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Austrian Bad Bank "Black Swan" Bail-In Is Unconstitutional, Austria Declares
The subject of bail-ins and bank resolutions is back in the news this month as every eurocrat in Brussels scrambles to determine the best way to recapitalize Greece’s ailing banking sector, which, you’re reminded, is sinking further into insolvency with each passing day thanks to the unyielding upward pressure on NPLs that’s part and parcel the country’s outright economic collapse.
And while you could be forgiven for focusing squarely on the trainwreck that’s occurring in Athens, it would be a mistake to ignore the fact that just a few months back, a black swan landed in Austria when a €7.6 billion capital hole was "discovered" in Heta Asset Resolution, the vehicle set up to resolve the now defunct lender Hypo Alpe-Adria-Bank.
In short, the bad bank went bad, and when it became clear that no further state support was forthcoming, Heta Asset Resolution was itself put into resolution and a moratorium on bond payments was declared.
The debacle raised a number of troubling issues not the least of which involves the beautifully picturesque southern Austrian province of Carinthia, which had guaranteed some €10 billion worth of Heta debt despite the rather inconvenient fact that annual provincial revenues only amount to around €2.3 billion.
So here was a bad bank gone bad with billions in outstanding debt that carried public sector guarantees or, as we described it previously, "we now have a waterfall bailout chain whereby the state guaranteeing the debt of the insolvent entity that guaranteed yet another insolvent entity, will itself need to be bailed out by the sovereign."
We went on to note (in what now looks remarkably prescient with regard to Greece) that "while the world waits for Greece to announce capital controls, or a bail-in, it’s none other than one of the Europe's most pristine credits (one which until recently was rated AAA/Aaa) that informed creditors a bail-in is imminent: 'The finance ministry noted that creditors can be forced to contribute to the costs of winding down Heta - or bailed in - under new European legislation that Austria adopted this year so that taxpayers do not have to shoulder the entire burden.'"
Or maybe not, because now, it appears as though the law which would have allowed for the imposition of some €800 million in losses on junior bondholders (i.e. a bail-in) has been ruled unconstitutional, meaning the debt will now be reinstated under the moratorium which is bad news for Carinthia and ultimately, for taxpayers. Here’s FT with more:
An attempt by Austria to slash the cost to taxpayers of Hypo Alpe Adria bank, a high-profile European casualty of the financial crisis, by imposing losses on some bondholders has been thrown out by the country’s top judges.
In a ruling that came as relief for investors who feared a precedent would be set for other European bank failures, Austria’s constitutional court on Tuesday declared illegal a law that would have “bailed in” €890m in subordinated debt.
The act would have breached the constitution by reversing guarantees given to bondholders by the province of Carinthia as well as treating investors unfairly, the court ruled. The law would be “repealed in its entirety”, the judges said in a statement.
Introduced last year by Michael Spindelegger, then finance minister, the law created alarm in Austria and elsewhere in Europe amid fears investors would question the value of guarantees given by other regional governments — for instance in Germany.
The Austrian law highlighted the pressures on European politicians to limit the impact of bank failures on stretched government finances. Mr Spindelegger “needed something to show the electorate he would prevent taxpayers bearing the cost”, said Josef Christl at Macro-Consult, a Vienna-based financial consultancy. “It was a political decision, not economically or legally based.”
Tuesday’s constitutional court reversal was "a good decision for bondholders but it’s embarrassing for the government. This was not a law you would have expected from Austria and a lot of PR damage has been done," added Franz Schellhorn, director of the Agenda Austria think-tank.
Got it. So essentially, the finance ministry passed a law they knew was unconstitutional in order to pay lip service to taxpayer concerns regarding whether the government would ultimately end up on the hook for enormous losses at banks. Meanwhile, private sector creditors were unnerved by the law because they feared it might set a precedent for bail-ins going forward. For now at least, it looks as though the creditors have prevailed.
Here’s a bit more from Bloomberg:
Austria is breaking new ground in Europe with the wind-down of Heta, the bad bank of failed Hypo Alpe-Adria-Bank International AG. Lawmakers in Vienna last year enacted legislation that wiped out Heta’s junior debt and the state guarantees on which creditors had relied. That bill preceded Heta’s own resolution, which kicked off in March when regulators imposed a moratorium on its remaining debts.
The debt moratorium, as well as Austria’s bank restructuring law on which it is based, are expected to become the subject of a separate case at the Constitutional Court, court president Gerhart Holzinge said.
