Economy
Austria ‘Pulls Ripcord’ on Bailouts, A ‘Bottomless Pit’
A “long-yearned-for shock of liberation” for taxpayers.
by Wolf Richter, via Wolf Street.com:
Hypo Alpe-Adria bank, when it was still owned by the small Austrian state of Carinthia, was a cesspool of corruption. It involved bankers, politicians, and powerbrokers in Austria and the Balkans. It was the perfect union of money and power. Investigators found 160 instances of suspected fraud, amounting to €1.6 billion, of which €890 million occurred in Austria, €250 million in Croatia, €164 million in Bosnia and Herzegovina, among others. Six of the bank’s former executives have been convicted of crimes.
“I’m not aware of a criminal case bigger than this one,” explained Christian Böhler, whose forensics team started investigating the bank in 2011. “It was a mix of greed, criminal energy, and utter chaos.”
The sheen started to come off in 2006. The Austrian banking supervisor determined that executives had buried over €300 million in losses. And Hypo’s business model fell apart: it had been issuing bonds guaranteed by Carinthia that gave it access to cheap money to fund it shady activities. But the EU prohibition against state guarantees was kicking in. So it was time for Carinthia to sell the bank.
Sure enough, in 2007, state-owned Bavarian bank, BayernLB, despite warnings from its own analysts – a “squeezed-out lemon,” they called Hypo – bought a majority stake for €1.66 billion. Within months, BayernLB had to bail out its crown jewel with a capital injection of €441.3 million.
In 2008, BayernLB itself toppled and was bailed out by the German and Bavarian taxpayers to the tune of €10 billion, of which €700 million went to prop up Hypo, along with €900 million from the Austrian government. In 2009, Bavaria shuffled its Hypo jewel off to Austria, which nationalized it. The deal left Bavaria as one of Hypo’s creditors. It has since sued Austria, which has countersued, and more suits and countersuits followed.
Other notable Hypo bondholders include the World Bank and Aurelius Capital Management, which was one of the hedge funds that chased Argentina all the way to the US Supreme Court.
A year ago, Austria’s central bank governor Ewald Nowotny and his task force recommended that Hypo’s toxic assets of €17.8 billion should be put into a “bad bank.” But to stop the drag on public finances, the federal government should not guarantee Hypo’s bonds. At the time, Austrian taxpayers had already plowed €4.8 billion into Hypo to bail out these bondholders.
He then explained on TV to incredulous Austrians that this deal would nudge the budget deficit over the 3% limit set by the Maastricht Treaty and push the government’s debt from 74.4% of GDP to 80% of GDP. This one rotten, state-owned bank in Carinthia was causing this much damage to the country’s finances!
Nowotny exhorted the government to not let Hypo become insolvent because the €12.5 billion in guarantees that Carinthia had issued would then push the state itself into bankruptcy.
But to the consternation of bank bondholders around the world, Finance Minister Michael Spindelegger dug in his heals and refused to rule out letting Hypo become insolvent; bondholders, instead of taxpayers, would then get to eat the losses.
Now the moment has come. Another audit discovered a new financial hole of €7.6 billion. And that was it.
