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Black Swan 2: This Is "The Next Critical Chapter In The Austrian Banking System Story"

Tyler Durden's picture




 

When it comes to the sweeping of (trillions of) toxic assets until such time as the ECB starts purchasing not only government bonds but equities, bank loans and really anything else that in a normal world would have some "mark to market" value, Europe had a ready answer: bad banks. A tradition which started with Switzerland and the semi-bailout of UBS during the great financial crisis, "bad banks" have been proposed every time there are a few hundred billion in bad assets that need to be swept away or otherwise removed from the the public eye.

In fact, it was just a few hours ago that Spain's economy minister praised the usefulness of bad banks, which have certainly seen their fair share of use in Spain over the past 5 years.

  • GUINDOS: BAD BANKS USEFUL INSTRUMENT TO CLEAN UP BALANCE SHEETS.

Yes, useful. Until you have a massive blow up like in Austria when several years of avoiding reality exploded in everyone's face when the Bad Bank meant to fix the mess left after the collapse of Hypo Alpe Adria itself became insolvent, after the horrendous state of its balance sheet could no longer be masked, and creditors were shocked to learn they would foot the bail out, or rather bail in costs thanks to massive debt writedowns.

And since there is never just one cockroach when it comes to hiding Europe's biggest financial problem, namely trillions in non-performing loans, the question always is: which cockroach is next?

For now the answer, thanks to the ECB's relentless intervention in all capital markets is hiding, but one proposal comes from Daiwa Capital Markets which suggests to take a long hard look at Austria's Pfandbriefbank Oesterreich AG.

Here is what Daiwa's Jakub Lichwa thinks:

  • A relatively low-profile entity in Austria – Pfandbriefbank Oesterreich AG (Pfandbriefbank) – is becoming the next critical chapter in the Austrian banking system story.
  • This all started with the capital shortfall disclosure by Heta Asset Resolution AG (Heta), which prompted the Austrian Financial Market Authority (FMA) to announce on 1 March 2015 a moratorium on Heta’s debt securities, including €10.2bn of senior unsecured bonds guaranteed by the State of Carinthia. Carinthia has indicated that it does not have either the resources or will to honour these guarantees, which should be activated upon the bail-in or insolvency of Heta. This has sparked investor uncertainty about the broader guarantee framework in Austria.
  • Given Pfandbriefbank’s exposure to Heta, that moratorium has a direct effect on Pfandbriefbank’s standalone ability to repay nearly €600mn of bonds due in June 2015. As things currently stand, these can only be repaid if Pfandbriefbank’s own guarantees are invoked. If they are not, that will further undermine guarantee mechanisms in Austria, and possibly beyond.
  • The Austrian regional mortgage banks have publicly announced their commitment on 4 March 2015 to adhere to these guarantees, although the current trading level of senior unsecured bonds (PFBKOS 2.875 07/17) does not imply investor confidence in these assurances.
  • Nevertheless, the PFBKOS 2.875 07/17 bond is currently quoted at around 95 (z-spread of 583bps), a significant discount from the 108 (z-spread of 2bps) level seen prior to the announcement of the Heta moratorium, reflecting investors’ increasing doubts about Austria’s guarantee mechanisms.
  • The reaction from the rating agencies to the Heta moratorium has been more sanguine, suggesting that they believe that Pfandbriefbank’s own guarantees will be honoured. S&P sees no immediate effect of the recent events on the two related Austrian entities it rates, while Moody’s placed Pfandbriefbank’s A2 rating on review earlier in March, but did not downgrade it.

Daiwa's conclusion, ironically, after correctly calculating where the next major capital shortfall will be, reverts to the logic of the original Heta Asset Resolution bondholders, and assumes that all shall be well, and that this time, the government will not let the bank fail because the downstream effects will reverberate even louder and with far more dire consequences. To wit:

We are inclined to agree with the rating agencies that these guarantees will ultimately be honoured.