The Constitutional Court’s decision comes less than a month after Austria agreed to pay 1.23 billion euros to the German state of Bavaria to settle all the pending litigation over Heta between the neighbors. Under the deal, BayernLB will drop its claim concerning 800 million euros it was owed by Heta and that were also reinstated by today’s court decision, according to the Austrian finance ministry.
Austrian lawmakers may be well advised to read the Constitutional Court’s ruling closely and draw their conclusions for the future, Holzinger said. If the cancellation of guarantees is necessary to prevent the collapse of Carinthia, bailing in bondholders of Heta while sparing all other creditors of Carinthia won’t work, he said.
In short, the ruling raises more questions than it answers. If Austria has just declared creditor bail-ins to be unconstitutional, then one certainly wonders what that means in terms of the future scope of government-sponsored bailouts especially in light of the potential for a domino-like collapse, as outlined in our discussion of Pfandbriefbank back in March. Furthermore, as indicated in the excerpts cited above, the case is far from over as the legality of the moratorium as well as the fate of the entire wind down effort still hangs in the balance. Here's FT again:
Investors may not get any answers until they find out the amount of their shortfall in May 2016, when Heta knows how much money it can pay bondholders, so lawsuits could be years away.
"This discussion is not helpful for the market, this is clear," said Karl Sevelda, chief executive of Austria’s Raiffeisen. "The consequences of uncertainty are never good because investors want certainty."
Finally, it's unclear what, if any, impact this will have on how resolutions for failed banks are handled across the eurozone. As one lawyer who spoke to FT back in April put it, "there will be extremely important precedent set" in terms of "how publicly guaranteed debt should be dealt with when banks are wound down." Which raises the rather interesting question of how Greek banks' Pillar II "assets" (some of which may or may not have been pledged for ELA) will ultimately be treated when it comes time to recapitalize the country's banking sector.
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Austria who?
kreditAnstalt who ?
A court upholding the law?
Who would have thunk it?
A court siding with 'investors' who were given state 'guarantees' for payment of distressed/defaulted debts and knowingly passing the costs onto taxpayers who had nothing to do with the debts instead of imposing market discipline is entirely unsurprising to me...
No one considers robbing from people unassociated with a failed contract as 'moral hazard'.
No one dares to question whether the politicians of a state actually have the legal right to offer guarantees on private debts in the first place. THAT issue is not going to be considered at any court high or low...
Bang on. Why do they need investors if the government guarantees to take the loss anyway? How is that not unconstitutional?
The government are basically investing the taxpayer's money in a risky position, and if it pays off, they don't get a dime. If the investment loses however...
I would be angry even if my gov were going to collect the potential profits of this dodgy investment, but they could not even be fucked pretending that was ever a chance.
This world.
So where did all that money go? The money was loaned to someone?
My understanding is, that the money the investors only ponied up with a guarantee from the gov that the taxpayers would incur any loss, went to an insolvent bank.
So, without the dubious gov guarantee, the investors would not invest, the insolvent bank would receive no money, and the taxpayers foot no bill.
Instead, the gov made the guarantee, freerolled the investors (investors make great campaign contributors), and helped siphon off taxpayer money to an insolvent bank (also good campaign contributors).
I'd like to think treachery this obvious would need to be executed under a veil of obfuscation, guess not, hey is that a TV?
So the citizen takes it up the arse any way one looks at it.
Bad debt. Packaged as 'new' good debt via a 'state guarantee' which means that Taxpayers are transformend into co-signers for an already defaulted loan after the fact.
Plain robbery clothed in legal jargon and political 'expedience' sans consent from those whose wealth is pledged post-facto to the failure.
I have never seen a law formally stipulating that any government at any level has the right to pilfer the local treasury to pay off the holders of bonds containing nothing but previously defaulted debts.
NO politician would even actually table a bill to legalize such a thing in clear language in broad daylight lest their constituents expulse them from office for suggesting it.
I have never seen a law formally stipulating that any government at any level has the right to pilfer the local treasury to pay off the holders of bonds containing nothing but previously defaulted debts.
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As long as no law prohibits it, no law is necessary to permit it.
NO politician would even actually table a bill to legalize such a thing in clear language in broad daylight lest their constituents expulse them from office for suggesting it.
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Wishful thinking I'm afraid. Think TARP, think bi-partisan support on all the issues that actually matter.
You wish to advertize your ignorance. why?
