Will Austria lead Germany into another round of banking crises?

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.

Surprise! Surprise!

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.

http://www.mindfulmoney.co.uk/wp/shaun-richards/erste-banks-problems-show-us-that-austria-too-is-one-of-the-casulaties-of-the-rise-of-the-swiss-franc/

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
falling further

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.

Comment

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.

Don’t forget that the of cut interest-rates by 0.25% on Saturday. If things are going so well why are so many cutting rates?!

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

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10 thoughts on “Will Austria lead Germany into another round of banking crises?

  1. Hi Shaun

    You haven’t mentioned the possibility of bail ins which I think has been mentioned in some reports of this situation in Austria. The reports seem to indicate a potential bail in covering bond holders but one does wonder if this may ultimately extend to depositors, which presumably it could under the recent European rules. I suspect that no one minds bond holders getting hit because they are investors who have made a conscious decision but deposit holders who only want somewhere to park their cash? If this happened many would look at this with alarm and it could precipitate bank runs.

    I also wonder if there were to develop a widespread, but not even necessarily systemic, banking crisis in Europe how far the European deposit guarantee would be honoured. I don’t think it’s at all difficult to envisage circumstances where it would not be honoured simply because it was unaffordable. What does one do in these circumstances? In my view there is only one thing to do – stock up on baked beans!

    • Hi Bob J

      Any bail in (which currently has a probability of around 100%) will be of bondholders as Heta is the bad bank part of the operation. Yes it is where everything was supposed to be contained! A bit like Windscale/Sellafield I guess. Should the losses mount will the bonds be enough?

      As to the deposit guarantee this did come up when I covered Corpbank/KTB in Bulgaria. Whilst it is an EU and not EU country the deposit guarantee is in fact the same – an EU standard- but it was quite some time before Bulgaria enacted this. The link below gives you a flavour.

      http://bnr.bg/en/post/100466652/institutions-drag-their-feet-corpbank-depositors-lose-patience

      Last time I checked 90% had been paid out but the delays did not exactly inspire confidence.

    • The thing to do is what I did following the Cyprus debacle. wait for nay time deposits you have to mature and then place all yopuir cash on immediate access, watch the news carefully and closde your acconts if you suspect a collapse of your bank putting the cash under your mattress. High risk putting your cash under your mattress? Yes but less risky than leaving it with a doubtful banker.

  2. another banking crisis ?

    I’m not so sure the first one has finished , Shaun .

    We still have back of a fag packet “imputed ” GDP figures .

    Our own banks are not healthy either , when Austria gets its does of EU QE I suspect it won’t just be the German banks breathing a sigh of relief!

    Oh, we still on emergency interest rates as well, whats the betting we’ll go minus interest rates , from zirp to mirp ?

    oh let the popcorn flow !

    Forbin

  3. ah , now I arrive home I see my interest on my ISA is dropping from 1.5% to 1.3%

    do you remember Shaun , the UK MSM used to report incredulously on Japanese savers getting excited over differences of 0.1% savings rates ?

    oh how little we knew then !

    Forbin

    • Hi Forbin

      The “Turning Japanese” theme must have given a lot of free publicity to The Vapors. As you point out it is ongoing a and even the competition from the Pensioners Bonds seems to have had little effect. From today’s Bank of England data.

      “The effective rate paid on households’ outstanding time deposits decreased by 1bp to 1.72% in January and the rate for households’ new time deposits decreased by 3bps to 1.47%.”

      Whoever gets new deposit rates at the Bank of England seems pretty good, do you think that he/she will get them for us?

  4. Shaun, surely a bank in resolution has no ‘ordinary’ depositors. You are the only serious commentator to raise this Austrian pig’s breakfast. Meanwhile, back in Blighty, a US based minor company sees its share price triple in 3 months, without the benefit of results or a clear picture of what it does. (Allied Minds LSE, of course). The Great SouthSea Company springs to mind. What could possibly go wrong.

    • Hi Rowland and welcome to my blog

      The South Sea Period was a marvel and at the end of this quote from Historic UK is perhaps my favourite company of all time.

      “For example; one company floated was to buy the Irish Bogs, another to manufacture a gun to fire square cannon balls and the most ludicrous of all “For carrying-on an undertaking of great advantage but no-one to know what it is!!” Unbelievably £2000 was invested in this one!”

      I forget now to which country he scarpered!

      As to Heta yes any bail in would be of bond holders. Always seems such a neutral term does it not? Let us see who was backing them…

  5. Hi Shaun,

    There is a positive here – “…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.”

    Excellent! So at long last a Government somewhere has said “nein” to the banksters when they demand the socialisation of their losses whilst jealously keeping their gains of the past and potential future gains privatised.

    Hopefully this is a turning point where it’s spelt out to banksters that the Government’s of the world are not their personal piggy banks!!

    As to depositor bail – ins, I thing the authorities would do well to consider the inevitable consequences of such a move. They would have to crank up every printing press they could find to meet the demand for hard cash. I’d be one of them demanding his entire deposits be returned in cash.

    If they choose not to deliver the cash then it is the end not only of the Euro but most other currencies and we will be back to barter within a couple of years – their choice!!

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