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Austrian Insolvency Hits Germany

Source: imago/Eibner Europa
  • Why it matters

    Why it matters

    The collapse of Hypo Alpe Aldria has had a ripple-effect across the German banking sector, where many smaller banks provided loans.

  • Facts

    Facts

    • Hypo Alpe Adria, based in the Austrian southern state of Carinthia, owes €3.1 billion in bonds to banks and insurance companies in Germany.
    • Hypo Alpe Adria was bought by the Austrian government for €1 in 2009 to avert a collapse of the bank.
    • Heta Asset Resolution has been set up by the Austrian government and put in charge of dissolving Hypo Alpe Adria.
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    Audio

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It was only a matter of time before a banking crisis in tiny Austria would force bailouts in its larger neighbor, Germany.

Hypo Alpe Adria, a long-troubled bank that was bailed out by the Austrian government in 2009, is now officially being liquidated. Its German creditors are unlikely to be re-payed, while the Austrian state of Carinthia that offered the bank guarantees could face bankruptcy too.

The domino-effect from that decision has now begun in earnest in Germany.

German mortgage bank Düsselhyp, based in the far-away western German city of Düsseldorf, was expecting several hundred million euro in bond re-payments from Hypo Alpe Adria. As a result of the crisis in Austria, Düsselhyp is facing insolvency. The mortgage bank will now be bailed out and eventually taken over by a private banking fund run by the German Private Banking Association.

“The deposit protection fund of the Private Banking Association is shielding Düsselhyp from Heta bonds to eliminate immediate risks. The goal is to absorb Düsselhyp fully,” said a spokesperson for the banking association, known here as the Bankenverband.

“We expect that this will cause the (banking) sector to lose 10 percent of its net profit in 2015.”

U.S. rating agency Fitch

Overall, Hypo Alpe Adria, based in the southern Austrian state of Carinthia, was bought by the Austrian government for €1 in 2009 from the Bavarian bank BayernLB. It still owes €1.8 billion in re-payments to banks in Germany, as well as about €1.3 billion to German life insurers.

Hypo Alpe Adria, a publicly-owned bank, made billions in reckless and dubious loans to south-eastern European countries like Croatia ahead of the 2008 financial crisis. The bank also has a subsidiary in neighboring Italy. Like Germany’s state-backed regional banks, known as Landesbanken, Hypo Alpe Adria long benefited from state guarantees that allowed it to raise money cheaply from markets, even though it was always under capitalized.

The bank was nationalized in 2009 to avert a bank collapse. Now, the Austrian government has put the remaining assets into a bad bank, Heta Asset Resolution, which will run the bank’s remaining business activities until the liquidation is complete. Corinthia, which provided the state guarantees, stands to lose the most from the bankruptcy.

But other German banks also count as Hypo Alpe Adria’s creditors and could run into trouble. They include Norddeutsche Landesbank, or NordLB, which was expecting repayments of €350 million, as well as Deutsche Pfandbriefbank or PBB, Dexia Kommunalbank Deutschland and FMS Wertmanagement.

“We expect that this will cause the (banking) sector to lose 10 percent of its net profit in 2015,” a statement by the U.S. rating agency Fitch said.

Heta Asset Resolution decided earlier this month that Hypo Alpe Adria would stop all debt re-payments beginning in May 2016, after discovering the troubled bank has a total capital gap of €7.6 billion.

Some of the controversy will be decided by the courts.

FMS Wertmanagement, itself a “bad bank” created out of the nationalized German Hypo Real Estate Holding, or HRE Group, following the financial crisis, is demanding €200 million plus interest from the Austrian bank and is now filing a lawsuit with the court in Frankfurt against Heta, after the latter refused to pay interest on bonds they hold that were due on March 6.

 

Elisabeth Atzler, Peter Köhler and Hans-Peter Siebenhaar are based in Germany and Austria, covering finance related issues. To contact the authors: atzler@handelsblatt.com, koehler@handelsblatt.com  and siebenhaar@handelsblatt.com

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