One month ago we wrote about the ripple effects of the "mini-Greece going off in the heartland of Europe", referring of course to the Viennese black swan, the bailed-in implosion of the Austrian Heta bad bank which nobody had anticipated because the numbers were so thoroughly cooked, nobody had even the faintest clue just how bad the truth was. We said that "while the acute pain came and went for Heta bondholders who have seen a nearly 50% loss in just a few short months, the bigger and far more diffuse pain is only just starting.... The first casualty: the beautifully picturesque southern Austrian province of Carinthia."
As it was revealed in late March, the issues for Carinthia, the home province of doubly defunct lender Hypo Alpe Adria, is that the Heta bonds were guaranteed by the state of Carinthia which is now liable for the bail-in.
The problem is that Carinthia guarantee was equivalent to €10.2 billion, or nearly five times the state's 2014 operating revenue. As the Telegraph summarized it "what the Austrian government is doing is cutting loose an entire region, rather in the way the federal authorities in the US allowed Detroit to go bust a number of years ago. It’s a mini-Greece going off in the heartlands of Europe."
Carinthia's budgeted revenue in 2015 is just €2.36 billion, and as such the southern province of 556,000 would be unable to honor the guarantees if they came due now or in a year’s time.
Carinthia was then promptly downgraded by Moody's from A2 to Baa2 with the rating agency stating that "the downgrade reflects an increased susceptibility to event risks, including litigation from Heta's bondholders and further actions by the FMA, and greater than anticipated shortfalls of Heta's assets. All these factors could lead to a crystallization of a significant portion of Carinthia's guaranteed debt. This amount could exceed Carinthia's liquidity resources, likely lead to increased financial leverage and could require some form of extraordinary central government support."
We summarized this unexpected outcome as follows: "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, Austria! Or perhaps not: Finance Minister Hans Joerg Schelling has said repeatedly that the Austrian government isn’t liable to cover Carinthia’s guarantees."
Herr Schelling's warning is about to be tested.
Yesterday, Carinthia officially asked Vienna for financial support, saying it will run out of money by the beginning of June without external help Reuters reports.
The rest of the story is already known to regular readers:
Carinthia provided debt guarantees for years to fuel Hypo's rapid expansion before the practice was stopped in 2007, but the last ones do not expire until around 2017.
With an annual budget of 2.2 billion euros ($2.36 billion), Carinthian officials have said the province cannot honour nearly 11 billion euros of backing for Hypo debt that creditors facing a "haircut" could demand.
Adding to the province's woes, ratings agency Moody's downgraded Carinthia last month to one notch above junk grade, making it more difficult to borrow in the open markets.
Carinthia's cash needs are tiny by global insolvency standards: "In the current financial year, Carinthia needs 340 million euros and is hoping for loans from the capital, a spokeswoman for the province said. Carinthian politicians are meeting Chancellor Werner Faymann and Finance Minister Hans Joerg Schelling in Vienna on Thursday.
So while everyone is eagerly awaiting to find out on what day Greece runs out of (confiscated) money, one of Austria's provinces - a country that is considered a pristine credit - may have beat the Mediterranean nation to the punch:
The spokeswoman said Carinthia would run out of money in June without help, confirming local media reports. No Austrian province has ever gone bankrupt and there is no legislation on how to handle such an event.
And to think all of this could have been avoided if only Carinthia had used any spare cash it has to just BTFD.