VZCZCXRO6310
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1534/01 2891436
ZNR UUUUU ZZH
P 151436Z OCT 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1113
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 001534 
 
SIPDIS 
 
TREASURY FOR FTAT AND OFAC 
TREASURY FOR OCC/EILEEN SIEGEL 
TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PLEASE PASS TO FEDERAL RESERVE AND FINCEN 
TREASURY ALSO PASS TO SEC/E.JACOBS 
 
E.O. 12958: N/A 
TAGS: EFIN AU
SUBJECT:  Austrian Euro 100 billion package for banks 
 
REF:  (A) VIENNA 1484; (B) VIENNA 1454 
 
¶1.  Summary:  In accordance with the October 12 EU agreement, the 
GoA proposed a Euro 100 billion ($135 billion) "rescue package" for 
Austrian banks on October 13.  The Government Council (cabinet) 
approved the corresponding legislative proposal on October 14.  The 
plan includes Euro 85 billion ($115 billion) in government 
guarantees for inter-bank lending and a Euro 15 billion ($20 
billion) guarantee to strengthen the banks' capitalization.  The 
guarantees are surprisingly high compared to other EU countries' 
measures.  Chancellor Gusenbauer, Finance Minister Molterer and 
National Bank Governor Molterer claimed in unison that the package 
is only a "precautionary measure," not a bail-out plan for banks. 
The Vienna Stock Exchange (VSE) experienced an all-time-high rise of 
over 12 percent on Monday, and a more modest 6 percent rise on 
Tuesday.  End summary 
 
¶2.  The GoA's proposal for a Euro 100 billion financial rescue 
package for Austrian banks is unique for a country of its size -- 
Austrian GDP was Euro 270 billion in 2007.   The package consists of 
four measures and should be adopted in a special session of the 
outgoing parliament on Monday, October 20th.  The Euro 100 billion 
guarantees will only be available until end of 2009. 
 
 
GOVERNMENT "CLEARING POINT" SHALL GUARANTEE BANK LENDING 
--------------------------------------------- -------- 
 
¶3.  The Euro 85 billion guarantee is intended to ensure longer-term 
liquidity and to re-stimulate credit lending between banks: 
inter-bank trading had largely ceased e in recent days.  The 
government will set up a "clearing agency" to administer the 
guarantees and bank lending.  Loans from one bank to a second bank 
with liquidity problems will be made through the clearing agency, 
which will   be established from the resources and staff of the 
Austrian Control Bank.  Banks that want to claim government 
guarantees will also have to take a financial interest in the 
clearing agency (probably in relation to their balance sheet total), 
according to the draft law. 
 
 
GOA CAN NATIONALZE BANKS IF NEEDED 
---------------------------------- 
 
¶4.  The GoA also foresees Euro 15 billion to provide additional 
equity to banks if needed, so as to strengthen the equity/debt ratio 
and guarantee bank assets. The GoA will set up a subsidiary to the 
existing Government Holding Company (OIAG) to work with the money at 
its disposal.  There are two ways for the government to intervene: 
A) If a bank has a grave liquidity problem, the OIAG subsidiary can 
buy new shares issued to increase the bank's capital stock. B)  If a 
bank or other financial institution is collapsing, the government 
can buy existing shares up to 100%.  In the case of such a (whole or 
partial) nationalization, private owners must be compensated.  The 
draft law foresees that the government shares must be re-privatized 
"when the capital market situation has been stabilized".  The main 
goal of these measures is to increase the core equity capital quota 
to eight or nine percent, if needed, the Finance Ministry explained. 
 Gusenbauer said that the government would exercise ownership rights 
"only under very exceptional and turbulent situations in the 
financial markets." 
 
 
UNLIMITED GUARANTEE FOR PRIVATE BANK DEPOSITS 
------------------------------------------- 
 
¶5.  A third measure -- agreed upon a week ago -- is an unlimited 
guarantee for bank deposits of private customers (guarantees now 
cover only Euro 20,000 per customer and bank) retroactive to October 
1, 2008.  This guarantee could theoretically cost hundreds of 
billions of euros. 
 
