VZCZCXRO0147
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #1665/01 3181540
ZNR UUUUU ZZH
P 131540Z NOV 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1356
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 001665 
 
SIPDIS 
 
TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/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 Government Establishes Bank Rescue 
Holding Company; More Banks Resort To Government Funds 
 
REF:  (A) VIENNA 1619; (B) VIENNA 1601 and previous 
 
¶1.  SUMMARY:  The GoA has established a bank rescue 
holding company, known by its acronym as FIMBAG, to 
administer the EUR 15 billion from the bank rescue 
package available for GoA equity injections for banks 
and insurance companies.  Its first acquisition was 
Kommunalkredit, which the GoA nationalized November 3. 
Most or all large Austrian banks will apparently tap 
GoA funds.  Though domestic in intent, GOA equity 
injections could provide additional breathing room to 
shore up foreign subsidiaries (Austrian bank 
subsidiaries hold 15.3% of the CEE/SEE/CIS banking 
market, accounting for 26% of Austrian banks' total 
assets).  However, GOA reps see no need at present for 
Austrian banks to supply additional equity to their 
CEE/SEE/CIS subsidiaries.  END SUMMARY. 
 
Government Establishes Bank Rescue Holding (FIMBAG) 
--------------------------------------------- ------ 
 
¶2.  On November 11, the GoA officially established a 
bank rescue holding company to administer EUR 15 
billion (from its EUR 100 billion bank rescue package) 
available for GoA equity injections in banks and 
insurance companies (ref B).  The new company, 
Finanzmarktbeteiligung AG (FIMBAG / in English, 
Financial Market Participation Company) is a wholly 
owned GoA enterprise established as a subsidiary of 
OIAG (the GoA holding / privatization company). 
 
¶3.  The GoA appointed two experienced bankers as 
FIMBAG's executive CEOs: former National Bank (OeNB) 
Governor Klaus Liebscher and former OeNB Director 
General / President Adolf Wala.  The supervisory board 
will consist of Veit Sorger (President of the 
Association of Austrian Industrialists), Hannes 
Androsch (industrialist and former Minister of 
Finance), Stefan Zapotocky (OIAG supervisory board 
member and former CEO of the Vienna Stock Exchange), 
Herbert Kaufmann (CEO of the Vienna International 
Airport), and two lawyers, Hellwigg Toggler and 
Alexander Russ. 
 
Troubled Kommunalkredit 
----------------------- 
 
¶4.  FIMBAG's first acquisition was the troubled 
Austrian banking group Kommunalkredit, which the GoA 
nationalized on November 3 (ref A) by taking over the 
Austrian Volksbanken AG's 50.78% share and the 49% 
share of the Belgian-French Dexia Credit Local. 
Volksbanken and Dexia were obliged to convert 
unsecured Kommunalkredit papers worth EUR 173 million 
and EUR 200 million, respectively, into participation 
capital (thus contributing to Kommunalkredit's equity 
base).  That participation capital bears an interest 
rate of 8% p.a. with a term of at least 5 years.  The 
GoA will have to pump additonal funds into the bank to 
raise its Tier 1 equity ratio to 9% (reportedly a low 
three-digit million EUR amount). 
 
More Banks Will Use State Capital Injections 
-------------------------------------------- 
 
¶5.  After Erste Bank (Austria's second largest banking 
group) became the first large Austrian bank to request 
a GoA capital injection (EUR 2.7 billion) via non- 
listed, non-voting and non-transferable participation 
shares, it appears now that most or all of the large 
Austrian banks will tap GoA funds.  Raiffeisen 
Zentralbank (RZB), Austria's third largest banking 
group, will decide on a GoA capital injection of up to 
EUR 2 billion at a November 25 general meeting.  After 
its Kommunalkredit debacle, Volksbanken (Austria's 
fourth largest banking group) will need at least EUR 1 
billion to bring its Tier 1 capital ratio to 9%;  it 
is unclear how much will come from a capital increase 
among shareholders and how much from a GoA capital 
injection.  Bank Austria, Austria's largest bank and a 
member of the Italian UniCredit group, and BAWAG 
(Austria's fifth largest bank, wholly owned by U.S. 
private equity fund Cerberus Capital Management) are 
still discussing the issue within their international 
owners.  Mid-sized financial institutions are also 
being mentioned as possible beneficiaries of the fund, 
including Hypo Alpe Adria, home loan savings bank 
 
VIENNA 00001665  002 OF 002 
 
 
Wuestenrot, and mortgage banks. 
 
How does Austria's Rescue Affect Emerging Europe? 
--------------------------------------------- ---- 
 
¶6.  A Finance Ministry (MoF) representative confirmed 
that the EUR 15 billion available for equity 
participation is designed for domestic use, but this 
is not spelled out in the MoF's ordinance of October 
30 (ref A) because it would violate EU regulations. 
Banks and perhaps insurance groups will enjoy 
additional liquidity through state equity, are 
expected to provide loans to domestic businesses and 
private individuals, and reportedly understand that 
they cannot use the GoA money for equity injections 
into CEE/SEE subsidiaries.  However, money is fungible 
and GoA money for domestic purposes will free up other 
funds.  Our MoF source foresaw no large-scale problems 
in Austrian banks' in CEE/SEE/CIS subsidiaries and 
thus no need currently for equity injections. 
 
¶7.  According to the OeNB's Financial Stability Report 
of June 2008, 12 Austrian banks operated 73 fully 
consolidated subsidiaries in CEE/SEE/CIS as of 31 
December 2007.  Of those subsidiaries, 38 are in the 
12 new EU member states, 24 in other SEE countries and 
11 in the CIS.  Austrian banks have a 15.3% share of 
the entire CEE/SEE/CIS banking market (22.7% excluding 
Russia).  In 2007, Austrian banks' CEE/SEE/CIS 
business accounted for 26% of their total assets and 
43% of consolidated profits before taxes.  NOTE: 
Unconsolidated bank assets of Austrian banks totaled 
EUR 899.5 billion in 2007;  total assets on a 
consolidated basis (i.e. including CEE/SSS/CIS 
subsidiaries) were EUR 1,073 billion, of which the 
five largest Austrian banks accounted for 62.5%.  END 
NOTE. 
 
GIRARD-DICARLO