VZCZCXRO3120
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #1751/01 3361516
ZNR UUUUU ZZH
P 011516Z DEC 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1477
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 001751 
 
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 Bank Rescue - Update 
 
REF:  (A) VIENNA 1665; (B) VIENNA 1619 and previous 
 
¶1.  SUMMARY:  As expected, more large Austrian banks 
(Raiffeisen Zentralbank, Volksbank, and Hypo Alpe 
Adria) have applied for GoA equity injections;  no 
insurer has showed interest so far.  Volksbanken AG, 
after its Kommunalkredit flop and other write-offs, 
will likely show a loss for 2008.  Hypo Alpe Adria 
bank (HAA) has a low equity ratio and problems 
stemming from troubled majority shareholder Bayerische 
Landesbank.  The Austrian Financial Market Authority 
(FMA) is endorsing GoA equity injections and 
monitoring whether foreign owners plan to withdraw 
capital from Austrian banks.  Credit is still scarce, 
even with GoA-guaranteed interbank lending auctions 
underway(an EUR 85 billion program).  The GOA's EUR 15 
billion equity injection program has not yet received 
EU Commission approval and has not paid out a single 
Euro.  Banks complain that regulators are trying tack 
on conditions to equity contracts and have not defined 
the role of FIMBAG (which will administer GoA funds). 
END SUMMARY. 
 
More Banks Resort to State Capital 
---------------------------------- 
 
¶2.  After Erste Bank's request for state equity 
(reftels), on November 25 Raiffeisen Zentralbank (RZB) 
decided to raise about EUR 2 billion in fresh equity 
in form of participation shares.  Existing 
shareholders will raise EUR 700 million, with RZB 
requesting GoA capital for the rest. 
 
¶3.  Volksbanken is negotiating with the GoA for 
participation capital of about EUR 1 billion to bring 
its Tier 1 capital ratio up to 9%.  Volksbanken will 
try to secure the entire amount from the GoA:  no 
equity increase by existing shareholders is planned, 
rather current shareholders would at a later date buy 
the GoA's stake in the form of common shares. 
Volksbanken faces a difficult period and will likely 
show a net loss for 2008 due to its Kommunalkredit 
debacle (prompting write-offs of almost EUR 400 
million) and losses of at least EUR 300 million from 
business with Lehman Brothers, Iceland, and structured 
products. 
 
¶4.  Another problem bank is Hypo Alpe Adria (HAA -- 
Austria's sixth largest bank) which has made headlines 
repeatedly in recent years due to scandals and high- 
risk ventures.  Since mid-2007, HAA's majority 
shareholder (at least 57.5%) is now troubled 
Bayerische Landesbank.  Other shareholders include the 
Carinthia provincial government (16%), Grazer 
Wechselseitige insurance (26.5%).  With its Tier 1 
capital ratio reportedly only 5.6%, HAA needs EUR 2 
billion of which EUR 1.3 billion would come from the 
GoA and EUR 700 million from current owners.  The 
Bavarian state government's rescue package for 
Bayerische Landesbank reportedly includes fresh equity 
for HAA (its largest foreign subsidiary), but since 
one of the Bavarian government's conditions is a 
massive cut-back of Bayerische Landsbank's 
international business, rumors are that it may try to 
sell HAA. 
 
¶5.  So far, no insurance company has shown interest in 
GoA money.  Speaking for one of Austria's three 
largest insurers, Uniqa CEO Konstantin Klien recently 
remarked that 8% is too high a price. 
 
¶6.  Austrian Financial Market Authority (FMA) co-CEO 
Helmut Ettl has suggested that most or all large 
Austrian banks could tap the GoA EUR 15 billion pot -- 
since the market is demanding higher capital ratios -- 
but opposes expanding GoA protection to related 
industries such as funds.  The FMA does not see signs 
that foreign owners want to withdraw capital from 
Austrian banks, but is monitoring the situation. 
NOTE:  Ettl's remark primarily concerns BAWAG (100% 
owned by U.S. fund Cerberus Capital Management) and 
Bank Austria (97% owned by the Italian UniCredit 
group), and Hypo Alpe Adria cited above.  END NOTE. 
 
Show Us the Money 
----------------- 
 
¶7.  Even though auctions have started under the EUR 85 
 
VIENNA 00001751  002 OF 002 
 
 
billion guarantee of interbank lending, entrepreneurs 
say loans are unavailable or very difficult to get. 
Austrian National Bank Governor Ewald Nowotny has also 
said that credit availability remains a pressing 
problem. 
 
¶8.  The GoA's EUR 15 billion equity injection program 
has not paid out a single Euro, even though the GoA 
decided on it six weeks ago and Parliament approved it 
October 21.  The GOA is still waiting for EU 
Commission approval after a reported communication 
breakdown between Brussels and the Austrian Ministry 
of Finance (MoF) and the Commission's reported 
questioning of the fixed annual interest of 8% as too 
low.  RZB CEO Walter Rothenteiner, chairman of 
Federal Economic Chamber's Bnking and Insurance 
Division, complained publicl that if the package 
"does not kick in soon, the hole thing was not really 
helpful." 
 
COMMENT------- 
 
¶9.  Frictions over GOA capital particiption extend 
beyond the marked delays.  Bank intelocutors say 
regulators are trying to attach mor and more 
conditions into quity participation contracts. 
Unclear is the role of the new FIMBAG, created to 
administer GoA funds (ref A).  FIMBAG co-head Hannes 
Androsch, a respected Social Democratic industrialist, 
has signaled that FIMBAG will take an activist role -- 
something banks will probably resist.  With Austrian 
bank holdings in southeastern/eastern Europe (about 
$290 billion) now weakening, now is not the time for 
an ideological battle over state interference, 
especially if it keeps the GOA from delivering on its 
existing promise to shore up bank capital.  END 
COMMENT. 
 
GIRARD-DICARLO