European bonds

Austria, in Bank Debacle, Rethinks Guarantee

Hypo Alpe Adria Source Imago Eibner Europa
The headquarters in Klagenfürt, Austria, of Hypo Alpe Adria, which collapsed during the financial crisis and is now under government administration.
  • Why it matters

    Why it matters

    Austria’s plan to avoid honoring a regional state guarantee for troubled lender Heta has cast doubt on Europe’s sub-sovereign bond market and may prompt investors to take a closer look at the creditworthiness of public borrowers even in the continent’s richest nations.

  • Facts

    Facts

    • German banks and insurers have a total exposure of around 6.8 billion to Heta Asset Resolution.
    • The Austrian state of Carinthia wantts to avoid paying €10.2 billion in debt guarantees for Heta.
    • Heta’s troubles claimed its first German victim this month when Düsseldorfer Hypothekenbank had to be rescued.
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    Audio

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What’s a state debt guarantee worth these days? Not as much as it used to be, following Austria’s plan to write down the debt of Austria’s Heta Asset Resolution. The decision risks undermining investor confidence in European sub-sovereign debt.

If it were Greece, it wouldn’t come as a surprise. But rich Austria, one of the core members of the European Union?

The southern Austrian province of Carinthia said this month it was checking whether it can escape €10.2 billion in debt guarantees for defunct lender Hypo Alpe Adria that are still outstanding at its wind-down vehicle Heta.

Hypo, formerly owned by publicly-owned Bavarian Landesbank BayernLB, expanded rapidly in Austria and the Balkans, aided by low borrowing costs made possible by state guarantees provided by Carinthia. It overstretched itself and came close to insolvency before the government in Vienna bought it in 2009.

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