 
NO MORE SHORT-SELLING AT THE VIENNA STOCK EXCHANGE 
--------------------------------------------- - 
 
¶6.  Finally, the package suspends short-selling at the Vienna Stock 
Exchange, a measure also agreed a week ago: The VSE is authorized to 
prohibit short selling (ref A) temporarily and/or until revocation 
for single or all securities traded.  In the case of price changes 
of a financial instrument of more than 10%, the VSE is authorized to 
suspend trading in such instruments. 
 
¶7.  All government officials and the head of the National Bank tried 
to play down the possibility of taxpayer's money flowing to the 
rescue of banks.  National Bank Governor Ewald Nowotny said the 
 
VIENNA 00001534  002 OF 002 
 
 
guarantees were "a vaccination for the economy".  Molterer said that 
the GoA will do everything possible so that "the package will not 
become a redistribution of risks and losses from the banks to the 
taxpayers." 
 
¶8.  Two big Austrian banks (Raiffeisen, Erste Bank) welcomed the 
Euro 85 billion in guarantees.  It appears that all major Austrian 
banks will participate in the clearing agency.  A week ago, most 
Austrian bank CEO's had claimed that their balance sheets were 
strong enough to avoid any state intervention. 
 
 
AUSTRIAN BANKS INVOLVED IN THE ICELAND CRISIS 
-------------------------------------------- 
 
¶9.  Meanwhile, some information about Austrian banks' exposure in 
Icelandic banks, which the National Bank and the Finance Market 
Authority (FMA) are investigating, came to light.  According to 
unconfirmed press reports the finance sector is worried about assets 
worth Euro 2.6 billion ($3.5 billion).  Most affected seems to be 
the Raiffeisen Bank with over Euro 1 billion.  In cooperation with 
other European banks they had granted loans worth Euro 900 million 
in 2007 to several Icelandic financial institutions.  According to a 
June 2008 Raiffeisen Bank press release, the bank also granted 
another Euro 275 million loan to Iceland's Kaupthing Bank together 
with Bayern LB and the Bank of America. 
 
¶10.  On October 8, the FMA had issued an administrative decision 
prohibiting the Austrian branch of Kaupthing Bank from accepting 
deposits and from transferring any deposits from accounts in 
Austria.  The measure will apply for a maximum of 18 months. 
Kaupthing Bank had only opened its Austrian branch on September 4, 
¶2008. 
 
Economic Stimulus Package 
------------------------ 
 
¶11.  In another effort to fight the financial crisis, the government 
agreed on an economic stimulus package to counter the weakening 
economy (ref A).  Detailed information on the measures to support 
the labor market, stimulate investment and finance infrastructure 
projects are not yet available and will be worked out during the 
next one or two weeks.  The placeholder government also plans to 
seek parliamentary approval for the stimulus package in the 
parliament's October 28 (or may be even October 20) plenary 
session. 
 
COMMENT: WHY DO AUSTRIAN BANKS NEED SUCH A STRONG 
--------------------------------------------- ---- 
SAFETY NET? 
----------- 
 
¶12.  Comment: The amount of the Austrian "rescue package" in 
relation to the GDP is significantly higher than the rescue plans in 
most other EU countries.  The GoA argues that the relative size of 
the Austrian banking sector compared to the rest of the economy 
necessitates stretching a robust safety net. The GoA also seems not 
to expect the guarantees to fall due or to have to put fresh money 
into the banking sector.  Given the leading role of Austrian banks 
in ailing Central and Eastern European countries such as Romania, 
Bulgaria and particularly neighboring Hungary, and the significant 
stake in Iceland, the GoA's assessment could turn out to be wrong. 
Given that the guarantees account for over a third of the entire 
Austrian GDP, should the crisis deepen, we would expect major 
domestic policy implications and cannot rule out spillover effects 
to the region.  End comment 
 
#GIRARD-DICARLO