Faymann Evokes 1931 Austria Creditanstalt Crash on Hypo AlpeBoris Groendahl
Austrian Chancellor Werner Faymann said the government is right to avert the collapse of Hypo Alpe-Adria-Bank International AG, as he cited the precedent of Creditanstalt, whose crash helped trigger the 1930s depression.
Hypo Alpe’s bonds dropped to five-year lows after Faymann said the risk remains that the lender’s insolvency could affect other Austrian banks or the government. Hypo Alpe came close to collapse in 2009 after an ill-fated expansion in the former Yugoslavia.
“The crash of Creditanstalt in 1931 caused economic meltdown,” Faymann told parliament’s lower house in Vienna today. “There was a consensus in 2009 to act where necessary, to avoid the mistakes of the 1930s, to avoid a collapse by nationalizing and by installing protection measures at the European level.”
Austrian anger over the cost of winding down Hypo Alpe has reignited a debate about the lender more than four years after its nationalization. The bank already cost taxpayers 4.8 billion euros ($6.6 billion) before the European Union approved another 7 billion euros in state aid to wind it down. Polls show two-thirds of voters disapprove of the government’s handling of the matter.
Faymann was speaking during a parliamentary debate forced by opposition lawmakers who criticize the government for mismanaging the nationalized lender and are demanding an investigative committee be set up. Faymann said the damage was caused by its former owners, in particular the southern Austrian state of Carinthia, then led by the late Joerg Haider’s Freedom Party.
Even as Faymann warned of the risks, Finance Minister Michael Spindelegger reiterated that he wouldn’t rule out an insolvency of Hypo Alpe as a possible means to force a contribution from bondholders and from Germany’s Bayerische Landesbank, which bought the bank from Carinthia in 2007.
Carinthia, which enabled Hypo Alpe’s growth with bond guarantees that peaked at about 25 billion euros, or more than 12 times its annual tax revenue, has the moral duty to make another payment, Spindelegger said. About 12.5 billion euros of the guaranteed Hypo Alpe bonds are still due until 2017.
“Even if the legal rules aren’t clear-cut, decency at least demands that Carinthia carries part of the costs,” Spindelegger said. There’s no legal obligation for Austria to stand in for those guarantees, he said.
The debt rating of Hypo Alpe’s Carinthia-guaranteed bonds was lowered four levels by Moody’s Investors Service last week because of the government’s failure to rule out insolvency.
The spread over swaps for Hypo’s 4.25% guaranteed senior unsecured bond maturing in 2016 and its 4.375% bond maturing in 2017 widened by more than 100 basis points to record highs today, making them the worst performers in the BofAML Euro Financial Index. The 2016 bond’s yield was 737 basis points over swaps, while the 2017 bond’s was 720 basis points higher.
Creditanstalt, the Austrian lender founded by a member of the Rothschild family in 1855 and whose successor is now owned by UniCredit SpA, declared its insolvency in May 1931. Its failure triggered bank runs across central Europe and was among the events that “made the Great Depression great,” according to former Federal Reserve Chairman Ben Bernanke, who researched the 1930s crisis during his academic career.
An insolvency of Hypo Alpe is preferred by 63 percent of Austrian voters, a poll published by newspaper Oesterreich over the weekend showed. Sixty-five percent of respondents said they think the government has handled the nationalized lender badly.
Haider’s successor at the helm of the nationalist Freedom Party, Heinz-Christian Strache, said in the debate that the damage was caused by the nationalization that let BayernLB and the German state of Bavaria off the hook too easily. He chided Faymann for blaming the deceased Freedom Party leader.
When Austria nationalized Hypo Alpe in December 2009, BayernLB put a final 825 million euros into the bank, bringing the total loss it made with the investment to 3.75 billion euros. Hypo Alpe still owes BayernLB 2.3 billion euros that it refuses to pay back. Austria may also sue BayernLB if it finds sufficient legal evidence to show it was duped into taking over Hypo Alpe, Spindelegger said.
Carinthia paid 200 million euros as part of the nationalization agreement. The province, Austria’s poorest in terms of economic output per capita, still has about 500 million euros parked in a fund from the sale to BayernLB in 2007. Grazer Wechselseitige, the insurer that was the third shareholder, paid 30 million euros.
Austria is seeking to sell Hypo Alpe’s bank units in former Yugoslavia, with total assets of around 9 billion euros, by the end of next year. It plans to put the remaining 19 billion euros of assets into a state-owned “bad bank” after its plan failed to bring other Austrian banks including Erste Group Bank AG and Raiffeisen Bank International AG on board.