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Cablegate: Austrian Government Takes Over Hypo Alpe Adria Banking

VZCZCXRO7585
OO RUEHIK
DE RUEHVI #1583/01 3500957
ZNR UUUUU ZZH
O 160957Z DEC 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3881
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUCNMEM/EU MEMBER STATES PRIORITY
RUEHVB/AMEMBASSY ZAGREB PRIORITY 1806
RUEHBW/AMEMBASSY BELGRADE PRIORITY 0005
RUEHVJ/AMEMBASSY SARAJEVO PRIORITY 0200

UNCLAS SECTION 01 OF 02 VIENNA 001583

SIPDIS, SENSITIVE

TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/MAIER
TREASURY PASS TO FEDERAL RESERVE AND SEC/E. JACOBS

E.O. 12958: N/A
TAGS: EFIN AU GM
SUBJECT: Austrian Government Takes Over Hypo Alpe Adria Banking
Group after Crisis Weekend

REF: VIENNA 1479

VIENNA 00001583 001.2 OF 002


Sensitive but unclassified -- protect accordingly.

1. (SBU) SUMMARY: On December 14, the GoA nationalized Hypo Alpe
Adria (HAA) -- Austria's sixth largest bank -- in concurrence with
the bank's private shareholders. HAA's troubles were increasingly
evident (reftel) and the GoA took the step (in consultation with the
ECB and the provincial governments of Carinthia and Germany's
Bavaria) in order to prevent a collapse of confidence in the bank,
ensure its long-term liquidity, and avoid broader fallout from a
bankruptcy/liquidation. While HAA is now safe, the GoA will have to
restructure the group and may split it into "good" and "bad" banks.
GoA FinMin Proell and central bank governor Ewald Nowotny criticized
HAA's erstwhile owners, particularly the governments of Bavaria (the
former owner of BayernLB) and Carinthia, for bringing a major bank
to the precipice. HAA subsidiaries are among the largest banks in
southeast Europe; their future is now in GoA hands and subject to EU
scrutiny of state aid. END SUMMARY.

An Extraordinary Step
- - - - - - - - - - -

2. (SBU) A weeks-long standoff over recapitalizing HAA (reftel) --
fought between Austria's Finance Ministry (MoF) and HAA's owners
Bayerische Landesbank/BayernLB (67%), the provincial government of
Carinthia (12.5%) and GRAWE insurance company (20.5%) -- culminated
in a weekend of frenzied negotiations among Austrian, German, and
ECB policymakers and bankers, resulting in agreement on GoA takeover
terms. FinMin Josef Proell announced the decision on the morning of
December 14, less than an hour before HAA branches opened. NOTE:
Absent the GoA move, the bank might have been unable to open (if it
had reported a Tier 1 capital ratio below the legal minimum of 4%)
or could have experienced a run on deposits - END NOTE. FinMin
Proell said the move was closely coordinated with Austrian
Chancellor Werner Faymann, Austria's Nationalbank, the German
Bundesbank, and the ECB.

3. (U) Details of the agreement:
-- The GoA will take over 100% of the bank, paying each of its
former owners (BayernLB, state of Carinthia, GRAWE insurance) a
symbolic one Euro;
-- HAA's three former owners will provide EUR 1 billion in fresh
equity to HAA (BayernLB EUR 825 million, Carinthia EUR 200 million,
GRAWE EUR 30 million). The GoA will add EUR 450 million in equity.
In sum, this gives HAA the EUR 1.5 billion it reportedly needs to
put its Tier 1 capital ratio above 8% (the de facto minimum to
obtain liquidity and do business internationally); without the
injection, HAA would reportedly have fallen below the 4% regulatory
floor.
-- HAA's former owners will provide EUR 3.4 billion in liquidity to
HAA (BayernLB EUR 3.075 billion, Carinthia EUR 227 million, GRAWE
EUR 100 million).
-- Austria's other large banks will together provide c. EUR 500
million in liquidity. If some of those funds are used for
recapitalizing HAA, they will reduce the aforementioned EUR 450
million GoA equity injection. COMMENT: this kind of "collective
rescue effort" is typical crisis behavior for Austria's close-knit
financial sector. END COMMENT.

