VZCZCXRO3615
PP RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHVI #1270/01 1240703
ZNR UUUUU ZZH
P 040703Z MAY 06
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 3317
RUEATRS/TREASURY WASHDC PRIORITY
INFO RUEAWJA/DEPT OF JUSTICE WASHDC
RUCNFB/FBI WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 VIENNA 001270 
 
SIPDIS 
 
SIPDIS, SENSITIVE 
 
TREASURY FOR OCC/EILEEN SIEGEL 
TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PLEASE PASS TO FEDERAL RESERVE AND SEC/E.JACOBS 
JUSTICE FOR DOJ/CRM/ATMLS AND FOR OIA/RICHARD OWENS 
FBI FOR CID 
 
E.O. 12958: N/A 
TAGS: EFIN PGOV ELAB AU
SUBJECT:  Government Rescues BAWAG - Gets "Thanks" From 
Abashed Union Chief 
 
REF:  VIENNA 976 
 
Summary 
------- 
 
¶1.  (U) In a May 1 meeting, the GoA and the Austrian 
financial sector agreed on a rescue package for Austria's 
fourth largest banking group, BAWAG P.S.K. (BAWAG).  The 
GoA will provide a temporary Euro 900 million government 
guarantee to BAWAG to stop massive withdrawals and to 
reassure BAWAG customers about the bank's stability.  In 
addition, major Austrian banks and insurance companies 
will provide Euro 450 million in fresh capital to BAWAG 
to enable the institution to meet the Banking Act's 
strict equity requirements.  The immediate trigger for 
BAWAG's current problems was a class-action lawsuit, 
which creditors from the bankrupt U.S. futures and 
commodities brokerage firm Refco, filed against BAWAG in 
U.S. bankruptcy court on April 25.  Revelations in March 
(reftel) that BAWAG lost Euro 1 billion in speculative 
transactions through offshore centers had previously 
precipitated criticism of the bank's 100% owners, the 
Austrian Trade Union Federation (OGB).  At a joint press 
conference with Chancellor Schuessel announcing the 
rescue package, new OGB President Rudolf Hundstorfer 
could only say "thanks." 
 
¶2.  (SBU) While there was apparently no risk of BAWAG's 
insolvency, the rescue package clearly aimed to bolster 
the reputation of Austria's financial sector.  The 
political consequences from the scandal and lawsuit will 
probably be more far-reaching.  The governing center- 
right People's Party will seek to use BAWAG as an issue 
in autumn elections, highlighting the economic and 
managerial ineptitude of the OGB and its ally, the 
opposition Social Democrats.  End Summary. 
 
 
Government and Financial Community Rescue BAWAG 
--------------------------------------------- -- 
 
¶3.  (U) In a late night emergency meeting on May 1, 
Chancellor Wolfgang Schuessel, Finance Minister Karl- 
Heinz Grasser, and Austrian National Bank (ANB) Governor 
Klaus Liebscher met with representatives from Austria's 
financial community to devise a rescue package for 
Austria's fourth largest bank, BAWAG P.S.K. (BAWAG).  The 
GoA agreed to provide a Euro 900 million ($1.2 billion) 
guarantee to BAWAG, valid through July 1, 2007, to 
reassure BAWAG customers that deposits are safe.  The 
move came after customers made withdrawals reportedly 
totaling as much as Euro 60 million per day last week. 
This did not include withdrawals by institutional 
investors.  Under these circumstances, the guarantee of 
BAWAG's 100% owner, the Austrian Trade Union Federation 
(OGB), was no longer sufficient because of the OGB's own 
financial problems. 
 
¶4.  (U) In addition to the GoA guarantee, major Austrian 
banks and insurance companies will provide BAWAG Euro 450 
million ($563 million) in fresh capital.  The capital, in 
the form of debtor warrants, will enable BAWAG to meet 
the Banking Act's strict equity requirements and to 
submit a balance sheet for 2005.  BAWAG will have to 
repay these warrants as soon as its economic situation 
stabilizes.  ANB Governor Liebscher acknowledged that 
BAWAG had liquidity and equity problems, which the 
emergency measures would address.  Liebscher stressed, 
however, that there was no danger of insolvency. 
 
 
BAWAG's Problems - The Aftermath of the Refco Bankruptcy 
--------------------------------------------- ----------- 
 
¶5.  (U) BAWAG's current problems result from its 
involvement in the bankruptcy of the U.S. futures and 
commodities brokerage firm Refco in October 2005.  In 
this connection, BAWAG also suffered from March 2006 
revelations that the bank had incurred Euro 1 billion 
($1.3 billion) in losses due to speculative transactions 
with offshore centers in 2000 (reftel).  On April 25, a 
group of Refco creditors filed a $1.3 billion lawsuit 
 
VIENNA 00001270  002 OF 002 
 
 
against BAWAG in U.S. bankruptcy court, alleging BAWAG 
aided and abetted Refco CEO Philip Bennett in fraudulent 
activities that led to Refco's collapse.  (Note:  A BAWAG 
lawsuit against Refco in the U.S. is also pending.  End 
Note.) 
 
¶6.  (U) On May 1, BAWAG reached a preliminary agreement 
with the creditors' lawyers on an out-of-court 
settlement.  Details are still not public, but BAWAG's 
original offer of $500 million seems to have been 
insufficient.  Until both sides agree on a final 
agreement, a U.S. court has blocked BAWAG's U.S. assets 
($1.1 billion) as collateral.  The preliminary agreement 
allows BAWAG to continue its business in the U.S.  Most 
importantly for BAWAG, the agreement increases the 
possibility that the OGB can proceed with the sale of 
BAWAG. 
 
 
Comment -- Economic and Political Fallout 
----------------------------------------- 
 
¶7.  (SBU) The GoA needs parliamentary approval for the 
BAWAG guarantee.  This should come during a special 
parliamentary session on May 8.  As part of the 
guarantee, the OGB will have to disclose its financial 
position, which has historically been nebulous, to the 
ANB.  Moreover, the OGB will have to transfer its own 
(8%) and BAWAG's (12%) shares in the ANB to the GoA at 
face value.  While ANB Governor Liebscher's comments 
about no danger of insolvency were most probably correct, 
it took a concerted rescue effort by the GoA, the 
National Bank and Austria's banks and insurance companies 
to avoid damage to the reputation of Austria's financial 
sector. 
 
¶8.  (SBU) The domestic political fallout from BAWAG's 
problems will likely be much more consequential than any 
financial repercussions.  BAWAG's and the OGB's woes 
overshadowed the opposition Social Democrats' (SPO) 
traditional May Day celebrations.  SPO leader Alfred 
Gusenbauer publicly blamed "neo-liberalism" for the BAWAG 
speculation losses.  However, OGB President Rudolf 
Hundstorfer sheepishly thanked the GoA for the guarantee. 
 
¶9.  (SBU) The governing center-right People's Party (OVP) 
has missed no opportunity to highlight the economic and 
managerial incompetence of the OGB, and implicitly the 
SPO.  Schuessel admitted that the OVP would make BAWAG a 
campaign issue in the autumn elections.  The OVP has also 
underscored the unusual situation of a right-of-center 
government bailing out a bank associated with the labor 
unions and the Social Democrats.  The clear implication 
that the OVP would like to draw is that the OVP protects 
the interests of the Austrian worker better than the SPO 
does. 
 
MCCAW