Austria: Parliament approves controversial haircut plan, public debt and fiscal deficit expected to increase this year
July 8, 2014
The Austrian Parliament approved a bill to restructure the troubled Hypo Group Alpe Adria (HGGA) bank on 8 July. The measures contained within the bill, which include the creation of a bad bank in order to liquidate HGGA’s assets, are expected to drive an increase in the country’s fiscal deficit and public debt this year. The bill also includes a controversial haircut for HGAA’s holders of subordinated bonds, which were guaranteed by the state of Carinthia (Kärnten).
HGAA was originally a regional bank owned by the state of Carinthia. In 2007, it was acquired by Bayerische Landesbank—a German state bank—with guarantees from the state of Carinthia. HGAA expanded its activities rapidly in Europe’s south-eastern markets, particularly in the Balkan region. However, in 2008 and 2009 the global financial crisis exposed HGAA’s risky operations and it was declared insolvent in December 2009. The Austrian government was forced to buy back the troubled bank in order to avoid immediate bankruptcy.
The Austrian government’s intervention was key in avoiding a banking crisis in the Balkan region and, due to the massive guarantees from Carinthia, the government’s move also avoided Austria’s southernmost state going bankrupt. According to official estimates, since 2009, the Austrian government has spent around EUR 5.5 billion to keep the nationalized bank afloat. Yet since no real signs of progress were evident, the government finally decided to liquidate the bank.
The bill approved by the parliament will allow for the creation of a bad bank, which will hold most of the non-performing loans and will have assets worth EUR 15.0 billion. The bad bank’s total balance sheet will be added to Austria’s public debt. According to official estimates, the measure will cause the country’s fiscal deficit to increase from 1.5% of GDP in 2013 to 2.7% of GDP in 2014 and public debt will rise from 74.5% of GDP in 2013 to 79.2% of GDP by the end of 2014. Analysts surveyed by FocusEconomics are broadly in line with the government’s estimates. They expect the absorption of the bad bank’s balance sheet to drive Austria’s fiscal deficit up to an average Consensus of 2.7% of GDP in 2014 and they see public debt increasing to 79.5% of GDP.
The government has decided that creditors should also take at least a portion of the losses, given the expected increase in the country’s public debt as well as the unpopularity of the measure. Consequently, the new bill wipes out nearly EUR 900 million of subordinated HGAA debt, which had been guaranteed by the state of Carinthia, as well as around EUR 800 million in loans that were granted by Bayerische Landesbank in 2008. This measure marks the first time ever in Europe that state-guaranteed debt has not been honored outside an insolvency scenario.
Investors and market participants took the controversial measure with relative calm; Austrian bond yields were stable following the events. In addition, markets welcomed the government’s pledge that this was a unique event and that it will not happen again. Moreover, analysts do not expect an increase in systemic risk in the banking system since the sector is well capitalized and since no other Austrian bank is in a position similar to that of HGAA.
Author: Ricardo Aceves, Senior Economist