Central & Eastern Europe Special Report: Mountain rescue
23 March 2009
Austria’s government is now spending e100bn on saving the country’s failing banks. Tom Phillips investigates
After rebuilding eight former Communist nations that joined the EU in 2004, the banks of Austria are now fighting to stay afloat.
How one of the world’s most secure banking communities found itself with loans of around e201bn (£185.87bn) – equal to around 71 per cent of the nation’s GDP – is a question for the historians. But with investors ranking Austria’s bonds as less safe than those of Italy, Spain or even Slovakia, the country’s lawyers are frantically working on recapitalisations brought about by a major e100bn (£92.12bn) rescue package from the Republic of Austria.
One week after the rescue legislation was passed, the government undertook the first bank nationalisation when it agreed to buy Kommunalkredit Austria on 27 October 2008. Since then Austrian law firms have been working overtime on an array of firsts for the legal market that put them at the heart of the national economy’s recovery.
“This is an unusual and interesting time. A year ago we couldn’t have imagined anything like this,” says Wolf Theiss banking partner Markus Heidinger.
Wolf Theiss and its 35-strong banking practice is heavily involved in many of the issues affecting the banks, including advising Hypo Group Alpe Adria, Erste Bank and Volksbanken on either strengthening the banks’ equity basis or guaranteeing their debt issues.
Heidinger says Austrian banks may become targets for international players in the future, meaning more traditional lawyering. But right now this is unprecedented legal work.
“We’re answering questions no one has asked before,” he explains. “The work is sophisticated, time-critical and requires greater partner input.”
Fellner Wratzfeld & Partners is representing a group of Austrian banks (Bank Austria, Erste Group, Raiffeisen Zentralbank Oesterreich (RZB), Bawag PSK and Oesterreichische Volksbanken) in saving one of the largest private banks in Austria, Constantia Privatbank. As part of the package, the five largest Austrian banks bought all the shares in Constantia together. Extensive legal and business due diligence is still being undertaken to determine the future strategic direction of the troubled bank.
“We worked on a previous well-publicised bank restructure in 2005 with Bawag PSK, involving the Austrian government and the European Commission, and this is very similar,” says Markus Fellner, partner at and head of Fellner Wratzfeld’s 10-strong banking and finance practice. “If we hadn’t solved that problem in two nights there would’ve been supervision by the banking authority and the bank would be made insolvent. We learnt a lot then and we’re working with the same people now.”
Christian Herbst, a banking partner at Schönherr, is advising Oesterreichische Volksbanken as the majority shareholder in the sale of Kommunalkredit, and RZB on the first-ever asset-backed securities transactions of an Austrian originator.
The firm is also advising Immofinanz on its reorganisation and restructuring of real estate groups throughout Central and Eastern Europe worth e15bn (£13.82bn). Much of it is unique work, and that which is normal is being performed in a unique environment.
“The structure of the Kommunalkredit nationalisation was groundbreaking,” says Herbst. “Our advice to clients is new and evolving constantly. We’re using financial instruments to tap government funds and case law is being tested for the first time.”
Although they now appear to have the greatest credit exposure in the region, Austrian banks were in fact helped by their investment into Eastern Europe, missing out on the majority of bad debt that has brought down financial institutions across the world.
“Austria missed out on the first wave of the recession,” says Tibor Varga, a banking and finance partner at Dorda Brugger Jordis. “So far there’s only been one bank nationalisation, but others are in discussions as a precautionary measure. People outside Austria are taking an interest in what happens here.”
Varga believes that the impact of the Austrian bank restructuring will impact on Eastern European economies, but what form that will take is uncertain.
Cries of an Austrian banking crisis from external analysts are threatening to drag the country’s hitherto unblemished banking reputation down with Italy and Spain, sparking a ferocious defence from Austria’s banking community.
Herbst adds: “It’s a debate that the Austrian banks reject. It’s much too early to tell how the Austrian economy will perform.”
Fellner Wratzfeld’s Fellner says the economic crisis will make a famously conservative banking system even more careful. “The banks have to concentrate more on their core business and leave synthetic financial processes aside. This will, of course, mean less profits,” he says.
Austria’s Action plan
To deal with the financial crisis and restore investor confidence, Austria implemented measures that were received with interest by governments and interested parties beyond its own borders.
The changes, made under the 2008 Inter-Bank Market Enhancement Act, the 2008 Financial Market Stabilisation Act and amendments to the Banking and Stock Exchange Acts, came into force in October 2008 and centred on a e100bn (£92.12bn) kitty for the Austrian finance minister to administer like a fiscal Band Aid.
For the banks, the plan included up to e15bn (£13.82bn) earmarked for
their recapitalisation or expropriation (as with Kommunalkredit).
Other new legislation includes an amendment tightening the rules on short selling. Austria’s financial regulator, the Financial Market Authority, can now prohibit short selling of any security or may impose restrictions with regard to short selling for a period of up to three or even six months. Short selling rules have also been changed for traders on the Vienna Stock Exchange.
The majority of the rescue package, up to e75bn (£70.23bn), was set aside for state guarantees, sureties and assumptions of liability. Up to e10bn (£9.37bn) has been allocated for a backup and enhancement of deposit guarantees. Under the new scheme, the protection amount has been increased to 100 per cent of the bank deposits of ‘natural persons’, while the protection for mid-size businesses has increased from e20,000 (£18,733) to e50,000 (£46,823) (expiring on 31 December 2009).
As of 1 January 2010, deposits of individual persons will be guaranteed up to e100,000 (£93,646).