VZCZCXRO8942
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0060/01 0161326
ZNR UUUUU ZZH
R 161326Z JAN 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 1865
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 VIENNA 000060 
 
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 ECON AU EUN
SUBJECT: Taking Stock of Austria's Financial Markets 
and Crisis Impacts 
 
REF: A) 08 State 125609; B) 08 Vienna 1889 and 
previous 
 
¶1.  SUMMARY:  The Austrian government was decisive in 
crafting a EUR 100 billion financial sector rescue 
package in October, but implementation has been slow. 
Credit is scarce; demand is weak for GoA-guaranteed 
interbank funding; only one major bank (Hypo Alpe 
Adria) has gotten actual equity from the state so far; 
and the GOA is pursuing a non-transparent policy on 
funding other banks.  On January 2, the Financial 
Market Authority/FMA put a government commissioner in 
charge of Bank Medici (which channeled money to Madoff 
vehicles):  with an exposure of over $2 billion, Bank 
Medici customers are among those hardest hit by the 
Madoff scandal.  Troubled Kommunalkredit bank was 
nationalized January 5.  The Vienna Stock Exchange was 
among Europe's worst performers in 2008, with its main 
index falling 60% and market capitalization down by 
two-thirds. 
 
¶2.  On the bright side, the financial crisis has 
bolstered Austrian opinions of the EU and the ECB, and 
Austrian banks are not backing away from markets in 
emerging Europe.  END SUMMARY. 
 
Banks: Show Us the (Public) Money 
- - - - - - - - - - - - - - - - - 
 
¶3.  Observers here universally praise the GoA for 
passing the EUR 100 billion rescue package in October 
-- comprising EUR 15 billion for equity injections 
into banks/insurace companies and EUR 85 billion to 
guarantee intrbank lending.  However, implementation 
has beenmixed.  In late December, leading economists 
and Austrian National Bank (OeNB) Governor Ewald 
Nowony urged banks to take the money and called on 
te GoA to speed up implementation.  Hannes Androsch 
co-head of the new state bank holding company (IMBAG) 
urged Finance Minister Josef Proell to sped up 
payouts:  Proell replied that the money is there for 
the taking, as long as banks fulfill requirements. 
 
¶4.  Aside from specialty lender Kommunalkredit, so far 
only Hypo Alpe Adria bank (HAA) has seen actual state 
money:  in late December 2008, it got EUR 900 million 
in form of participation shares, at an 8% interest 
rate and with conditions including limits on dividend 
payments and a requirement that HAA must lend twice 
the amount received (i.e. EUR 1.8 billion) to SMEs 
over the next three years.  HAA's ownership structure 
remains unchanged, but the GoA can convert the 
participation shares into ordinary shares at any time. 
HAA has a call option to name a buyer at any time for 
the GoA's participation shares.  HAA also received 
from its parent (the German Bayerische Landesbank) a 
EUR 700 million equity increase which with the GoA 
injection will push HAA's Tier 1 capital ratio to 
8.4%.  HAA, which had a troubled record even before 
2008, was the Austrian bank is direst need. 
 
¶5.  Most or all of the top five Austrian banks are set 
to take state equity injections, but progress has been 
surprisingly slow.  Volksbanken AG, with its exposure 
to failed Kommunalkredit bank, is likely to be the 
next to receive a GoA equity injection.  In December, 
Volksbanken shareholders authorized management to take 
state capital of up to EUR 1 billion.  Erste Bank's 
management is authorized to take in up to EUR 2.7 
billion participation capital, Raiffeisen 
Zentralbank's (RZB) up to 2 billion.  BAWAG (owned by 
U.S. private equity fund Cerberus Capital Management) 
reportedly had initial talks with the OeNB and the FMA 
for EUR 300-400 million in new equity, but has not 
started negotiations with the Finance Ministry.  Bank 
Austria (owned by the Italian UniCredit group) has 
shown interest, but has not made a decision. 
 
¶6.  Credit is still scarce, even with GoA-guaranteed 
interbank lending auctions underway (a EUR 85 billion 
program).  To date only few auctions have taken place 
and demand was light.  As in Germany, Austrian banks 
can use the GoA guarantee for issuing bonds -- but few 
have done so. 
 
¶7.  Reasons for slow implementation include 
-- Waiting for approval in Brussels (until mid- 
 
VIENNA 00000060  002 OF 003 
 
 
December), as the Commission sought to prevent 
competitive advantages in any member state 
-- Apparently, a requirement (added by the EU) that 
taking state equity prior to December 31 would entail 
paying a full six months' interest 
-- Efforts by the GOA Finance Ministry to add new 
conditions, such as requirements to lend to SMEs. 
COMMENT: the new conditions are in part political 
cover against charges of "bailing out" rich bankers -- 
but also a legitimate attempt to make banks lend and 
prevent a downward credit spiral. 
 
Kommunalkredit Bank Nationalized 
- - - - - - - - - - - - - - - - 
 
¶8.  In November, the GoA decided to nationalize the 
troubled Austrian banking group Kommunalkredit.  The 
move was approved by the Federal Competition Authority 
and became effective January 5, 2009.  The GoA took 
over (for a symbolic one Euro each) the shares of 
Volksbanken (50.78%) and the Belgian-French Dexia 
Credit Local (49.0%), while the Austrian Association 
of Municipalities, which holds 0.22%, remains a 
shareholder. 
 
