While we will get into the nuances of why the Austrian AAA rating is the next to go (just after Hungary is downgraded in a matter of weeks if not days, following the country's request for IMF help earlier today) an event which we described ten days ago when the news that Austria's shaky rating was about to be downgraded first broke via the FTD and has since resulted in a major spike in Austrian credit spreads and bond yields, first we wanted to show readers the one ad which explains why the seeds of Austria's credit perfection collapse were sown back in 2007. In the ad, the second biggest Austrian bank, Raiffeisen Bank, explains precisely what its "selection" criteria were to get a loan in Hungary at the peak of the credit bubble (and yes, the ad is real). The ad explains the follow up news, which is namely that Austrian bank supervisors were today told to limit their lending to Eastern Europe. Unfortunately, the horses are out of the barn, and the biggest banks in Austria are about to be at the mercy of the markets, especially once the rating agencies do the inevitable and cur the country by at least 2 notches.
The ad in question:
As to what the catalytic lit match is that will set the forest ablaze look no further than Hungary. As a reminder, 67% of Hungarian household debt is denominated in foreign currencies, mostly CHF. The average long term entry point is about 155 CHFHUF which now trades 60% higher at 248. bank assets are about 50% of GDP which is at $130bln. Household debt is 39% of GDP. Assuming 50% of fx loans we are talking about an amount of about $10 BN by which loans are under water, and Austrian bank equity is more than wiped out.
Which brings us to the actual story of the day, which ties in perfectly with the above, namely an FT story in which we learn that "Austrian central bank said in a statement that Erste Group, Raiffeisen Bank International and Bank Austria, owned by UniCredit of Italy, would be prevented from loaning significantly more in CEE countries than what they raise in local deposits. Subsidiaries that are “particularly exposed” must ensure the ratio of new loans to local refinancing is not more than 110 per cent." In other words, the sins of the fathers have now come back and are haunting the same banks that so willingly doled out cash to anyone with a heartbeat as recently as 4 years ago.
Needless to say, Austria's AAA rating is the only reason why its banking system (where as a reminder mega bank Erste recently "uncovered" billions in underwater CDS that had never been reported previously) has been spared the vigilante anger so far. All that is about to change.
From the FT:
Austrian bank supervisors have instructed the country’s banks to limit future lending in their east European subsidiaries, a further sign of the potential knock-on effects of the eurozone crisis for economies around the world.
The restrictions come as Austrian officials seek to defend the country’s AAA credit rating, amid concerns that the government might have to bail out its banks because of losses in central and eastern Europe, where they are the biggest lenders, and their exposure to Italy.
The moves by Austria, which appear to be unilateral, show how even the eurozone’s strongest economies are feeling the pressure of the sovereign debt crisis.
However, Hungary is first:
Neighbouring Hungary on Monday officially requested precautionary financial help from the International Monetary Fund and the European Union, confirming a U-turn after it shunned further IMF support 18 months ago.
And as reported above, the pain for the top three banks is only now starting:
The three banks’ CEE exposure exceeds Austrian GDP, raising concerns that the government would be unable to bail them out if their loan portfolios turned sour. The announcement came just as the spreads of Austrian bond yields over German Bunds rose to record highs and was also designed to calm market jitters, a central bank official said.
Unfortunately, it is, at this point, too little too late. Once the downgrade comes, most likely before the end of the year, the latest flare up of European contagion will become apparent as the Eastern European flank quickly goes under.