VZCZCXRO1598
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHVI #1571/01 2961443
ZNR UUUUU ZZH
P 221443Z OCT 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1140
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 001571 
 
SIPDIS 
 
TREASURY FOR FTAT AND OCC/EILEEN SIEGEL 
TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY PASS FEDERAL RESERVE, FINCEN, SEC/E.JACOBS 
 
E.O. 12958: N/A 
TAGS: EFIN AU
SUBJECT: Austria Enacts Bank Rescue Package; Consortium 
Rescues Small Constantia Bank 
 
REF:  VIENNA 1534 AND PREVIOUS 
 
¶1. SUMMARY: On October 21, the Austrian Parliament 
unanimously approved an EUR 100 billion ($130 billion) 
rescue package, with modest changes to the draft 
announced last week (reftel).  The GoA will guarantee 
up to EUR 75 billion ($97 billion) in loans (down from 
EUR 85 billion), will set aside EUR 15 billion ($19.5 
billion) in equity to be injected into banks if needed, 
and has earmarked EUR 10 billion ($13 billion) to cover 
deposit guarantees.  On October 17, the five major 
Austrian banks agreed to bail out the small Constantia 
Privatbank by injecting a GOA-guaranteed EUR 400 
million ($520 million) into the bank.  END SUMMARY. 
 
¶2.  Due to the crisis, the outgoing Austrian Parliament 
convened a special session on October 21 to adopt the 
EUR 100 billion rescue scheme for Austrian banks 
(reftel).  Parliament approved the package unanimously 
but with a few changes following negotiations over the 
weekend: 
 
- The new state guarantee for interbank lending was 
scaled back from EUR 85 billion to EUR 75 billion. 
 
- The GOA can inject up to EUR 15 billion total into 
banks and insurance companies in case of liquidity 
problems.  The GoA will have the option to buy shares 
of banks and insurance companies and the Ministry of 
Finance can even nationalize banks (partially or fully) 
to avoid systemic damage (a "last resort" according to 
FinMin Molterer).  The GOA is more likely to raise bank 
capital increase through preferred shares with no 
voting rights, to minimize government influence.  GOA 
shares must be privatized as soon as market conditions 
allow it, but there is no time limit. 
 
- The GoA will earmark EUR 10 billion to cover 
individual bank deposits.  The new law foresees that 
banks will guarantee assets of private and business 
account holders up to EUR 50,000 ($65,000), including 
accounts of SME's with sales up to EUR 9.7 million 
($12.6 million).  The GoA will guarantee unlimited 
individual deposits until the end of 2009.  As of 2010, 
the GoA will guarantee individual savings up to EUR 
100,000 ($130,000). 
 
¶3.  Most major Austrian banks still insist that 
recapitalization is not needed -- nobody wants to be 
the first one in line -- but experts expect the "big 
five" (UniCredit-Bank Austria, Erste Bank, Raiffeisen 
Zentralbank, Bawag and Volksbank) to take capital 
injections in a concerted action soon.  Only Erste Bank 
has not ruled out a state capital injection to date. 
On October 21, a member of the board of the National 
Bank advised banks to take government financial 
assistance. 
 
¶4.  The first Austrian bank to stake a guarantee claim 
is the small "Constantia Privatbank" (CPB), mainly 
active in private banking and real estate assets.  CPB, 
which was to be sold to Credit Suisse earlier this year 
for around EUR 1 billion, suffered a liquidity collapse 
in recent weeks.  UniCredit, Erste, Raiffeisen (25% 
each), Bawag and Volksbank (12.5% each) agreed to take 
over CPB and will inject EUR 400 million into CPB, 
which the GoA will guarantee.  The National Bank added 
another EUR 500 million ($650 million). NOTE: 
Reportedly, the banks did not rescue CPB voluntarily 
but only under GoA pressure, which feared negative 
consequences.  The "big five" have their own private 
banking departments and have no use for the CPB's 
assets, so they may liquidate CPB soon if they do not 
find a buyer. END NOTE. 
 
¶5.  CPB had balance sheet assets of around EUR 1.2 
billion ($1.5 billion), oversaw about EUR 10 billion 
($13 billion) of client assets, and employed 260 
people.  The bank's majority owner, Christine de 
Castelbajac, may be forced to pledge the assets of her 
industry group Constantia Packaging (worth EUR 350 
million) to CPB's rescuers.  Observers debate whether 
CPB was a victim of the financial crisis or collapsed 
purely due to mismanagement.  The bank's collapse 
stemmed from its ties to two troubled real estate funds 
("Immofinanz" and "Immoeast") led by CPB CEO Karl 
Petrikovics and whose deposits CPB managed.  The funds' 
 
VIENNA 00001571  002 OF 002 
 
 
share prices plummeted from over EUR 7 to less than one 
euro within six months.   Insiders including the bank's 
owner reportedly withdrew their assets prior to CPB's 
fall. 
 
Modest Economic Stimulus En Route 
--------------------------------- 
 
¶6.  The caretaker GoA has agreed on the outline of an 
economic stimulus package that could be approved at the 
first session of the newly elected Austrian parliament 
next week.  Proposed measures include expanding credit 
guarantees for SME's (from EUR 2 to 3 billion), EUR 150 
million ($195 million) in subsidized loans for SME's, 
and commissioning infrastructure projects (primarily 
rail/road construction) worth EUR 1 billion over the 
next four years.  The full package is worth about 1% of 
Austrian GDP. 
 
COMMENT 
------- 
 
¶7.  The EUR 100 billion financial rescue package is 
huge, representing over a third of Austria's GDP (EUR 
260 billion in 2006) if fully utilized.  GoA 
representatives insist their guarantees will not come 
due, but the fact that the GoA rushed to enact the 
package -- a week before the new parliament debuts -- 
might hint of unknown liquidity problems at banks.  The 
collapse of the small Constantia Bank should not be 
overrated, but puts an additional burden on the other 
banks.  The Austrian banks' heavy involvement in 
troubled Central and Eastern European states, 
particularly in Hungary and Ukraine, will have 
implications as will shrinking demand for Austria's 
exports.  As elsewhere in Europe, economic growth 
forecasts for Austria are trending downwards (0.9 to 
1.2 percent in 2009, per the Austrian Institute for 
Economic Research) and there are clear signs that 
Austria's strong labor market (3.6% unemployment in the 
2nd quarter) will soon deteriorate. 
 
GIRARD-DICARLO