Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Europe's zombie march of bank burials is stumbling closer to the finish line. But there's still trouble ahead.

The seven-year saga of bailed-out Austrian bank Hypo Alde Aldria, which has pitted Austrian politicians against private creditors over who should foot the bill for 11 billion euros ($12.4 billion) of guaranteed debt, seemed to be wrapping up on Wednesday. Investors holding about 5 billion euros' worth of debt in Heta Asset Resolution -- the "bad bank" designed to wind down Hypo over time -- have signed up to a compromise solution in which their losses will be softened by a new stack of zero-coupon bonds guaranteed by the Austrian taxpayer.

In this case, zero really is better than nothing. In a world of negative interest rates, debt at zero percent looks pretty good -- and offers a face-saving solution for both sides.

Bondholders can say they've pulled a better deal out of the fire: The new offer in aggregate represents about 90 percent of face value for senior bonds and about 45 percent for junior bonds, according to Berenberg analysts, compared with an earlier tender offer of 75 percent for senior debt and 30 percent for junior securities. Austria can say it has averted a big taxpayer crisis -- it had warned bondholders that they were gambling with the insolvency of Carinthia, a province in the eastern Alps, which was on the hook for that $12.4 billion.

When Nothing Is Everything
Heta's 2017 bond bounces back after proposed zero-coupon settlement with creditors
Source: Bloomberg

For this settlement to work, two-thirds of Heta creditors will have to approve it. But leave aside for a minute whether or not they will, and assume that they do. There are still questions raised as to whether this saga was an ugly one-off specific to Austria or a sign of things to come as Europe tries to shift the cost of bank losses away from taxpayers and onto private bondholders.

While it's true that creditors have been inflicted with losses in this case, it's hardly been a smooth ride. Bondholders have argued that bail-in rules shouldn't even have been applied to Heta, given that it is technically not a bank; that's a question that Austria's Constitutional Court is still due to consider. 

A spokesman for the Austrian Constitutional Court said that unless the entity that originally filed a claim against the bail-in application dropped its objection, the ruling would still be on track for around October or November. Were that to proceed, it is therefore entirely possible that the court may rule against the application of bail-in in this case.

More broadly, if future bail-ins are still vulnerable to dispute on technical or legal grounds, even with new laws in force it's hard to say the new regime of bondholder losses reigns supreme. 

State guarantees have also muddied the waters in this particular case. Austria's government debt guarantees are already the highest in Europe relative to the size of its economy, according to Eurostat data, and today's deal will likely add more to the pile -- while keeping taxpayers indirectly linked to banks' clean-up. While this could be held up as a one-off bailout of a region by a state, it could also be seen as another obstacle to shedding debt ties to bailouts.

Slippery Slopes
As a percentage of GDP, Austria's government debt guarantees are the highest in the EU
Source: Eurostat, 2013 data on contingent liabilities.

So while it's good news that the undead of Europe's banks may yet be marched into the graveyard, it's still not clear taxpayers have been cleanly taken off the hook for their ills. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net