Submitted by Toni Straka of The Prudent Investor
It Takes Only a 4% Adverse Move and Austria's Banks Are Out of Business
Austria's banks sat on a derivative hoard valued at €1,786 Trillion at the end of June 2011. The volume of off balance derivative items is €99 billion more than at the end of 2010 but €800 billion less than a year earlier.
This dwarfs cumulative core capital of the banking sector, which stood at €75 billion or roughly 1/23rd of outstanding derivatives. It will take only a little more than a 4% adverse move against the desperate bets of the banks in the Alpenrepublik and they will be wiped out, can be read from figures released by Oesterreichische Nationalbank (OeNB) (German language only) on Wednesday and overlooked by all media so far.
The press release does not waste one word on the only trillion-figure that can be found in the economy of this 8-million small country. Austria's GDP rose 4.1% to €286 billion in 2010, according to official data.
Taking a clue from other affairs in Austria, where silence always means that something's boiling up, this figure serves well as a reminder that every Eurozone country has an explosive banking problem lingering in its backyard.
Already one year ago central bank governor Ewald Nowotny was not able to provide an ad hoc figure of the actual risk of these off balance items that are usually hidden away from prying eyes in undercapitalized bank subsidiaries. A year earlier the volume was €2.6 trillion. Industry insiders said at that point of time the actual risk after netting out short and long contracts may lie somewhere between 5% and 10% or €90 billion to €180 billion, based on the most recent data.
While the overall year-on-year reduction looks advantageous as banks reduced their risks, it makes one wonder what Austrian banks are betting on. This does not look as if they would hedge their risky East European lending activities and neither does it appear that Austrian banks are running book profits on the more profitable CDS contracts on PIIGS and other irrecoverable debts on the left side of their balance sheets.
Austria Will Soon Meet the Limelight of International Attention
Austria will soon meet the limelight of international attention again. On Thursday the ruling coalition tried to set a date for the necessary vote on change of Austria's constitution that would allow the Eurozone to proceed on the ill-fated way of Eurobond issuance. Due to the opposition from the Green Party and the two xenophobic parties FPÖ and BZÖ the vote did not reach the obligator 2/3 majority in the upper house.
The Green party had already issued a warning to the bank-controlled coalition in June, threatening to boycott a pro-Eurobond vote as long as Austria does not ensure that money lent to the PIIGS will be repaid absent the factor of pure hope.
The Greens got unexpected support from conservative hardliner and finance minister Maria Fekter. on Friday In an interview with Austrian press agency APA she said Austria will reject a top-up of the €780 billion European Financial Stability Fund (EFSF). She also addressed US Treasury Secretary Tim Geithner and advised him to put his own house in order before handing out fiscal advice to the Eurozone.
Austria's coalition is getting shattered day after day by new scandals alleging corruption involving a string of partly state-owned companies like Telekom Austria, public railways, the purchase of 12 Eurofighter jets (only 2 are operable during daylight hours), alleged kickbacks in the privatization of the country's real estate holdings. Scandals have so far centered on the conservative ÖVP and their former xenophobic coalition partners. But since Thursday allegations about current social democrat chancellor Werner Faymann concerning advertising of public companies in preferred media begin to make bigger and bigger headlines.
It does not only look like this little beautiful country that would love to dance year round on the by now infamous opera ball, where the level of celebrities has degraded from Sophia Loren to Berlusconi's former Bunga Bunga chick in the last decade, Rubina, has problems.
Austria will see a system collapse that is still mistaken as a run-of-the-mill crisis by officials who are increasingly busy holding on to their seats and the comfortable state pensions that come with it. Expect a rapid development aka deterioration once denial mutates into hesitant acceptance of the fact that matters are going to change in a big way.