Fine, but keep in mind: there are those FX carry traders who were inclined to agree that the SNB would never drop its EURCHF peg, and were promptly carted out feet first when it did. And then there were those bondholders who also thought they would never be bailed-in to rescue Austria's Bad Bank. They too lost at least half of their investment.

In fact, the number of cases where investors go all in on a bet that some official public authority will not let them down, appear to be spreading very fast in the past few months. Which is why for any bondholders still long Pfandbriefbank bonds, the time to exit the dance-off is be now. Because when another shock announcement follows and sleepy Pfandbriefbank announces it is the next casualty of Austria's completely unexpected black swan, you will have nobody to blame but yourselves.

Full Daiwa Note:

Pfandbriefbank - Not Another Heta?

DetailPfandbriefbank is an issuing vehicle for its member banks (including Heta – the wind up entity for Hypo Alpe Adria Bank), with total assets of €5.6bn as of end-FY14, and very limited equity, given its business profile. The funds raised by the entity are channeled to its members and therefore Pfandbriefbank relies on the payment of these claims to service its own liabilities.

This reliance is strengthened by the Pfandbriefstelle-Act and Article 92 of the Austrian Banking Act, according to which members of Pfandbriefbank and their respective liable public authorities (Gewährsträger) are jointly and severally liable for all obligations of Pfandbriefbank. In an event of default, recourse against any or all of the member institutes and their respective liable public authorities is possible.

The members include: Hypo Noe Gruppe Bank AG (-/A/-, by Moody’s/S&P/Fitch), Hypo NOE Landesbank AG (-/A/-), Vorarlberger Landes- und Hypothekenbank AG (A2 RuRd/-/-), Hypo Tirol Bank AG (Baa2 RuRd/-/-), Landes-Hypothekenbank Steiermark AG (-/-/-), Salzburger Landes-Hypothekenbank AG (-/-/-), Hypo-Bank Burgenland AG (-/-/-), Austrian Anadi-Bank AG (-/-/-), and Heta Asset Resolution AG (Ca/-/-).

Pfandbriefbank has funded its activities via the wholesale markets, although it has not issued any bonds since 2007.

Pfandbriefbank’s bonds came into focus at the beginning of March following the announcement of the moratorium on Heta’s liabilities, whereby the Austrian Financial Market Authority suspended the interest or principal payments on some of Heta’s liabilities until 31 May 2016, with a view to drawing up a resolution strategy by then. The moratorium included €10.2bn of senior unsecured bonds guaranteed by the Province of Carinthia. Carinthia has indicated that it does not have either the resources or will to honour these guarantees.

Pfandbriefbank carries €1.24bn of exposure to Heta, of which nearly €600mn will come due in June 2015. By this date, the guaranteeing member states will need to agree and extend liquidity support to Pfandbriefbank AG or €5.6bn of its liabilities could come due immediately.

The Austrian regional mortgage banks have publicly announced their commitment on 4 March 2015 to adhere to these guarantees, although the current trading level of senior unsecured bonds (PFBKOS 2.875 07/17) does not imply investor confidence in these assurances.

In recently published research, Moody’s stated that “honouring of the guarantee obligations for Pfandbriefbank has limited impact on the federal states' risk-bearing capacity”. This suggests that what is in doubt is the willingness of the guarantors to act in line with their statement of 4 March, rather than the financial capacity of the guarantors to honour their commitments.

To our mind, therefore, there is a fundamental difference between the case of Heta, where Carinthia’s guarantee obligations threatened to sink the state financially, and Pfandbriefbank, where the guarantee obligations for the states are much less onerous.

Given this, and the potential contagion impact on trust in other guarantee structures if these obligations were also reneged on, it would appear more likely than not that that the guarantees provided to Pfandbriefbank will indeed be honoured. The current price of Pfandbriefbank’s bonds does not reflect that.

* * *

Until it does of course.

 

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Fri, 03/27/2015 - 13:49 | 5934467 observer007
observer007's picture

#which bank will be bankrupt next?