For the three people on here who read, and have minds; study up on Ausria. It's a very interesting country. Very Interesting. If I had a secret number only bank account at one time, I would have had it in Austria, with a small family owned private bank; not in Switzerland. The Austrians genuinely don't give a fuck what big brother or Uncle Sam wants; and the reality on the ground there is often different than the official story.
As in Austro-Hungarian Emipire; American idiot.
They refuse the bail inshrined in the almighty European treaty of the banking union. The have to leave the euro. Where is Djissoelbom or those other eurocrat ?
Well I really hate the idea of forcibly taking away people's money. But, violating the constitution, at least here in the USA, has become almost routine. That will probably come here to American shores at some point.
In much of the rest of the world, violating the "constitution" is very normal when .govs change.
Hiding is now much harder. *Sigh*
It's already here.
See MOA, FDIC-BOE.
They already made us "unsecured shareholders" at our banks here in the US. Meaning they can take your money and issue you stock. They also put derivative holders ahead of us and made them FDIC insured. Aint that funny
I was just thinking about this little oopsie last weekend. Good to know things are going as I figured they would. It's a good thing they aren't Greece, then they'd be in REAL trouble with Germany etal......
Dear Austria,
Reunite with Germany and leave the Euro together. Save yourselves.
Anschluss baby!
Is it just me or does anyone else find it inappropriate to use the term bail-in to describe situations where bondholders are wiped out? Bondholders should be wiped out in this case, no?
I feel like bail-in should be reserved for use in instances where depositors money is taken, not normal bond-holders. I guess bail-in describes something othe than a taxpayer 'bailout', but I'm not sure why a new term is needed, when bankruptcy normally suffices. This article is talking about bondholders, not depositors, at least for now.
Well observed! Soon they will talk about the Chinese-stock-holder-bail-in, in September about the US-bond-holder-bail-in and in October about the everybody-everywhere-with-anything-bail-in. Just kidding, BTFD!
It's all in the execution. GM was the wrong way.
agreed! I had to go back & read the history of this term as it clearly isn't being used to mean what I thought it does appear tfa is using it (term bail-in) correctly while its popular (at least among zh, marketticker, etc communities) usage is more recent & evolved.
the term appears to have been coined by a couple of guys at the table during the lehman debacle (http://www.economist.com/node/15392186) who seemed to intend for it to mean something along the lines of "shoot the shareholders & screw the bondholders to the extent necessary to minimize liquidation". in their defense there's no mention of depositors (probably b/c lehman wasn't in that business) so as long as the blast radius is sub-depositor I would think it's more accurately labeled "getting obama'd" (I'm sure former gm boldholders would call that a fair characterization). & fwiw I'm not using obama as a verb automatically derrogatorily (if that's a word) - I get the argument for net least detrimental outcome (I'm all about pragmatism) but given the only people really qualified to execute this are the same ones who enriched themselves causing the problem in the 1st place I for one am less than eager to hand these people that kind of power - it's like trusting the doctor whose the pill mill paid for their lake house, porsche, etc to do your teenager's detox/rehab...
That is right, but the state has taken over and promised to pay the debts. In the first run the debt holders should have taken the losses, but the states has taken over and if you take over you take over all of it. Debts and assets. What they tried - and it seems they failed - is seizing the assets but rejecting the debts. That is all but ok.
It also stated that the bondholders were being treated unfairly......if everyone gets wiped out it will be ok.
Thank God the creditors are safe for another day. I was getting worried there for a minute.
Sorry, but that is not how this is explained here. The government has taken over the bank and guaranteed the payments, and they wanted to cut short on this. So either they are complete bankrupt, or they have to stick to their promises. The ideas was that the state does not have to pay, and that's it they want that their lies to be beared by creditors. That's illegal to the ground and it's correct to held them responsible for their promises. For that I voted you down.
In my humble opinion, the Governments' plan to save the economy by stealing everyone's money and giving to the bankers and then harvesting babies' organs, setting fire to the place and then fleeing the countrey - is never going to work.
They're all having fun unless the nukes go off, so calm the fuck down!
Say, I been thinking about innocent child's liver pate and ....
Have any of the Hypo Alpe-Adria-Bank folks went to jail over this?
(Just kidding...)
Yes.
Some of them sit in the jal.
here is a small part, they gave a credit to the friend, let me say a failed air line provider. just 2 mil Euro. But it went this way the last 20 years......I wonder how could they cover-up such a long time.
http://derstandard.at/1345164688744/OGH-beraet-ueber-Kulterer-Freisprueche
coming to an oil patch near you...
