VZCZCXRO7117
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0108/01 0281528
ZNR UUUUU ZZH
P 281528Z JAN 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 1924
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES
RUEHKV/AMEMBASSY KYIV 0067

UNCLAS SECTION 01 OF 03 VIENNA 000108 
 
SIPDIS 
SENSITIVE 
 
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 EU
SUBJECT: Austrians Push EU to Help Banks on Eastern 
Frontier 
 
REF: (A) VIENNA 0060; (B) 08 VIENNA 1852 
 
¶1. SUMMARY: The Austrian government announced January 
27 it will press the EU to help the financial sectors 
in Central, Eastern and Southeastern Europe (CESEE) in 
the wake of the global credit crisis and global 
downturn.  Last week, the GOA assembled key regional 
players (including the IMF) for closed-door talks. 
Spearheaded by Austria's Raiffeisen International 
(RI), nine large EU banks active in CESEE announced 
they will lobby for the EU and ECB to work with local 
governments in assisting banks in the region.  Banking 
risks in CESEE have grown significantly in past weeks 
because of spillover from Western Europe's deepening 
recession.  With assets of EUR 228 billion in CESEE, 
Austrian banks are the biggest lenders in the region, 
followed by German and Italian banks.  END SUMMARY. 
 
GOA Pressing Europe to Aid CESEE Banks 
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¶2. On January 23, the GoA hosted a meeting of 
representatives from the Austrian National Bank (OeNB), 
the Austrian Financial Market Authority (FMA), the EBRD 
and the IMF to discuss how to bolster ailing CESEE/CIS 
economies, support banks active in those countries 
(including foreign banks), and prevent a downward 
liquidity spiral in the region.  (Austrian officials 
characterized it as a pre-scheduled meeting and not a 
"crisis" gathering). 
 
¶3.  On January 27, Chancellor Werner Faymann and Finance 
Minister Josef Proell followed-up the meeting with an 
announcement that Austria will push for an international 
stabilization/aid package to help banks and the region's 
economies to weather the current crisis.  PM Faymann and 
FinMin Proell argued that such aid will help the EU's 
member states (including Austria) whose banks are 
heavily exposed in the region.  Austria's leadership 
want the IMF, EU, ECB, EIB and the EU's Cohesion Fund to 
join in a coordinated package.  The GoA initiative also 
calls on countries such as Bulgaria, Romania and the 
Ukraine to devise national measures to shore up their 
banking sectors. 
 
Road Show to Promote the Initiative 
- - - - - - - - - - - - - - - - - - 
 
¶4. Faymann will raise the issue with German Chancellor 
Angela Merkel during his January 28 visit.  Beyond 
Germany, the GoA is seeking support from France, Italy 
and Belgium -- the most important investors in CESEE -- 
and the EU Presidency (Faymann will soon visit Czech 
Premier Mirek Topolanek).  Senior Austrian officials, 
including PM Faymann and FinMin Proell, will also visit 
key CESEE countries to promote the initiative.  Key for 
Austrian interests (and those of other wealthy EU member 
states) is that the initiative would also help Western 
banks doing business in emerging Europe. 
 
Rapid Deterioration of the Situation in CESEE 
- - - - - - - - - - - - - - - - - - - - - - 
 
¶5.  The unexpectedly sharp real downturn in Western 
Europe is spreading to CESEE countries, whose financial 
situation (especially in countries dependent on exports 
to/capital imports from Western Europe) has deteriorated 
faster than expected.  Downward revisions to Eurozone 
forecasts mean that many CESEE/CIS countries, originally 
projected to grow in much of 2009, are expected nowto 
fall into recession.  The IMF recently downgraded its 
economic prospects for CESEE and warned of credit crises 
in the region, whose challenges include a sharp dip in 
exports (exacerbating the large current account deficits 
of many countries in the region), current account 
financing problems, the depreciation of local currencies 
vis-a-vis the dollar and the Euro (causing severe 
repayment problems for local borrowers who have took out 
hard currency loans), and rumors of 1993/1998-style 
hedge fund speculation against local currencies. 
 