Bondrates and Credit default swaps:

 

http://cds-info.com/index.php

Fri, 03/27/2015 - 13:56 | 5934494 KnuckleDragger-X
KnuckleDragger-X's picture

Yeah, you have to wonder what other little surprises are out there and don't forget, this is the 'healthy' part of the EU.....

Fri, 03/27/2015 - 14:00 | 5934513 kaiserhoff
kaiserhoff's picture

Yes, that's the problem.

Parts of the EU still try to balance the books.  Not pretty.

Fri, 03/27/2015 - 14:32 | 5934666 max2205
max2205's picture

What!.....banks don't blow up anymore 

Fri, 03/27/2015 - 15:41 | 5935006 Theosebes Goodfellow
Theosebes Goodfellow's picture

The only thing that makes sense is that EU banks just find bankruptcy auctions simply too gauche to undertake. How "American" to put it all under a gavel to the highest bidder...

Fri, 03/27/2015 - 16:35 | 5935185 Mister Ponzi
Mister Ponzi's picture

Creditanstalt, bitchez!

Fri, 03/27/2015 - 13:57 | 5934501 Dubaibanker
Dubaibanker's picture

Some bank in Greece should be bankrupt in the next quarter. We have been through a few countries in EU:

Cyprus

Portugal

Austria

Ukraine

I see Greece as next.

Fri, 03/27/2015 - 18:44 | 5935624 HardlyZero
HardlyZero's picture
Fitch downgrades Greece to 'CCC' from 'B'

 

http://www.cnbc.com/id/102508251

 

This afternoon after Wallstreet market close.

 

Fri, 03/27/2015 - 22:48 | 5936210 one_hundred
one_hundred's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Fri, 03/27/2015 - 13:58 | 5934503 LawsofPhysics
LawsofPhysics's picture

Please, in the "everybody gets a trophy", "mark to model" world of banking, there are no "bad banks"....

 

until there are...  tick tock motherfuckers..

Fri, 03/27/2015 - 14:00 | 5934516 Kirk2NCC1701
Kirk2NCC1701's picture

What happens when a Black Swan mates with a White Swan?

Do you get Mulatto Swans?

Fri, 03/27/2015 - 14:12 | 5934565 PresidentCamacho
PresidentCamacho's picture

You get a grey swan event. Something like the SHTF we have all been talking about. We know its coming, but nobody has ever seen it or is really sure if it exists, but we know for sure its coming here at ZH.

Fri, 03/27/2015 - 14:25 | 5934622 DontGive
DontGive's picture

I heard from my brothers co workers uncles brother who has a sister, who also has another bother, but only half brother, who trolls ZH, and he said it's coming for sure.

Fri, 03/27/2015 - 14:32 | 5934665 PresidentCamacho
PresidentCamacho's picture

What they don't understand, is that its already here....

Fri, 03/27/2015 - 14:13 | 5934562 gcjohns1971
gcjohns1971's picture

You know, I have to wonder.

Is it better to dominate and enslave your fellow human beings by largely non-violent fraud and artifice, as bankers do?
Or is it better to dominate them the way Ghengis Khan did?  With brute military force and abundant murder?

As much as I hate the bankers, having been in a few military battles, I have to wonder.

Viscerally, fraud is much preferable.  More innocents are harmed, but they are harmed - at least in the direct sense - much less.  Watching a 7-year-old kid live in a trailer is a lot easier than watching them die a torturous death as their arms, legs, and a portion of their torso has been blown off.

On the other hand, harm is harm.  Battles do not last forever before giving way to old fashioned slavery, or a softer Colonialistic version of it.

Modern banking, then, can perhaps do much greater harm because it is so difficult for most people to detect.  And the process systematically punishes virtue while rewarding every form of vice, inducing moral decay and collapse.  The aftermath of that, it seems to me, is incalculable.  It survives centuries after the slavery itself is gone.   When I consider that, then the battles seem to be a mercy for their relatively limited duration.

Still, there is the long term aftermath of the battles to consider.  And it may be that the ends - slavery - are the same between the two means, but that fraud lacks all the initial murders...

This is the calculus of hell...