The Austrian taxpayer will get saddled with the tab for this bank failure. It seems that lots of Eurozone jurisdictions are hell bent on protecting the bank bondholders at the expense of the ordinary taxpayer.
My gut tells me that there is more to run with the story and the collateral damage from same.
I won't be back.
A. Schwarzenegger
I had some advance warning of this event coming back into the headlines and most of this comment was made in anticipation of this post. Since this is a political post let me phrase my reply through an unrelated scenario. Let's say as a global nautical analogy related to finance. This along with a few questions and thoughts for your consideration.
EXAMPLE:
Definitions (which are also apolitical):
*Ship Name: Global Ship Finance (GSF)
*Bail-Out: Remove excess water on a ship. Sometimes caused by a leak or break.; Synonyms:Rescue; Antonyms: Bail-in
*Bail-In: Take on excess water into a ship; Synonym: Sink; Antonym: Bail-out
*Leak: A hole in the ship.
*Apolitical: Not political
Let's say we are all on 1 global ship. The GSF sailing on Earth. And each of the two actions above can now happen on this ship. At first there is one leak. Resources are assigned to address the leak. The root cause is not identified and repaired so it remains. And so this leak and others start to form creating the eventual need for bail-outs. And as even more leaks and bail-outs continue to occur eventually these result in the need for a larger alleged solution called Bail-ins. But these are all tactical attempts being used which are not providing the needed permanent strategic global solution to save the ship.
KEY QUESTIONING
who caused the first global leak? Who is doing the bailing?
What caused the global leak to occur?
Where did the leak and the bailing first take place?
When did the leak and the bailing first take place?
Why did it happen? Why are the leaks not being repaired permanently?
How can the ship be kept both afloat and repaired? Or will there be another global flood and the ship sink?
How much time, energy and resources would be needed to effectively accomplish maintaining the leaks to keep the ship afloat, find the root cause and permanently repair the ship?
The questions, although by no means complete, reflect the importance of past, present and future in a solution and positive outcome for the global ship. And in the mean time the various parties involved working together addressing the leaks and eventually a permanent solution will have to do their utmost to set aside their differences in order to successfully save the ship. And any aid provided to any party/parties involved, as a means of growth, improvement or future contribution for the benefit of all, will need to be overlooked as much as possible in order to ensure a smooth and timely transition. Yet, it is still very important that all declarations of protest should still be duly noted and tracked in order to help assist in ensuring a balanced approach as we move forward.
PATIENCE IS A VIRTUE
In the case of this post their could be the possibility of moral, ethical or legal questions that exist. There is already an increased potential for open conflict anywhere. And this in turn increases the danger and chances of the global ship sinking. These should be avoided at all costs. So in my small way I would politely request that all parties exercise the maximum degree of patience and understanding, while working together on the global ship being maintained, permanently repaired and proceeding on the right course.
Someone once referred to me as a beautiful animal. Should I have taken offense and been angry? Instead of getting angry I take those types of information sharing instances as learning and self-improvement opportunities as the Captain of my own ship. These may lead to eventual teaching opportunities or more. They frequently lead to smooth sailing ahead. And I hope each of you take similar advantage of the opportunities that are presented to you as they arise as well.
"Beauty is in the eye of the beholder." - Greece 300 B.C.
LEARNING OPPORTUNITIES
Sailing
Etymology
History
Key Questioning
Physics (Various branches)
Philosophy
Politics
Trivium
Idioms
Good article on this issue at Nachrichten Heute. Complete bunch of sleazebags from
Iran Contra/Ollie North types who took over a bank which was really a nameplate
on a door somewhere's.Makes one wonder if the Austrian Finance police are sitting
around wanking to web porn.Sure were asleep at the switch on this one.It all started
back in the Reagan era,and simply got much,much worse and now the Austrian
taxpayer is gonna eat a shit sandwiche.Too bad they can't just print up a bunch of fiat
like everyone else does.The longer you let a stinky turd sit in your filing cabinet,the
worse the problem will be.This reminds me of Chicagos' problem (debts) or many
other cities worldwide.The public officials say," I don't care because I will be retired by
then,living on a beach in Florida".
Swear out some Interpol arrest warrants,throw their asses in jail until they
cough up the dough.Everyone bags the Italians,but their detention system
worked terrific against the mob (missed their families,and mamas' pasta!).
A Catholic Muslim country has nowhere to go but war.