Austria’s festering boil

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Beautiful scene – but financially a festering boil – that won’t pop for several years.

This is a follow up to the HETA Asset Resolution AG (HETA – formerly Hypo Alpe-Adria Bank International AG) in Austria (1) – in my article ‘Austria breaking really bad‘. (2)

I deferred writing anything until the Court case was settled – it was to start in February 2016 – but instead no Court Case – the Government in its wisdom invoked the first bank resolution – under the new European bank resolution regime – which is currently taking place in Austria.

In a nutshell – everything forcibly postponed until 2023 with Bondholders taking a 54 percent haircut – no interest payments and – yes deposits seized – a bank bail in.

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Lengthy – very lengthy court process – will decide the eventual outcome and no doubt set precedents for all EU banks.

So Austria will not be the trigger for any financial crisis this time round. The simple fact of the matter is that the Courts have to decide whether the process – distribution – is legal under the 2015 EU Legislation- fair and equitable.

It should be noted that the dreaded ‘Bail-In’ legislation has consequences – for individuals – companies – funds – public and quasi public bodies.

A big holder of Hypo Bonds was Bayern Landesbank – owned by the German State of Bavaria and the Munich based FMSW – which is again publicly underwritten.

All of HETA’s problems are the tip of the iceberg – as Europe is a cesspool of interlinked banking and public liabilities – massive losses are in prospect for these institutions and the public.

The EU Banking Resolution is a nightmare and one in which with HETA – shows that depositor funds are definitely not safe.

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The European debt crisis is far from resolved!

 

The full story on what transpired for the legal eagle beagle and briefcase brigade is detailed more fully below.

The Austrian Financial Market Authority (FMA) – the official government regulator for banks – funds and financial institutions is tackling the resolution of HETA.

The background is that Hypo Alpe-Adria Bank International AG made headlines in 2008 for losing billions of euros – this being backed by a State Guarantee of the Province of Carinthia, Austria – it was subsequently nationalized in 2009.

Carinthia guaranteed the bonds of local lender Hypo Alpe Adria – before it collapsed and HETA was formed to wind it down.

Carinthia cannot afford to fully honour the remaining guarantees – which the FMA put at 11.1 billion euros – some five times the provinces’ budget – with roughly 540,000 residents.

Creditors are likely to sue Carinthia to recover the difference between what is paid out to them under Heta’s wind-down and their bonds’ full face value.

The resolution of HETA represents a significant milestone for the European bank resolution regime – as this is the first application of the regime – so legally there are no prior precedents and absolutely no practical experience.

This new European bank resolution regime is set out in the EU Directive on the Recovery and Resolution of Credit Institutions and Investment Firms (BRRD).

The BRRD is transposed into Austrian law by the Federal Act on the Recovery and Resolution of Banks (BaSAG) – which entered into force on 1 January 2015.

The provisions regarding the preparation and execution of bank resolution measures constitute the centerpiece of the BaSAG – which aim is simply to ensure orderly resolution and preserve financial market stability in cases of failure – or a threat of failure – of institutions subject to its regime.

The FMA, in its role as the national resolution authority under the BaSAG – is responsible for orderly resolution in the ‘public interest’.

To enable FMA to complete this resolution – BaSAG provides the FMA with the following in order:-

  • Sale-of-business tool
    Establishment of a bridge institution tool – Bridge Bank
    Separation-of–asset-positions tool – the creation of a bad bank holding bad assets
    A moratorium tool
    Bailing-in-of-creditors tool – seizing bank depositors funds
    Application of resolution tools

In order for the ‘application of the resolution tools’ in HETA’s case started at the beginning of 2015.

At the beginning of 2015 – HETA was subject to an asset quality review by external auditors – who advised that the Bank would require further funding to avoid insolvency.

As a result both HETA and the FMA asked the Republic of Austria – as HETA’s owner by virtue of the nationalization – as to whether it would be willing to inject further capital into HETA – to which the government declined.

This paved the way for the FMA to correctly assess that the legal requirements for a ‘resolution of HETA’ – under the EU Directive – were fulfilled.

The FMA – in its role as the national resolution authority – issued an administrative decision on 1 March 2015 initiating the resolution of HETA in accordance with the BaSAG and the BRRD.

So basically this administrative decision postponed the maturity of certain eligible liabilities of HETA towards its creditors – pursuant to the BaSAG – until 31 May 2016.

This deferred the due date of payments until this time – 31 May 2016 – as the FMA imposed a temporary moratorium on the debts held by the Bank – which in their view was necessary to prevent HETA’s insolvency – and no doubt the insolvency of the State of Carinthia and the Government of Austria.

The application of the BaSAG and BRRD resolution regime to HETA has not been undisputed by the creditors.

The single most controversial issues are:-

  • principal applicability of the resolution measures under the BaSAG and the BRRD to HETA, and
  • the unlimited guarantees for all HETA obligations assumed in the 1990s by the Austrian Province of Carinthia. Regarding these Carinthian unlimited guarantees, the Hypo Reorganization Act (HaaSanG) – adopted in 2014 – provided for certain categories of the guarantees to expire.
  • in July 2015 – the Austrian Constitutional Court declared the HaaSanG unconstitutional and it was repealed in its entirety.

One of the reasons for this decision was that HaaSanG made a ‘non justifiable’ and ‘non-proportionate’ distinction between the guarantees of junior creditors and other creditors.

The Austrian Constitutional Court found that legal guarantee statements issued by a Federal Province cannot be rendered completely invalid ‘retroactively’ through a single measure imposed by law.

The upshot now is that Austria’s FMA imposed a big haircut on Bondholders and a long wait for the HETA creditors until 2023 plus depositors funds held can be seized to assist with the payment of debts.

Austria’s FMA cut the senior bonds by more than half – 54 percent – cancelled coupon / interest payments and extended all bonds to mature in 2023.

Bondholders have to wait for seven years for their repayment of 46 percent of senior bonds’ face value.

Carinthia offered to buy back the bonds it guaranteed – with loans from the Austrian government – to 82 percent of senior bonds’ face value – but too few creditors accepted the offer before it expired.

The FMA expects a large number of Court cases on a myriad of issues – this dispute will only be settled through the Courts.

It is clear that the Austrian Finance Minister and Carithia province want a negotiated settlement – dissolving Carinthia’s guarantees – avoiding a costly legal course to set precedents for the whole of the EU.

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The German insurers are of the view that full repayment of the debt to creditors was required – obviously not the Austrians intention.

In conclusion I stumbled upon this caricature which was apt for how the original Hypo Bank operated.

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1. http://www.heta-asset-resolution.com/en

2. https://millermatters.wordpress.com/2015/10/14/austria-breaking-really-bad/

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