Austria's Ex-Minister Invokes Krugman to Defend Hypo Bailout

  • Former finance minister Proell testifies in parliament hearing
  • Collapse in 2009 would have caused greater damage, Proell says

Allowing Hypo Alpe-Adria-Bank International AG to fail in 2009 would have caused even greater damage to Austria’s economy during the financial crisis, said the country’s ex-finance minister, Josef Proell, who defended his decision to rescue the lender by invoking U.S. Nobel Laureate Paul Krugman.

“Let me remind you that in 2009, the American economist Paul Krugman predicted a collapse for Austria,” Proell told a parliamentary committee in Vienna on Thursday. Should an Austrian finance minister have been expected “to throw a match into this economic powder keg?” he asked.

Krugman, a professor of economics at the City University of New York, warned in the New York Times in April 2009 that although Austria wasn’t “doomed,” it faced the prospect of “a bank bailout that will seriously strain the country’s resources.” Eight months later, Proell’s finance ministry made the decision to nationalize Hypo.

Hypo Alpe became one of the most damaging Austrian bank failures from the financial crisis. With growth fueled by loan guarantees given by Austria’s southern province of Carinthia, and later taken over by Germany’s Bayerische Landesbank, Hypo eventually had to write off billions of euros of bad debt from its Balkan business. Austria spent more than 5 billion euros ($5.4 billion) to prop up the bank after the nationalization, angering voters and undermining the country’s credit ratings.

An independent investigative commission set up by the finance ministry criticized the 2009 takeover of Hypo Alpe from BayernLB, saying that government negotiators failed to develop a proper strategy or to consider alternatives, which led them to nationalize the bank on unfavorable terms.

Hypo Alpe’s remnants are still being wound down by Heta Asset Resolution AG, a “bad bank” which continues to threaten its home province with insolvency due to the debt guarantees issued by Carinthia until 2007. Austria plans a discounted buyback offer for Heta’s bonds, which creditors representing more than a third of the outstanding securities say they object to.

“Even six years later, after a significant reduction of the state guarantees, still nobody dares to let the bank go insolvent,” Proell said. “So much for the drama of the decision at the time.”

Before it's here, it's on the Bloomberg Terminal.