Bank Medici Investors Lost Billions in Madoff Scheme 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶9.  The Austrian Bank Medici (75% owned by Sonja Kohn, 
25% by Bank Austria) is among those hit hardest by the 
Madoff scandal.  Bank Medici's Madoff exposure is 
about US$ 2.1 billion, most of it reportedly from 
clients outside Austria (Russians, Ukrainians and 
Israelis) but apparently also prominent bankers such 
as former OeNB president Adolf Wala.  Bank Medici is a 
small Austrian bank which marketed Madoff-linked 
investments through other banks and asset managers in 
Europe and beyond.  In Austria, Bank Medici is not 
seen as "system-relevant;" until this month, most 
Austrians did not even know the bank's name (the 
minimum investment was EUR 50,000).  The bank has only 
16 employees and derived most of its earnings from 
fees linked to Madoff products. 
 
¶10.  On January 2, when Bank Medici's two managing 
directors resigned, the FMA appointed an auditor as 
government commissioner to protect the interests of 
creditors and secure entrusted assets.  (NOTE: Under 
the Austrian Banking Act (para 70/2), the FMA may 
order temporary measures (up to 18 months) or appoint 
a government supervisor to address threats to the 
financial interests of a bank's clients - END NOTE). 
High-profile media reports (including in the New York 
Times) say Bank Medici founder Sonja Kohn has dropped 
out of sight -- although journalists were apparently 
in touch with her as of January 14. 
 
¶11.  New York law firm Stull, Stull & Brody has 
petitioned to introduce a class action suit in New 
York court on behalf of investors in the funds Herald 
USA, Herald Luxemburg, Primeo Select and Thema 
International from January 2002 through January 12, 
¶2008.  The suit -- not yet filed -- alleges monies 
were invested in Madoff vehicles without the knowledge 
of investors.  It will name as defendants Bank Medici 
along with Bank Austria, UniCredit, Pioneer 
Alternative Investments, Ernst and Young, and HSBC 
Holdings. 
 
Austrian Banks To Stay in Emerging Europe 
- - - - - - - - - - - - - - - - - - - - - 
 
¶12.  Austrian banks -- which have an asset exposure to 
markets in Central, Eastern, and Southeastern Europe 
(CESEE) and the former Soviet Union (FSU) almost as 
large as Austria's GDP -- say they are determined to 
remain in eastern markets and still see growth 
potential there.  Banks feel they can manage the 
heightened risks with their solid base of deposits in 
the region and with GoA equity injections pushing most 
banks' consolidated equity ratios to 10 percent or 
above.  COMMENT:  Austrian banks see no alternative to 
staying in emerging Europe.  Raiffeisen International 
says it learned from staying put in Russia during the 
1998 ruble crisis -- recapitalizing at a cost of 
several hundred million dollars -- a key choice that 
made Raiffeisen the largest foreign bank in Russia and 
 
VIENNA 00000060  003 OF 003 
 
 
earned it tidy sums during the good years that 
followed. 
 
A Crash Year for the Vienna Stock Exchange 
- - - - - - - - - - - - - - - - - - - - - 
 
¶13.  2008 was the worst year for the Vienna Stock 
Exchange since the Austrian Traded Index (ATX) debuted 
eighteen years ago.  At year-end 2008, the ATX stood 
at 1,801 -- 60.1% lower than a year before (4,513) -- 
a worse fall than many other OECD stock exchanges: 
U.S. Dow Jones -34%, German DAX -40%, Japanese Nikkei 
-42%.  Market capitalization of listed domestic shares 
was down 66% from year-end 2007 at only EUR 53 billion 
(about 19% of GDP).  Vienna had no new domestic 
listings in 2008. 
 
Austrians now have more faith in EU than in GOA or USG 
- - - - - - - - - - - - - - - - - - - - - - - - - - -- 
 
¶14.  While some Austrians lost trust in their banks 
despite the unlimited deposit guarantee -- the OeNB 
says currency demand spiked in October as individuals 
stashed money in safe deposit boxes (or their 
mattresses) -- the crisis has bolstered opinions of 
the European Union.  A domestic poll taken in late 
November showed that Austrians have more confidence in 
the EU's crisis management than in their own 
government or in U.S. authorities: 
 
               Austrians' Opinions of 
        Ability to Respond to Economic Crisis 
            MUCH      LITTLE     NONE 
      EU     44%       42%        11% 
     GOA     37%       42%        14% 
     USA     13%       36%        45% 
 
This development is noteworthy since Austrians 
typically among the EU's main skeptics:  in June, only 
36% of Austrians said the country benefited from EU 
membership (EU average: 54%).  In Eurobarometer 
polling in October/November, Austrians showed the 
biggest jump in support among member states: 
currently 47% say that EU membership brings benefits. 
A solid majority (57%) trust the European Central 
Bank, significantly above the ECB's EU-wide approval 
rating (48%). 
 
GIRARD-DICARLO