Guest Post: Will Austrian Bank Woes Be Again the Catalyst For A European Kondratieff Winter?

Tyler Durden's picture

Originally posted at The Prudent Investor blog,

Sad affairs have been heating up in the tiny Alpine republic in the center of the European Union. While Austria experiences record unemployment at record growth rates and tax revenues  have fallen behind optimistic projections, the looming bankruptcy of a mid-sized regional bank, Hypo Group Alpe Adria (HGAA), may propel the country to the disdained position of being the catalyst for a new round of bank failures due to interwoven banks risks on both the domestic and the international level.

Austrian politicians are up in arms since a third-party expert opinion that recommends to wind down the bank at a cost of €18 billion has been leaked to the media, but keep on marching on the most fatal route that will not dissolve the problems: They keep flogging the dead horse HGAA with taxpayer's millions in a monthly money injection routine that has cost so far around €4.5 billion.

Current talks involving politicians appear to be more adequately suited for the Vienna opera house, but not for a rolling high finance train wreck that needs more than monthy band aids.

On Monday Austrian financial market authority FMA publicly said what the official Austria never wanted to hear as it is now confronted with a widening public discussion on a problem it had surrealstically hoped to brush under the carpet. FMA head Harald Ettl warned that any further delay would make the – in this blogger's humble opinion doomed HGAA – an incalculable risk and that Austria should consider no option as a taboo anymore.

Nothing could be more true. An unorderly liquidation of HGAA will not only push Austria from the throne of the best economy in the Eurozone, pushing its public debt to GDP ratio well over 100%, but will also have continent wide reverberations.

Bad Bank Idea Stopped In its Tracks by RBI

The governments preferred solution, a bad bank for HGAA with the other Austrian banks as shareholders was stopped in its tracks on Monday.

Raiffeisenbank International (RBI) CEO Karl Sevelda ruled out his participation in such a special purpose vehicle, claiming his shareholders will vote "no" on this issue. RBI is laden down with its own problems like a 3-digit billion exposure to ailing Central Easter Europe's countries where it had applied an aggressive "growth before everything else" strategy that is now becoming a boomerang due to to mounting bad loans.

The government was desperate to push through such a bad bank scenario as this would have helped to avoid a rapid expansion in public debts. Without a bad bank HGAA's debts would trigger guarantees from the owner, the province of Carinthia. As Carinthia is technically bankrupt itself this would lead to triggering state guarantees as Austrian laws do not provide for the bankruptcy of a province.

The FMA's comments on HGAA will at least have one effect: Fingerpointing between those responsible for the whole mess has already begun. Austria's central bank, which issued a "no problem" expertise about HGAA at the beginning of the financial crisis in 2008, is more focussed on avoiding investor litigation that could hit the institution based on this old "expertise."

So where do we go from here? As a dyed in the wool Austrian it can be assumed that the Austrian grand coalition, under fire from all sides since its formation last November because it has only come up with new tax ideas but no sizable savings in its expenditures, will apply the ostrich strategy once more.

Alas, this time the government may not find the time to sip coffee and push the debt wagon further as the EU is watching developments closely. On Monday Daniele Nouy, head of the newly formed EU banking authority EBA warned in an interview with the Financial Times, that it may not be appropriate to merge very sick banks with their not so sick counterparts. While not naming HGAA directly Nouy said, "we have to accept,  that some banks will disappear."

Austria's banking woes look eerily similar to the failure of Creditanstalt in 1931 that was the fuse for the last European Kondratieff winter. For those sticking with K-cycles this may not be a good outlook. 83 years later such an event is more than overdue in Europe and given Europe's overall outlook it does not take much anymore to set the Great EU Chaos into full fledged motion.



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Motorhead's picture

Credit-Anstalt, bitchez!

bania's picture

they're restocking their bullion supplies with olympic gold

nuclearsquid's picture

Olympic gold-plated bronze you mean.

Since the giraffe story got me pondering European eugenics, I began to wonder, why hasn't the EU systematically culled its Austrians from the herd?

walküre's picture

Trifecta of Credit Boom!

Unless ECB steps in, HGAA is toast. RBI says "no" to the bad bank because RBI can't afford to take it on. Other Austrian banks won't touch it with a ten foot pole. Let it go bust and sell the pieces instead. Huge risk and it might work but there's no alternative. ECB hands are tied imo.

HRE is still a huge problem for Germany's banks. That restructuring was a big deal. Commerzbank in the crapper. Don't expect German banks to even look at HGAA.

I'm surprised it took so long for this to blow up. HGAA is probably filled with Eastern European mortgages which are in default since the EM currency slide.

Let the great reach around commence!

Actions do have consequences, Beryellen!


FlipFlop's picture

HRE was an excellent customer. We sold lots of CDOs.

fonestar's picture

Kondratieff winter.

Satoshi spring.

Rafferty's picture

'HGAA is probably filled with Eastern European mortgages'


It is.

Buck Johnson's picture

I always said that the EU has hidden alot of their bad paper and banks and it's now starting to come to the surface.

25or6to4's picture

I think Europeans already have culled them. I can't think of one EU country that remotely follows Austrian economics, can you?

Motorhead's picture

Hard to believe that Ludwig Erhardt's "Economic Miracle" is virtually ignored throughout the world.

maxmad's picture

Well then "put another shrimp on the Barbie!"

StackAttack's picture

Max, you made me actually LOL. Well done.

Tinky's picture

I'd sure like to know what Mort Kondracke thinks of the prospect of another Kondratieff winter.

As the ancient John Mclaughlin would say… More-eton?

