The Austrian central bank is attempting to calm the financial markets that are increasingly worried about the regional banking system as two major events shocked the markets for two consecutive days. On Monday, the central bank nationalized Hypo Alpe Adria – Austria’s sixth-largest bank, a unit of German public-sector bank BayernLB — a move designed to prevent the bank from sliding into a bankruptcy fueled in part by bad loans, most of them originated in Eastern Europe. Today, Austrian daily Die Presse reported that the Austrian National Bank (ANB) and financial market watchdog FMA had put Volksbanken on a watchlist for endangered financial institutes. At 1530 GMT, shares in key Austrian banks were underperforming the wider Austrian market. Erste Group Bank was off 3.8%, while Raiffeisen Bank was down 6.1%.
The non-listed Volksbanken – Austria’s fourth-largest bank, is suffering its toughest year ever but apparently is sufficiently capitalized to cope with its losses. Volksbanken suffered a third-quarter pre-tax loss of EUR 468 million and reported a EUR 607 million loss for the first nine months of 2009. The bank also said that its core Tier 1 capital ratio remained at 9.1% at the end of the third quarter while its equity ratio stood at 11.4%. Going forward, the management claimed that the fourth quarter would also be hit by large write-downs and bad debt provisions. Bank’s spokesman rejected statements in the media report that said the Austrian government could eventually nationalize the bank. However, the newspaper cited a letter by the agency that manages Austria’s bank capital injections to Finance Minister Josef Proell as saying that the loss-generating bank had shown “worrying developments”. In the letter, the agency recommends that Volksbanken should find a strategic partner able to act as a financial investor. It is well known the fact that Volksbanken group is seeking 400 million euros in capital next year from its shareholders.
The Austrian banking sector has a record-high Eastern Europe credit exposure of some 70% of the country’s gross domestic product. In the boom years, the Eastern Europe exposure ensured Austrian banks major high growth rates and good earnings, but as the region was hit by the financial and economic crisis, strong loans growth turned to a steep climb in non-performing credits and exploding risk costs. In 1931, Austrian bank Creditanstalt, went under, causing a chain of bankruptcies on other Austrian financial institutions. Could history repeat itself, with Austria triggering a global financial meltdown? Some financial experts believe that Austria today is Europe’s weakest link whose collapse could send the whole region into a deep financial crisis.
Just like in the early ’30s, Austrian banks suffer now from excessive lending in Eastern Europe. Their loans to that region are estimated at $289 billion — 70 percent of Austria’s GDP. That lending includes $44 billion in Romania, $37 billion in Hungary, $22.4 billion in Russia, and $14.3 billion in Ukraine. Overall, Austrian banks account for about 19 percent of the $1.5 trillion in loans outstanding in Eastern Europe, making them by far the biggest player in the region. According to Standard & Poor’s estimates, banks’ troubled assets amount to a whopping 12 percent to 14 percent of Austria’s GDP. Analysts predict losses ultimately will total $42 billion. The OECD estimates that Austria’s public debt will surge to almost 70 percent of GDP in 2010. If Eastern European banks tumble, the fallout would hit Austria’s sovereign debt ratings quickly — an action that would isolate the country financially. Under such circumstances, Austria would end up a zombie country, completely dependent on last-resort lending from institutions like the International Monetary Fund. Is EU ready for a waltz?
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