Hypo Fallout

Austrian Bandits

HypoVerzerrt-Reuters
Hypo Alpe Adria has been causing problems for Austria and Europe since the financial crisis.
  • Why it matters

    Why it matters

    If the European Commission allows Austria not to honor claims against the troubled Hypo Alpe Adria bank, it could set the stage for other E.U. countries to renege on their obligations.

  • Facts

    Facts

    • Hypo Alpe Adria owes its creditors billions of euros, including €5.5 billion to German banks.
    • Austria passed a law in July 2014 absolving it of the responsibility for paying the bank’s debts, despite a state guarantee.
    • Austria isn’t trying to avoid meeting its obligations because it is in the middle of a financial crisis, but simply because it would be much cheaper for the national budget, the authors argue.
  • Audio

    Audio

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Pacta sunt servanda. Agreements must be kept.

This basic principle is central to every state based on the rule of law. It applies not only between private individuals, but also to agreements by the government. Yet right now, in the heart of Europe, this basic principle is being trampled.

The Republic of Austria is weaseling out of its own commitments to investors in the case of the Austrian bank, Hypo Alpe Adria, in an unprecedented case of a government acting like a robber baron. Austria is passing special legislation to cancel demands against the bank and the republic’s guarantees, not because Austria is in a debt crisis, but simply because it is cheaper for the nation’s budget.

The Austrian government is trying to conceal this breach of law behind the facade of what it dubs a “bail-in,” which amounts to the writing down of creditor claims against a systemically-relevant or “too big to fail” bank in a crisis. New European Union restructuring and resolution guidelines rightly allow this, reasoning that owners and creditors should bleed before bank bailouts or taxpayer money is tapped.

However, these E.U. guidelines provide for writing down claims against a bank, not against the guarantors. That’s because the bail-in is meant to protect the systemically-relevant bank, not its guarantors. They are not the same thing.

Germany rightly sees in the new restructuring and resolution guidelines that, even in the case of a bail-in, bank creditors whose claims are safeguarded by a state guarantee or guarantor liability retain their claims against the guarantor. Austria wants to eliminate both claims against the bank and the guarantee with the Hypo special legislation adopted in July 2014. It is a violation of E.U. law and amounts to dangerous financial policy.

The revoking of the guarantees infringes on the free movement of capital through the E.U. While a threat to public order and safety can be a justification, the overall financial interest of a state is not. The special legislation also has nothing to do with stabilizing the financial market. What once was Hypo Alpe Adria is now Heta. It’s no longer a bank, but a deregulated settlement unit in the process of being wound down.

If the special legislation isn’t stopped, it could set a precedent. Why wouldn’t other finance ministers seek to free themselves from the burdensome guarantees they gave to investors in an ailing bank if Austria gets away with it? This eats away at the very foundation of the financial market, which depends on the reliability of state institutions as responsible players in a crisis. What investor would keep their money in a bank with state guarantees when they know lawmakers could release the state from its obligations?

The E.U. Commission must initiate infringement proceedings against Austria. It is high time the curtain of bail-in rhetoric is pulled back so it is made abundantly clear just how shameless and dangerous the special legislation for Hypo is.

 

To contact the authors: gastautor@handelsblatt.com  

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