UNCLAS SECTION 01 OF 03 VIENNA 000060
SIPDIS
TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/ATUKORALA
TREASURY PLEASE PASS TO FEDERAL RESERVE AND FINCEN
TREASURY ALSO PASS TO SEC/E.JACOBS
E.O. 12958: N/A
TAGS: EFIN, ECON, AU, EUN
SUBJECT: Taking Stock of Austria's Financial Markets
and Crisis Impacts
REF: A) 08 State 125609; B) 08 Vienna 1889 and
previous
1. SUMMARY: The Austrian government was decisive in
crafting a EUR 100 billion financial sector rescue
package in October, but implementation has been slow.
Credit is scarce; demand is weak for GoA-guaranteed
interbank funding; only one major bank (Hypo Alpe
Adria) has gotten actual equity from the state so far;
and the GOA is pursuing a non-transparent policy on
funding other banks. On January 2, the Financial
Market Authority/FMA put a government commissioner in
charge of Bank Medici (which channeled money to Madoff
vehicles): with an exposure of over $2 billion, Bank
Medici customers are among those hardest hit by the
Madoff scandal. Troubled Kommunalkredit bank was
nationalized January 5. The Vienna Stock Exchange was
among Europe's worst performers in 2008, with its main
index falling 60% and market capitalization down by
two-thirds.
2. On the bright side, the financial crisis has
bolstered Austrian opinions of the EU and the ECB, and
Austrian banks are not backing away from markets in
emerging Europe. END SUMMARY.
Banks: Show Us the (Public) Money
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3. Observers here universally praise the GoA for
passing the EUR 100 billion rescue package in October
-- comprising EUR 15 billion for equity injections
into banks/insurace companies and EUR 85 billion to
guarantee intrbank lending. However, implementation
has beenmixed. In late December, leading economists
and Austrian National Bank (OeNB) Governor Ewald
Nowony urged banks to take the money and called on
te GoA to speed up implementation. Hannes Androsch
co-head of the new state bank holding company (IMBAG)
urged Finance Minister Josef Proell to sped up
payouts: Proell replied that the money is there for
the taking, as long as banks fulfill requirements.
4. Aside from specialty lender Kommunalkredit, so far
only Hypo Alpe Adria bank (HAA) has seen actual state
money: in late December 2008, it got EUR 900 million
in form of participation shares, at an 8% interest
rate and with conditions including limits on dividend
payments and a requirement that HAA must lend twice
the amount received (i.e. EUR 1.8 billion) to SMEs
over the next three years. HAA's ownership structure
remains unchanged, but the GoA can convert the
participation shares into ordinary shares at any time.
HAA has a call option to name a buyer at any time for
the GoA's participation shares. HAA also received
from its parent (the German Bayerische Landesbank) a
EUR 700 million equity increase which with the GoA
injection will push HAA's Tier 1 capital ratio to
8.4%. HAA, which had a troubled record even before
2008, was the Austrian bank is direst need.
5. Most or all of the top five Austrian banks are set
to take state equity injections, but progress has been
surprisingly slow. Volksbanken AG, with its exposure
to failed Kommunalkredit bank, is likely to be the
next to receive a GoA equity injection. In December,
Volksbanken shareholders authorized management to take
state capital of up to EUR 1 billion. Erste Bank's
management is authorized to take in up to EUR 2.7
billion participation capital, Raiffeisen
Zentralbank's (RZB) up to 2 billion. BAWAG (owned by
U.S. private equity fund Cerberus Capital Management)
reportedly had initial talks with the OeNB and the FMA
for EUR 300-400 million in new equity, but has not
started negotiations with the Finance Ministry. Bank
Austria (owned by the Italian UniCredit group) has
shown interest, but has not made a decision.
6. Credit is still scarce, even with GoA-guaranteed
interbank lending auctions underway (a EUR 85 billion
program). To date only few auctions have taken place
and demand was light. As in Germany, Austrian banks
can use the GoA guarantee for issuing bonds -- but few
have done so.
7. Reasons for slow implementation include
-- Waiting for approval in Brussels (until mid-
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December), as the Commission sought to prevent
competitive advantages in any member state
-- Apparently, a requirement (added by the EU) that
taking state equity prior to December 31 would entail
paying a full six months' interest
-- Efforts by the GOA Finance Ministry to add new
conditions, such as requirements to lend to SMEs.
COMMENT: the new conditions are in part political
cover against charges of "bailing out" rich bankers --
but also a legitimate attempt to make banks lend and
prevent a downward credit spiral.
