Austria Faces Capital Needs Caused by New Hypo Alpe Plan

Austria filed a new proposal to gain European Union approval for about 2.2 billion euros ($2.9 billion) in state aid for Hypo Alpe-Adria-Bank International AG by accelerating disposals and halting some new business.

The nationalized lender will complete the sale of its Austrian unit, won’t do any new business in Italy and will sell its biggest division, a network of banks in the former Yugoslavia, in the next two years, the Finance Ministry said in a statement today. Hypo Alpe said in a separate statement the measures, which need European Commission approval, may lead to writedowns in its first-half and require new capital, which it is evaluating.

“The Republic of Austria expresses its hope that the new restructuring plan will find the commission’s approval,” the Finance Ministry said in the statement.

Joaquin Almunia, the EU’s top antitrust official, told Austria in March its restructuring plan for Hypo Alpe wasn’t enough to justify retaining the aid the lender has received since 2008, and he may order Hypo Alpe to repay it. Austria installed a task force led by former central bank governor Klaus Liebscher to satisfy Almunia by drafting the plan.

The bank may need as much as 2 billion euros in extra capital due to the concessions, according to two people with knowledge of the situation, who asked not to be identified because talks with the EU are confidential.

IMF Advice

The amount may be lower if a unit to wind down the bank’s bad assets is set up, the people said. Austria has set aside 700 million euros of capital for Hypo Alpe in this year’s budget.

The International Monetary Fund, which presented an assessment of Austria’s financial sector today, said Austria was facing more expenses to shut down Hypo Alpe. It should take them and move on, the fund’s mission chief, Enrica Detragiache, told journalists in Vienna.

“The strategy to wait and hope for a quick turnaround doesn’t seem to pay off,” he said. “The experience in other countries is that the value tends to erode over time and hence we recommend to be more proactive and downsize the various operations even if it means realizing some losses.”

Hypo Alpe previously planned to sell its network of banks in Croatia, Serbia, Slovenia, Montenegro and Bosnia and Herzegovina by 2016. The shorter deadline means the unit has to be categorized as for sale under international accounting rules, creating the need for a writedown.

The ministry didn’t say what will happen with the bank’s unit containing assets to be wound down, which may grow to as much as 16 billion euros under the new EU plan, according to the people with knowledge of the situation. Hypo Alpe is seeking advisers for how to structure that part of the bank in a way that limits the need for taxpayer funds, they said.

If the unit is spun off and operates without a banking license, it may free capital and therefore require less funding, the people said.

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