Yesterday saw one of the past themes of this blog leap out of its apparent grave in Lazarus type fashion. This is the one about Swiss Franc denominated mortgages in Eastern Europe in countries which do not use it as their national currency for example in Hungary, Poland and Cyprus. I have written before about the problems created for the individuals who took out loans which soared in amount as the Swiss Franc soared in value many times before and this also posed problems for the national governments. But of course if a lot of loans go bad then this is also a problems for the banks which lent the money. Banks in Austria were heavily involved in this example of “innovative” financing and ever since they have seen the consequences. Back on the 31st of October 2011 I pointed out the future dangers from all of this.
We did see a concrete example of such problems with the losses on credit default swaps at Erste Bank which I discussed on the 11th of October. Austrian taxpayers will be hoping that there are no further such surprises.
Let us now jump forwards in time to yesterday when the Austrian Financial Market Authority released this statement and the emphasis is mine.
In order to draw up a resolution plan, which conforms with the aims of this new regime, the FMA on the strength of its legally granted powers has imposed a temporary moratorium on the liabilities of Heta Asset Resolution AG until 31.05.2016 against its creditors in accordance with BaSAG.
This is interesting in an institution which has a lot of state guarantees so let us take a look at why this might be so. From Reuters.
Sunday’s step, allowed by new legislation that gives banking supervisors more power, followed an audit of Heta’s balance sheet that exposed a capital hole of up to 7.6 billion euros ($8.51 billion) which the government was not prepared to fill.
Now this is extremely awkward in so many ways. We only need to look back to the latest Euro area bank stress tests last autumn when we were told this by Bank of Austria Governor Ewald Nowotony.
All in all, Austrian banks are found to have become more resilient to crises in recent years
It is also not the best of times for the European Central Bank which took over the mantle of banking supervision at the beginning of November 2014 although of course on the timescales here that is relatively recent.
A Problem for Austria
Let me simply ask the question what has everybody been doing since then and take you back to the 14th of December 2009? From the Financial Times.
Austria nationalised Hypo Group Alpe Adria on Monday to avert a bank collapse that could have undermined trust in banks in eastern Europe and cast doubt over Austria’s and Germany’s backing of state-owned lenders.
You would have thought that after five years of regulators and accountants giving the books a thorough going over that “surprises” or the “unexpected” like yesterdays would have a probability of zero would you not?! Exactly what has everybody been getting their wages and salaries for in this period? The (likely to be) poor Austrian and Carinthia taxpayer may be wondering what will happen to the money and guarantees already invested in this project. How much? Reuters pinned it down.
Carinthia backs 10.7 billion euros worth of Heta debt. The federal government backs a 1 billion euro bond issued in 2012 that the ministry said would be honoured in full.
At this point the words of Otto Von Bismarck come to mind.
Never believe anything until it is officially denied.
From the Austrian Finance Ministry via Reuters.
It stressed that Heta was not insolvent
How did Hypo get here?
Back in the day it was involved in lending in south-eastern Europe as I described earlier. This is how DW described the issue back then.
The lender, a unit of Germany’s BayernLB bank, was on the brink of collapse after suffering huge losses linked to loans in Southeast and Eastern Europe.
The German connection
I suppose that there are bigger surprises to readers than the fact that an Austrian development turns out to be linked with Germany although on this occasion there was a German leader. Back in the day it was reported like this.
The CEO of German public-sector bank Bayerische Landesbank, Michael Kemmer, has resigned just hours after the Austrian government said it was taking full control of the German bank’s troubled Austrian unit.
This was quite a reverse as it had only bought the position in 2007. This places it in line with the RBS and French banks in Greece style investment debacles. Also it is rarely discussed how such matters poses problems even for Germany itself.
BayernLB is Bavaria’s state bank and the eighth largest financial institution in Germany.
The Landesbanken crisis has been something of a stealth one.
Step Back in Time
Back on the 11th of October 2011 I discussed the problems of another Austrian bank.
As you can imagine I did not exactly fall off my chair when I read that Erste Bank of Austria which is the biggest Austrian lender and the second biggest lender to Eastern Europe issued a profits warning. In essence this said that so far in 2011 it had lost 950 million Euros.
The problem here was a familiar one for Austrian banks.
Moving outside of Switzerland a lot of property and construction borrowing in Eastern Europe was denominated in Swiss Francs. It is not a good situation for these borrowers to see the flip side of the Swiss Franc appreciation ie. their debt has risen in their own currency……Just to give you a flavour of some of the numbers involved here and concentrating on Hungary where this was and is a particularly big factor some 1.7 million mortgages were taken out in Swiss Francs and the total sum borrowed is estimated at around half of her Gross Domestic Product or GDP.
You may also be thinking that it is not a coincidence that this latest development for Heta/Hypo has followed the abandonment of the Swiss France cap at 1.20 versus the Euro.
For fuller details a link to that article is below.
What about the Austrian economy?
This rather flatlined in 2014 as quarterly economic growth went as follows, -0.1, 0, 0.1 and -0.2. If we move onto the latest business survey we were told this at the end of February.
The downturn in Austria’s goods-producing sector
continued in February, with output and new orders
So the theme here is of something of an economic struggle.
The government finance statistics look relatively controlled as the national debt to GDP ratio is 81% and in spite of the bank bailouts so far has risen from 65% pre credit crunch which is comparatively good. The catch of course would come if growth continues to struggle and more banks put their hands up post the January change in the value of their Swiss Franc denominated loan books. We know from experience that such things can change with indecent haste once they start in a type of domino effect.
There is much to consider here as we consider all of the bank resolution and bailout measures which have taken place in the last six years to not much gain apparently. Also we see how language has become perverted as both “insolvency” and “guarantee” need refinements in my financial lexicon for these times. We also see another phase in the crisis caused by all the Swiss Franc denominated borrowing which took place in countries which do not use it as a currency.
I expect there to be further bad news as this is the way that such events develop. Of course the establishment will trumpet good news at times but it will be smaller than the more stealthily released bad variety. We also get some perspective from what has otherwise taken place as Joseph Cotterill of the Financial Times has pointed out.
I wonder what the people who recently paid 200 cents per euro of face value for Austria’s 2062 bonds make of this Hypo/Heta situation…
Also the Austrian establishment may end up regretting boasts of this form.
By 2020, the Baby Boom Generation will reach
retirement age. Then the financial viability of
our retirement system will prove itself.
Of course the world is interlinked and one of the stronger ones is that between Austria and Germany. Thus we got a hint of trouble ahead when China cut interest-rates by 0.25% on Saturday.
Meanwhile for Heta investors, Ahem! From @lebullmarche
HETA bonds with 18 days to maturity traded at 85 on Fri, now 45 after “bank” put into resolution- 1st to use BRRD