German industry leaders don’t usually publicly criticize financial decisions other countries make.
But Nikolaus von Bomhard, chairman of the management board of the world’s largest reinsurer, Munich Re, has made an exception.
Mr. von Bomhard, angered by Austria’s handling of the “bad bank” Heta Asset Resolution, wrote a letter to shareholders of which Handelsblatt has received an exclusive copy.
After Greece negotiated a debt haircut with its creditors, at great political cost, the Austrian state of Carinthia is threatened by “an erosion of public debt morality,” Mr. von Bomhard wrote.
“If this approach catches on, politicians from much less solvent regions will find their citizens asking them why they should continue to service their debts,” Mr. von Bomhard wrote.
Hypo Alpe Aldria, a small state-backed bank from the Austrian state of Carinthia, was the biggest victim in Austria of the financial crisis in 2008 and earlier this year, its debts were bundled into Heta Asset Resolution.
Carinthia has said it is unable to cover the €8 billion that the bank owes its creditors which include €5.5 billion to banks in Germany. The Austrian government has refused to help.
“Guarantees stemming from guarantor liability must be honored; this applies to all countries in Europe.”
Many are concerned that this refusal will encourage other banks and institutions to default on their debt too, triggering a loss of faith in government bank guarantees which are at the heart of finance in Europe.
Many banks and insurance companies, including Munich Re, had purchased securities issued by the scandal-ridden Carinthian bank Hypo Alpe Adria, because they came with an indemnity bond from the Austrian state and were therefore thought to be safe.
But then Hypo Alpe Adria began to falter. It had made some bad speculative plays, and had to be bailed out by the Austrian government. It is now being liquidated under the name Heta Asset Resolution.
In early March, the Austrian financial market regulatory agency imposed a moratorium on Heta, which invalidated the state guarantees, forcing many investors to take write-offs.
Austria’s actions caused a major stir in the financial world.
As a rule, creditors should “be answerable” for the consequences of any bad investments, Mr. von Bomhard said. This is why there should in principle be no government guarantees for the banking sector. But, he noted, it is “a completely different story” when creditors are unwilling to be responsible for guarantees they had already made.
Mr. von Bomhard has the backing of the German government. “Germany takes a critical view of Austria’s attempts to structure the liquidation in such a way that guarantor liability could not apply or was essentially abolished retroactively,” said a spokesman for the German Finance Ministry. “Guarantees stemming from guarantor liability must be honored; this applies to all countries in Europe,” according to the ministry.
Mr. von Bomhard fears more negative consequences. As European governments seek ways to fund overdue and costly investment in public infrastructure, some are considering partnerships encouraging private investment.
“The high hopes and great expectations associated with the announced private investments in public infrastructure are unlikely to be met if confidence in the reliability of government action is harmed,” Mr. von Bomhard wrote.
Insurers are the ideal investors for such projects, he said, given the fact that they hold customer and shareholder funds for long periods of time. But it is “precisely with these long-term projects that the stability of the basic conditions for a financial commitment by insurers is so important.”
According to Mr. von Bomhard, Munich Re is prepared to invest €8 billion, or $8.9 billion in such infrastructure measures in the coming years, but suitable projects are hard to find.
The Heta crisis comes as a heavy blow to the German financial industry. Of the bad bank’s more than €10 billion in outstanding liabilities, €5.6 billion are held by banks and about €1.5 billion to insurance companies. According to the latest information, Munich Re will have to write off an amount “in the double-digit millions.”
The European Central Bank’s financial supervision department created additional turmoil when it recommended that the affected institutions make an allowance of 50 percent on their commitments. Virtually all affected institutions had to beef up their reserves for bad debt after that.
“Cases in which a government borrower retroactively modifies the basic conditions for its benefit, thereby worsening the creditor's legal position are especially alarming.”
Austria’s actions will trigger a wave of lawsuits. Affected banks, like NRW Bank, Pfandbriefbank, BayernLB and NordLB, have already indicated that they intend to take legal action but would rather avoid what NordLB CEO Gunter Dunkel called an “attorney enrichment program.”
The five key associations of the banking industry, as well as insurance industry association GDV, have also complained to the European Union. Michael Kemmer, the managing director of the private banking association, argued that the Heta moratorium violates E.U. rules on freedom of capital movement and, therefore, E.U. treaties.
In an interview with Handelsblatt, E.U. Commissioner for Financial Stability Jonathan Hill said he did not believe the German financial industry would have much chance in court. “At first glance, it appears that the E.U. bank liquidation guideline was applied correctly,” Mr. Hill said, referring to the Heta moratorium.
Mr. von Bomhard isn’t interested in legal subtleties.
In his letter, he reminded his readers of the moral underpinnings of doing business, and noted that there is both a legal relationship and a relationship of trust between creditors and borrowers.
Cases “in which a government borrower retroactively modifies the basic conditions for its benefit, thereby worsening the creditor’s legal position” are “especially alarming,” he writes.
At a time of slim government budgets, he notes, a “disconcerting trend” is taking shape.
“As long-term investors, we view this with great concern.”