 percent bond due 2016, gained the most in six weeks today, rising to about 59 cents on the euro. The European Central Bank has told the predominantly German banks that own Heta bonds to write them down by at least 50 percent.
Investors should have analyzed Carinthia’s guarantees, which peaked at 24.7 billion euros in 2006 before buying Hypo Alpe’s bonds, Schelling said. They apply to all debt the state bank issued before 2007 and which expires until September 2017.
“For me it was quite surprising that investors didn’t have any problems when a province with a 2 billion-euro budget issued guarantees for 20 billion euros of debt,” he said. “Why did nobody say, ‘Hang on, is that even possible?’”
To discourage hedge funds betting on a bigger payout, the ministry would advise Carinthia to set up a special vehicle to take over the bonds, Schelling said. That way, Carinthia’s guarantees would remain in place formally, preventing those not signing up for the deal getting a bigger share.
Carinthia’s Governor Kaiser and his finance secretary, Gaby Schaunig, have rejected suggestions the province could buy Heta’s bonds on the market. That may not solve the problem because those who sell below face value may still demand Carinthia compensate them for their losses, Schelling said.
“It’s a controversial debate, but there are those who say, ‘I’m owed 100, and if I only get 50, I want the rest out of the guarantee,’” he said. “The debate about Carinthia buying on the market is mistaken.”
Schelling said he was confident of striking a deal with Carinthia on its more pressing need for a 343 million-euro loan, without which the province would run out of money in four weeks. He rejected comparisons of the province with Greece, the indebted euro-area nation also seeking aid.
“In Greece, there is a problem with the state that’s been in the making for years and in which the banks are only involved on the margins,” he said. “In Carinthia, all the problems are caused by this one bank.”