Bond Sale Gives Austria a 70-Year Hangover From Banking Collapse

  • Country sells long-dated debt to help pay Hypo Alpe creditors
  • Probe found populist Joerg Haider turned bank into time bomb

It was one of Europe’s most notorious banking failures and now it’s one that will haunt Austrians for at least another couple of generations.

The country sold 5 billion euros ($5.4 billion) of bonds on Tuesday, including 2 billion euros of securities due in 70 years, joining the club of nations selling debt with ultra-long maturities. Behind the fanfare, though, was how the money will be used: to close the books on what’s left of Hypo Alpe-Adria-Bank International AG, whose collapse in 2009 led to billions in state bailouts, a winding up order and now seven decades of interest payments.

As the political landscape fragments across Europe, Austria’s bond sale is a lesson in the perils of populism. 

Originally a 19th-century mortgage lender, Hypo Alpe was turned into a time bomb by Joerg Haider, leader of Austria’s nationalist Freedom Party. As governor of Carinthia province, he allowed the bank to make unlimited use of state guarantees to pursue an expansion in former Yugoslavia that ultimately led to its downfall, a parliamentary committee said in a report this month.

“Austria is going to pay for the Freedom Party’s fraud and failure for 70 years,” said Jan Krainer, a Social Democrat lawmaker who sat on the committee. “It’s an enormous price tag and a clear warning for what happens when the Freedom Party has the power.”

Poll Leader

The Freedom Party is currently polling stronger than ever and would be the biggest party in parliament if Austrians voted today. Its candidate for president, Norbert Hofer, came within a whisker of winning in May and will have a second shot in December when a repeat of the election takes place following a court ruling.

Haider broke away from the party in 2005 and when it comes to Hypo Alpe, it says he’s not the only one to blame for the failure. The bank was taken over by the government in December 2009, a year after Haider was killed in car crash, to avoid a bankruptcy that would have triggered the debt guarantees and brought down Carinthia and possibly the whole country. The party says the nationalization was a mistake.

In the following years, the bank sucked up billions of euros of taxpayers’ money and engulfed three finance ministers in five years. The fourth, Hans Joerg Schelling, started a final effort last year to impose at least some of the losses on creditors.

While Schelling failed to extract as much as planned -- he originally offered 75 percent of face value and had to settle for 90 percent -- he managed to close the bottomless pit that Hypo Alpe and its successor Heta Asset Resolution AG had become. The financing came from the Austrian Treasury and the bond sale will help cover it.

“With this bond, Austria locks-in historical low interest rates for a very long time while providing additional pick-up in nominal yield to investors in this low rate environment,” said Markus Stix, the head of the Austrian Treasury. “This was a win-win situation.”

While it may be good timing, the duration will also serve as a reminder for the Hypo Alpe disaster until 2086 -- and a lot can happen in 70 years. In 1946, Austria was a defeated country under allied occupation, its economy in ruins following World War II with runaway inflation and food shortages.

“The responsible politicians, above all Governor Haider, were proud of the rapid growth and took no measures to reduce the risks,” according to the parliamentary report. “The business model was overly risky and doomed to fail. That was the root of all evil at the bank.”

— With assistance by John Glover

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