Austrian Banks Have a Huge Stake in CESEE/CIS Health 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶6. With outstanding loans of around EUR 228 billion in 
 
VIENNA 00000108  002 OF 003 
 
 
CESEE/CIS, Austrian banks are the biggest lenders in 
the region, followed by German and Italian banks. 
CESEE exchange rate weakness has turned out to be a 
bigger problem for banks than anticipated, as it calls 
into question the credit worthiness of many loan 
assets in the region.  Helmut Ettl, co-head of 
Austria's Financial Market Authority (FMA), said 
publicly that Austrian banks will use GOA state equity 
injections to shore up their CESEE subsidiaries and 
said the banks need help to prepare for more exchange- 
rate instability and a likely sharp increase in losses 
from emerging Europe.  NOTE: Austrian banks have 
applied for a total of EUR 8 billion in state equity - 
- which should be disbursed by early February -- but 
so far only EUR 900 million has been disbursed to one 
bank (troubled but relatively small Hypo Alpe Adria 
(ref A).  END NOTE.  Austria's FMA has called on CESEE 
governments to assist banks active in their countries, 
regardless of ownership. 
 
Nine Prominent European Banks Seek Rescue Plan 
- - - - - - - - - - - - - - - - - - - - - - -- 
 
¶7. The GoA initiative reflects strong lobbying by 
Austrian banks engaged in CESEE and a January 23 
meeting of the Austrian Finance Ministry (MoF) with 
representatives from the Austrian National Bank 
(OeNB), FMA, EBRD and IMF to discuss financial support 
for ailing CESEE economies and prevent a credit 
crunch, and rescue measures for banks engaged in 
CESEE. 
 
¶8. Herbert Stepic, CEO of Raiffeisen International 
(RI) Bank, one of the biggest players in CESEE/CIS, is 
spearheading a group of nine major banks active in 
CESEE who are seeking a "masterplan" by the EU, ECB 
and local governments to assist banks active in the 
region.  The nine banks are 
-- two Austrian banks: RI and Erste Bank 
-- two Italian banks: UniCredit (including its 
Austrian subsidiary Bank Austria) and Intesa Sanpaolo 
-- Belgian KBC 
-- French Societe Generale 
-- German Bayern LB (owner of troubled Hypo Alpe 
Adria) 
-- Greek EFG and 
-- Swedish Swedbank. 
The banks characterize such a masterplan as a 
precautionary measure in case the situation 
deteriorates. 
 
¶9. Stepic said economic difficulties in CESEE will 
soon hit the banking sector in those countries. 
Situations vary, but throughout the region the high 
dependency on foreign-currency loans is a problem. 
Therefore, banks active in CESEE have a strong need 
for fresh equity, which requires action by the EU and 
the national governments, according to Stepic.  Erich 
Hampel, CEO of Bank Austria (which handles CESEE 
business for its parent UniCredit) said that 2009 and 
2010 will be very difficult years but that BA (like 
other Austrian banks) has no plans to retreat from 
those markets. 
 
COMMENT 
------- 
 
¶10. Austrian bankers and officials have changed their 
storyline over the past two weeks.  Through the end of 
2008, CESEE markets were painted as a kind of refuge 
and blessing for Austrian banks (who had relatively 
little exposure to New York/London-centric CDO and 
CDS-type assets).  Now Austrians see the region as a 
source of potentially acute risks, and the current 
initiative has an air of urgency.  The Austrian 
banking sector is well capitalized and can draw on a 
huge asset/savings base (total balance sheet assets 
are over 1 trillion euros) to cover any losses -- but 
bankers would clearly prefer to avert a downward 
spiral in CESEE if the EU and IMF can mobilize in 
time.  Importantly, banks like Raiffeisen do not want 
a line drawn at the EU's borders, one which would 
leave them highly exposed in markets such as Ukraine. 
 
¶11. While the Austrian body politic stands firmly 
 
VIENNA 00000108  003 OF 003 
 
 
behind its banks, the notion (floated by some bankers) 
of a government-owned vehicle to take over troubled 
CESEE assets has not met a lot of sympathy here.  END 
COMMENT. 
 
KILNER