Why Government Takeover, Not Receivership?
- - - - - - - - - - - - - - - - - - - - -

4. (U) As Austria's sixth largest bank, HAA was designated "system
relevant" by Austrian authorities (i.e. "too big to fail") and
court-supervised receivership (or outright collapse) would have had
unforeseeable consequences for Austria's banking system, along with
repercussions for other banks in the Euro-zone and in southeast
Europe -- particularly in Croatia and Bosnia/Herzegovina (HAA is the
largest bank in both countries). At a press conference attended by
an Embassy representative, central bank governor Nowotny said that
liquidating HAA would have threatened market confidence in banks
serving the entire CESEE area. NOTE: besides Bosnia-Herzegovina
and Croatia, HAA is heavily engaged in Slovenia, Serbia, and
Montenegro. Of HAA's total assets, only 46% are in Austria and 12%
in Italy, while 16% are in Croatia, 11% in Slovenia, 6% in
Bosnia-Herzegovina, 4% in Serbia and 5% in other countries.

GoA Pans States of Bavaria, Carinthia
- - - - - - - - - - - - - - - - - - -

5. (U) FinMin Proell and Governor Nowotny had harsh words for HAA's
owners -- particularly the Bavarian state government (as owner of
BayernLB) and the Carinthian government -- for irresponsible
behavior in leading HAA to the edge of bankruptcy. Nowotny

VIENNA 00001583 002.2 OF 002


criticized BayernLB and the Bavarian government for trying to simply
drop a system-relevant subsidiary on a foreign government's doorstep
(a "moral hazard" issue in his words) -- and opined that the GoA had
shown responsibility, a view Nowotny said was shared by ECB
President Trichet. Nowotny also criticized Carinthian authorities
(who controlled HAA until its majority sale to BayernLB in 2007),
acknowledging that many of HAA's financial problems date back to
that era.

Criminal Investigation Ongoing
- - - - - - - - - - - - - - - -

6. (SBU) According to media reports, Austrian investigators are
looking into possible criminal behavior at Hypo Alpe Adria --
including potential fraud connected with the 2007 sale to BayernLB
and criminal connections in southeast Europe. A prosecutorial
spokesperson said the investigation "is just starting," and would
not speculate on timing or targets. Governor Nowotny called
publicly for an "in-depth" criminal investigation and appropriate
prosecution.

How We Got Here: An Insider View
- - - - - - - - - - - - - - - -

7. (SBU) On December 1, in the lead-up to HAA's takeover, Governor
Nowotny told the Ambassador that HAA would likely be rescued in
consultation with its shareholders including the state of Bavaria.
Nowotny admitted that the central bank had known of Hypo's troubles
for some time -- and opined that there may well have been criminal
behavior -- but argued that bank regulators cannot "go public" with
such knowledge ("the bank would collapse instantly") and instead has
to work behind the scenes to reach a solution. Nowotny said that
some of Hypo's problems likely date from before 2007, but Bavarians
bear responsibility too for their "hubris" in over-reaching during
the financial boom.

COMMENT
- - - -

8. (SBU) HAA is safe for now, but likely faces radical
restructuring. Although no details have been announced, Nowotny has
floated the prospect of splitting HAA into "good" and "bad" banks.
Also unclear is what will happen to HAA's foreign subsidiaries, some
of which are market leaders in southeast Europe. As 100% owner of
HAA, the GoA will have to make these decisions -- but will have to
justify its behavior to European Commission competition authorities,
who may take issue with HAA careening from one form of state aid
(Bavaria/BayernLB) to another.

9. (SBU) After years of sweeping HAA's problems under the rug, the
Austrian banking system is now stuck with the most serious de facto
failure in decades (even more costly than the BAWAG/Refco accounting
fraud debacle in 2005). While a radical step, this takeover is
still likely to be the least costly solution for the GoA given the
Carinthian state government's EUR 18-19 billion in guarantees for
HAA assets -- guarantees that could have come due if HAA had been
allowed to collapse, and would surely have landed in the GoA's lap.
With this negotiated approach, the GoA has also managed to extract
more capital and liquidity from HAA's former owners, most of all
BayernLB, reducing the risks to HAA, Austrian banking generally and
the GOA's fiscal position. END COMMENT.

EACHO

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