Joerg Haider's legacy.

Photographer: Dieter Nagla/AFP/Getty Images

Carinthia Won't Be the Next Greece

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Carinthia, the tiny Austrian province that guaranteed 20 billion euros ($22 billion) of a bankrupt bank's debt, has been compared to Greece. On the surface, the situations are similar: Carinthia is overindebted because of a corrupt and irresponsible former government, it's run by a vociferous and determined leftist and it may run out of money by June without outside help. Yet the province won't cause a Greek-style crisis: The Austrian government will ultimately rescue it -- but not until it has worn down debt holders to limit its losses.

The story began when Hypo Alpe Adria Bank, a modest-sized lender owned by Carinthia, decided to expand into southeastern Europe, and the province's ultranationalist governor, Jorg Haider, decided to back his banker friends with financial guarantees. Haider can't take the rap because he died in a car crash in 2008. The bank's former chief executive is now in prison. Austria poured 5.5 billion euros into restructuring the bank, then abruptly ended the politically unpopular effort. Here's what that did to the debt of Heta, the "bad bank" set up to unwind Hypo Alpe Adria:

Bloomberg

Ostensibly, Carinthia, which has outstanding guarantees of 10.2 billion euros on that debt, was left holding the ball. The tiny region has an annual budget of 2 billion euros and is unable to shoulder the burden. Its government, led by Social Democrat Peter Kaiser, has been trying to balance the provincial budget, eliminating Haider's costlier benefits, such as cost of living adjustments, a 500 euro bonus paid to new mothers or diesel fuel subsidies, but that won't be any help when the 5 billion euro bond, whose price is charted above, comes due in September 2016. 

Kaiser argued in a recent interview that it was "unreasonable" to leave Carinthia alone with its debt because the Austrian government shared blame for the crisis, having nationalized Hypo Alpe Adria in 2009.

Austrian Finance Minister Hans Joerg Schelling, whom Kaiser accused of being insensitive to Carinthia's problem, may sound as though he doesn't care. But he knows the guarantees must be honored to avoid a total meltdown of trust in European governments, which have piled up 1.28 trillion euros in contingent liabilities. Also, 59 percent of Austrians are against letting Carinthia default. Yet Schelling is determined to reduce the payout: The full amount of the guarantees is slightly more than Austria's entire gold reserve, and equals one-seventh of the country's federal budget revenues for last year.

On Wednesday, Schelling spelled out his plan for Kaiser. Since Carinthia issued the guarantees, it must initiate a deal with creditors, and if that deal is accepted, federal funding will be forthcoming -- in the form of a loan that Carinthia will then have to repay. The negotiations aren't going to be pleasant. Austria's public debt, at 84.5 percent of gross domestic product, includes the Heta liabilities, but it would be politically wrong for the federal government to absorb the full responsibility for the mess Haider left behind.

Austria, unlike Greece, can afford to pay in full, but Schelling's plan is about apportioning responsibility more fairly. This inevitably means a haircut for investors. "For me it was quite surprising that investors didn't have any problems when a province with a 2 billion euro budget issued guarantees for 20 billion euros of debt," he told Bloomberg. "Why did nobody say, 'Hang on, is that even possible?'"

Austria, Carinthia and the bondholders will all suffer losses. They all deserve to -- but they also deserve a break because the resolution will be final, unlike in Greece, where one bailout has followed another but the haircut to which investors agreed proved insufficient. The eventual deal will allay fears about a contingent liabilities implosion, and it may even work as an inoculation against electing big-mouthed populists as governors or even national leaders.

(Corrects reference to Heta's effect on Austria's public debt in sixth paragraph of article published April 30. The country's debt already accounts for Heta's liabilities.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net