FlipFlop's picture

When I was at the Deutsche, they were an excellent customer for structured stuff. They bought anything.

walküre's picture

you mean Douchebank was gorging itself on crap and potentially ending up in a coma...

not looking good for DB at all with all the Eastern exposure

css1971's picture

Think it's with a K, not a C.

ebworthen's picture

The citizens of developed economies are being subjected to involuntary gambling and not having any fun.

But the bankers and politicians sure are.

Hotmustard's picture

OK, who's got the Ed Stark Winter is coming meme?


NOTaREALmerican's picture

I want to be paid.   I got no money.   Collapse.

I wnat to be paid.   I got no money, but I can call the CB to get me more money.   Continuation.

samsara's picture

Hmm.  The K name finally shows up.  GEE IT'S GETTING COLD don'tcha think?


Maybe that's what happened to all the economists.  

They read Kondratieff and learned their lesson.   

If You are RIGHT.... You Get sent to Siberia/Prision.   If you lie and just pretend and go along,  you get promoted/enriched.  

To quote Dylan;

Now the wintertime is coming
The windows are filled with frost
I went to tell everybody
But I could not get across....

It takes a lot to laugh, but it takes a train to cry.


I Am Not a Copper Top's picture

to quote Stark:

Winter is coming...

lasvegaspersona's picture

Oil and gold are up OJ and oats down (oh and nat gas but it is flakey lately) problems here. The DOW and S&P are like rocks.

As long as the Fed can print the system will be fine....irritating isn't it. As long as the world's currency value can be ever so slightly diluted at the expence of those holding it then prices can be stablized, especially those all important asset prices that let the world know it is rich and pensions can be paid and bonuses had by almost all.

NOTaREALmerican's picture

Re:  irritating isn't it.

Well, from a moral perspective.   But, for people who don't have moral OCD it's probably not irritating at all.

Iam Yue2's picture

"@okonomia: Austria: Big banks to let the state shoulder the debt burden of Hypo Alpe Adria alone; will not participate in a bad bank scheme, leaving taxpayers saddled with about €19bn of debt."

kchrisc's picture

Black swans a roosting.

Dugald's picture

This final part of the 60 year Kondratieff wave will last a further 10 years and 2013 marks this point.

So, "summon the blood, stiffen the sinew let the visage assume brave countenance"

You lot plug along with that, I'm going sailing for few months.... cos my accountant says I should have an accident....

pashley1411's picture

Austria, and its other micro central European breathen, are continued testiment to the foolishness of breaking up the Austro-Hungarian empire.   (At Wilson's insistence (sigh)).    (Historians will give the rule of the American imperium mixed reviews).

I'm not over there, but I would think all that matters is what the Merkel wants.   I would think that she couldn't ignore a basketcase on the doorstep; its not like Austria is a hopeless olive oil protectorate at the end of Europe.    


Non Passaran's picture

Okay she won't ignore it, but what will she do?
What can she do?
I don't think she's as powerful as we think - especially when we do not assume that German taxpayers will sweeten the deal.
They could take on additional liabilities, but they wouldn't necessarily want to and Austrian banks are owed craploads of money in places where people play by their owne rules :-)

Watson's picture

I don't think she's as powerful as we think...

Sorry, disagree.
She is very popular with her citizens, has only recently won the election, and controls the only serious economy in Europe (and one of the few serious economies in the world - soundly built on the production of high quality items the rest of the world wants to buy, and not financial services, real estate or tons and tons of debt).

However, she really believes in the EU and Euro, and whether by assuming liabilities or direct cash trasnfers, she will spend her taxpayers' money without limit to keep that dream alive.

I _do_ think that in the end there could be a German taxpayer revolt, but these numbers are far too small to provoke it.

If you want the system to crash, you would be better off looking for a problem with bigger numbers (say Italy), or a bailee who simply rejects the conditions associated with receiving aid.
The latter will only be from emotional politics, because the 'conditions' for German aid will be weakened and weakened until the money is practically given away to keep Merkel's dream alive...

youngman's picture

Makes you wonder what the employees are doing in those banks....are they opening new accounts..making NEW loans...what do you do when your bank is broke...

BurningFuld's picture

"What do you do when your bank is broke?"


No-brainer here...steal the depositors money of course.

Doode's picture

Looks like the end of Winter is coming and the begining of Spring is around 2-4 years away! Great news!

eurogold's picture

It may be a joke to many ZH posters, but I can say from personal experience that the winter is here, in the EU.

max2205's picture

Looking for a home in a non Muslim country on the E Cuater

W74's picture

Ecuador is nice.  Lots of variety in such a small area.

WTFUD's picture

baden-baden bank, ja ja!

Kirk2NCC1701's picture

The "Winter or our Discontent" has been going on for 4+ years now on ZH.

Are we there yet?  Is it Winter yet?

Watson's picture

...wind down the bank at a cost of €18 billion...

1. Whatever we may think, Merkel really believes in the United States of Europe;

2. EUR 18Bil is surely less than Germany has already put into Greece, with no realistic hope of ever seeing it again, just to maintain that belief;

3. Merkel has just won her election, and the anti-EUR party didn't even get over the threshold for representation;

4. So, if necessary, German taxpayers will pay (again).

If you want a catalyst for the breakup of the EUR-zone, you need a bad situation involving much larger numbers than EUR 18Bil.

My suggestion would be to look at Italy...


MrSteve's picture

The German Landesbanks are leveraged at 100:1, so what happens in Austria stays in Germany. Once it was said there is never one cockroach and I bet that applies to Euro banks everywhere. Lost in history is the expression "Rhine Syndrome", where all countries east of the Rhine defaulted, on everything. Poland has already confiscated cash from all retirement accounts. The other shoes are now dropping and eventually, will be thrown into the werks, "sabotage".