Nowotny Prefers Hypo Alpe Bad Bank Over Risky Insolvency

Austria should set up a so-called bad bank to manage the assets of Hypo Alpe-Adria-Bank International AG rather than pursue a riskier strategy of shuttering the nationalized lender, Austrian Central Bank Governor Ewald Nowotny said.

The bad bank would manage about 17.8 billion euros ($24.7 billion) of Hypo Alpe’s assets, Nowotny said today on Austrian state broadcaster ORF. A task force formed to consider the bank’s future concluded that the costs of letting it go insolvent exceed the benefits, he said.

“It has consequences for other sectors of the banking industry,” he said. “It has consequences for the credibility of the Austrian state.”

Finance Minister Michael Spindelegger is fending off criticism over the costs of winding down Hypo Alpe more than four years after the departure of shareholders including Germany’s Bayerische Landesbank prompted its nationalization. The task force was asked to recommend models for a bad bank, consider ways to force former owners to contribute more and encourage bondholders to accept losses.

Spindelegger reiterated in a statement today that he’s trying to make sure taxpayers don’t carry all the burden and said he has “no taboos” regarding possible solutions. The government will decide which course to take this month, he said.

Bank Structure

Nowotny’s task force favors a bad bank without a banking license to avoid being subject to rules that call for additional capital injections, the governor said. An earlier plan unveiled Feb. 10 failed to bring Austrian banks on board. The wind-down unit shouldn’t have an unlimited state guarantee, which would set it apart from similar models in Germany such as FMS Wertmanagement AoeR.

Hypo Alpe has to wind down 17.8 billion euros of assets, of which about 8.2 billion euros are non-performing loans, according to a document obtained by Bloomberg. The remainder is made up of performing loans, cash and other liquid assets, according to the document.

The task-force’s proposal would increase Austria’s state debt by around 6 percentage points to about 80 percent of gross domestic product this year, Nowotny said.

The bad bank plan would require state aid of as much as 3.6 billion euros for Hypo Alpe this year which could boost the deficit by 1.2 percentage points, possibly beyond 3 percent of GDP, he said. The bank has said it expects another 4 billion euros in costs over 10 years.

While he advised against going after bondholders, Nowotny said the government should seek further contributions from the Austrian province of Carinthia and BayernLB, Hypo Alpe’s former majority owners. Hypo Alpe still owes BayernLB 2.3 billion euros, which it refuses to repay. Carinthia is holding about 500 million euros it received from the sale of its stake to BayernLB.

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