Fri, 03/27/2015 - 14:23 | 5934613 Enceladus
Enceladus's picture

Both those kids were screwed by the banks. One in a trailer with little to no hope or prospects and the other on the pointee end of some Bank fuled MIC daisy chain that collateralized his life.

Fri, 03/27/2015 - 14:31 | 5934662 demoses
demoses's picture

No worries... S&P has everything under control!

 

http://www.reuters.com/article/2015/03/27/sp-austria-idUSL3N0WT4R1201503...


 

Fri, 03/27/2015 - 14:34 | 5934681 mastersnark
mastersnark's picture

How do you say "domino effect" in German?

Fri, 03/27/2015 - 20:06 | 5935874 roadhazard
roadhazard's picture

Biltzkreig

Fri, 03/27/2015 - 14:40 | 5934724 ThroxxOfVron
ThroxxOfVron's picture

"To our mind, therefore, there is a fundamental difference between the case of Heta, where Carinthia’s guarantee obligations threatened to sink the state financially, and Pfandbriefbank, where the guarantee obligations for the states are much less onerous. "

Resource constraint.  They are broke.  They can bail-out little shit but the big problems cannot be surmounted.

When the bureaucrats finally throw in the towel and admit they do not have the money to cover more than the deposti guarantees the haircuts will start in earnest.  -Probably somwhere well below the waist...

Fri, 03/27/2015 - 15:10 | 5934857 Al Tinfoil
Al Tinfoil's picture

The joint and several guarantees among the listed banks guarantee contagion.  Also, the practice of banks lending to each other guarantees contagion.  Add recklessly-given guarantees by governments (Carinthia in Austria and Bayern in Germany in the Heta case), and add the Financial Stability Treaty among all the Euro countries, by which they all guarantee the debts of each other, and you have a perfect set of nooses around all their necks.

The PIIGS problem, of which Greece is the current star in the news, has come to the boil again, with Germany frantically insisting that all will be well if Greece just pledges enough "reforms" to cut government spending and further depress the Greek economy.  It is more than abundantly clear that Greece cannot possibly pay its debts, and the Troika's only "remedy" for Greece is to extend and pretend.

Time for some serious whistling past the graveyard.   

Fri, 03/27/2015 - 15:29 | 5934948 mutthead52
mutthead52's picture

Hypocritical hedgers--esp. some Tylers--want to have it both ways. One country--one--stands up to do the right thing against banksters (tht would be Austria) and they are ridiculed by those resentful that Austria is "socialist" and actually watches out for its people and not its elite: very low Gini wealth gap, lowest CEO/worker pay gap, superb public-private cooperative nonprofit health care, etc.

Hypo Adria bank was run into the ground secretly by Tea Party darling Haider when he ran Carinthia State like a tyrant. Carinthia finally woke up and threw out the far right crooks and thats when the crooked accounting was finally revealed. Not Federated Austria's problem: Carinthians wanted to indulge themselves with radical right and they will now pay the price.

How is any of this not what ZH ers "aay" they want (except the politics of couese)

Fri, 03/27/2015 - 15:40 | 5934998 Goldilocks
Goldilocks's picture

The Who - Baba O'Riley
https://www.youtube.com/watch?v=GS1JZOAI-vo (5:12)

 

Fri, 03/27/2015 - 17:01 | 5935264 WillyGroper
WillyGroper's picture

 With the CB's buying up the kitchen sink, what I see is a remake of the disenfranchisment of the peeps being able to participate in the alleged market. Just like those relegated to using pay day loan sharking because no bank wants them. Market participation will be removed next. They'll own it all.

DTCC & Cede & co.

Reflexive Law.

Sat, 03/28/2015 - 07:58 | 5936621 funny1
funny1's picture

Not a problem really. Only a small part of the heta exposure is to pfandbriefbank. That can and will be covered by government entities. Lot's of exposure to german banks though...
Austria will honour any obligations, it could reasonably be expected to. Will not honour claims to parts of the universe. And that is a good thing. No moral hazard here.

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