Kommunalkredit Bank Nationalized
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8. In November, the GoA decided to nationalize the
troubled Austrian banking group Kommunalkredit. The
move was approved by the Federal Competition Authority
and became effective January 5, 2009. The GoA took
over (for a symbolic one Euro each) the shares of
Volksbanken (50.78%) and the Belgian-French Dexia
Credit Local (49.0%), while the Austrian Association
of Municipalities, which holds 0.22%, remains a
shareholder.
Bank Medici Investors Lost Billions in Madoff Scheme
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9. The Austrian Bank Medici (75% owned by Sonja Kohn,
25% by Bank Austria) is among those hit hardest by the
Madoff scandal. Bank Medici's Madoff exposure is
about US$ 2.1 billion, most of it reportedly from
clients outside Austria (Russians, Ukrainians and
Israelis) but apparently also prominent bankers such
as former OeNB president Adolf Wala. Bank Medici is a
small Austrian bank which marketed Madoff-linked
investments through other banks and asset managers in
Europe and beyond. In Austria, Bank Medici is not
seen as "system-relevant;" until this month, most
Austrians did not even know the bank's name (the
minimum investment was EUR 50,000). The bank has only
16 employees and derived most of its earnings from
fees linked to Madoff products.
10. On January 2, when Bank Medici's two managing
directors resigned, the FMA appointed an auditor as
government commissioner to protect the interests of
creditors and secure entrusted assets. (NOTE: Under
the Austrian Banking Act (para 70/2), the FMA may
order temporary measures (up to 18 months) or appoint
a government supervisor to address threats to the
financial interests of a bank's clients - END NOTE).
High-profile media reports (including in the New York
Times) say Bank Medici founder Sonja Kohn has dropped
out of sight -- although journalists were apparently
in touch with her as of January 14.
11. New York law firm Stull, Stull & Brody has
petitioned to introduce a class action suit in New
York court on behalf of investors in the funds Herald
USA, Herald Luxemburg, Primeo Select and Thema
International from January 2002 through January 12,
2008. The suit -- not yet filed -- alleges monies
were invested in Madoff vehicles without the knowledge
of investors. It will name as defendants Bank Medici
along with Bank Austria, UniCredit, Pioneer
Alternative Investments, Ernst and Young, and HSBC
Holdings.
Austrian Banks To Stay in Emerging Europe
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12. Austrian banks -- which have an asset exposure to
markets in Central, Eastern, and Southeastern Europe
(CESEE) and the former Soviet Union (FSU) almost as
large as Austria's GDP -- say they are determined to
remain in eastern markets and still see growth
potential there. Banks feel they can manage the
heightened risks with their solid base of deposits in
the region and with GoA equity injections pushing most
banks' consolidated equity ratios to 10 percent or
above. COMMENT: Austrian banks see no alternative to
staying in emerging Europe. Raiffeisen International
says it learned from staying put in Russia during the
1998 ruble crisis -- recapitalizing at a cost of
several hundred million dollars -- a key choice that
made Raiffeisen the largest foreign bank in Russia and
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earned it tidy sums during the good years that
followed.
A Crash Year for the Vienna Stock Exchange
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13. 2008 was the worst year for the Vienna Stock
Exchange since the Austrian Traded Index (ATX) debuted
eighteen years ago. At year-end 2008, the ATX stood
at 1,801 -- 60.1% lower than a year before (4,513) --
a worse fall than many other OECD stock exchanges:
U.S. Dow Jones -34%, German DAX -40%, Japanese Nikkei
-42%. Market capitalization of listed domestic shares
was down 66% from year-end 2007 at only EUR 53 billion
(about 19% of GDP). Vienna had no new domestic
listings in 2008.
Austrians now have more faith in EU than in GOA or USG
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14. While some Austrians lost trust in their banks
despite the unlimited deposit guarantee -- the OeNB
says currency demand spiked in October as individuals
stashed money in safe deposit boxes (or their
mattresses) -- the crisis has bolstered opinions of
the European Union. A domestic poll taken in late
November showed that Austrians have more confidence in
the EU's crisis management than in their own
government or in U.S. authorities:
Austrians' Opinions of
Ability to Respond to Economic Crisis
MUCH LITTLE NONE
EU 44% 42% 11%
GOA 37% 42% 14%
USA 13% 36% 45%
This development is noteworthy since Austrians
typically among the EU's main skeptics: in June, only
36% of Austrians said the country benefited from EU
membership (EU average: 54%). In Eurobarometer
polling in October/November, Austrians showed the
biggest jump in support among member states:
currently 47% say that EU membership brings benefits.
A solid majority (57%) trust the European Central
Bank, significantly above the ECB's EU-wide approval
rating (48%).
GIRARD-DICARLO