Austria Escalates BayernLB Legal Drama Voiding Loans

Austria intensified a legal struggle with Bayerische Landesbank, voiding 800 million euros ($1.1 billion) of loans the Bavarian bank gave to its former subsidiary Hypo Alpe-Adria-Bank International AG.

Austria’s government proposed legislation today to implement the winding down of Hypo Alpe, which was nationalized to prevent its collapse in 2009 after BayernLB and other shareholders walked away. Apart from imposing losses on junior creditors, the law also voids loans Munich-based BayernLB gave in the year preceding the nationalization and after Hypo Alpe got a first round of state aid in December 2008.

“BayernLB has given loans at a time when the state had already given its support,” Finance Minister Michael Spindelegger told reporters after the weekly government meeting in Vienna that approved the draft law. “This was a necessary contribution to keep the business running.”

Hypo Alpe and BayernLB are embroiled in legal battles in courts from Munich to Vienna. The German bank’s ill-fated investment in Hypo Alpe, which mainly ran up losses due to non-performing loans in former Yugoslavia, has cost taxpayers in Bavaria and Austria billions already.

BayernLB said Austria’s move defied Austria’s legal agreements with it as well as guarantees granted by Austria and wouldn’t succeed in practice.

“The special law approved today seems to attempt to expropriate BayernLB with a retroactive law tailored to a single case,” the bank said in an e-mailed statement. “We are convinced that the law won’t stand and will take all necessary measures to protect our position.”

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