VZCZCXRO2487
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0365/01 0861447
ZNR UUUUU ZZH
P 271447Z MAR 09 ZDS
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 2209
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 000365 
 
C O R R E C T E D  COPY (CORECTED TEXT PARA 3) 
 
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
SUBJECT: Austrian Bank Rescue Shows Positive 
Effects;  "Cautious Optimism" 
 
REF:  (A) VIENNA 0108; (B) VIENNA 0060 
 
VIENNA 00000365  001.2 OF 002 
 
 
¶1.  SUMMARY:  The Austrian government's EUR 100 
billion bank rescue package is showing positive 
effects across the financial sector.  The interbank 
market is calmer with lower rates and improved 
liquidity;  there is no credit crunch in Austria 
even though banks are being more selective about 
borrower qualifications.  GoA state help does NOT 
restrict Austrian banks from using funds to 
(indirectly) support their subsidiaries in Central 
and Eastern Europe (CEE).  Austrian banks' stocks 
have recently stabilized, supported by good earnings 
reports and better EU and IMF engagement in emerging 
Europe.  END SUMMARY. 
 
¶2. The GoA's October 2008 bank rescue package set 
aside 
-- EUR 75 billion to guarantee interbank lending and 
bond issues (to improve liquidity) 
-- EUR 15 billion for equity injections into banks 
and insurance companies (to assure solvency) 
-- EUR 10 billion as additional cover for deposits 
in case of bank failures (NOTE: the GOA has issued 
an unlimited deposit guarantee for individuals and 
SMEs through the end of 2009). 
 
Implementation of GoA Interbank Lending Guarantees 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶3.  Austria's EUR 75 billion interbank lending 
guarantee has reportedly been a success.  The GoA 
quickly established the Austrian Clearingbank AG 
(OeCAG), a special-purpose bank to strengthen market 
confidence by clearing interbank transactions, 
acting as an intermediary in the money 
market, and as issuer of money market instruments 
with maturities of 1-12 months.  The GoA supports 
the OeCAG with a EUR 4 billion guarantee for loan 
assets and a EUR 5 billion guarantee for its 
interbank money market instruments (in particular 
commercial paper).  OeCAG sanitizes transactions by 
accepting money market deposits and, in the same 
maturity band, offering interbank money market 
securities with a GoA guarantee.  OeCAG also 
recycles loans on the basis of matching maturities 
and currencies.  NOTE: OeCAG publishes its auction 
schedule and results 
(http://www.clearingbank.at/en/pages/default. aspx). 
 
 
¶4. The GoA also now guarantees individual bond 
issues, bond issues under a debt issuance program 
(DIP) or a medium-term note program (MTN), and the 
issuance of notes under commercial paper programs. 
There is no restriction of the amount of single 
facilities issued other than the EUR 75 billion 
overall limit (principal only, not including 
interest and other costs).  GoA guarantees for new 
bond issues are available until June 30, 2009; 
extension beyond that deadline requires European 
Commission approval.  The GoA provides unconditional 
and irrevocable guarantees to the holders of notes, 
protecting them against the issuer default.  Issuers 
pay a fee for the guarantee based on market 
conditions.  Limitations: 
-- Maximum amount per issue is EUR 2 billion; 
-- Maximum maturity 3 years (up to 5 years in well- 
founded cases); and 
-- The issuing bank's Tier 1 capital ratio has to be 
at least 7%. 
 
¶5.  In 2008, the GoA issued guarantees totaling EUR 
4 billion; since then, the GoA has guaranteed ten 
issuances with a total amount of EUR 11.05 billion, 
of which Erste Bank issued notes for EUR 2.5 
billion, Raiffeisen Zentralbank EUR 2.75 billion, 
Volksbanken AG 2.0 billion, and Kommunalkredit 
Austria Bank EUR 3.8 billion.  Another EUR 9 billion 
covers the aforementioned GoA guarantees for OeCAG, 
meaning EUR 51.75 billion (or 69%) of the GoA's 
guarantee facility is still available through at 
least June. 
 
No Liquidity Shortage, No Credit Crunch 
- - - - - - - - - - - - - - - - - - - - 
 
VIENNA 00000365  002.2 OF 002 
 
 
 
¶6.  According to interlocutors in the banking sector 
and Finance Ministry, the liquidity situation has 
improved in this quarter due to the GoA's bank 
rescue package and CDS spreads have come down again, 
reflecting a general calming of market worries about 
the CEE countries.  Observers here point to greater 
IMF support and the EU's recent doubling of its 
balance-of-payments support facility to EUR 50 
billion, along with the successful rollout of the 
U.S. financial rescue package over the past ten 
days, as reassuring interbank markets and non- 
Austrian market participants. 
 
¶7.  Commercial credit markets in Austria have also 
eased, and according to our sources (supported by 
the latest Austrian National Bank Statistics for the 
fourth quarter of 2008) there is no "credit crunch" 
as such.  Lender scrutiny and loan terms are tighter 
than a year ago, but rates are moderate and terms 
are now less stringent than in the fourth quarter, 
again showing the effect of appropriate GoA support 
efforts. 
 
No Restrictions on Helping Subsidiaries in the East 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶8.  There are no specific restrictions in GoA equity 
injections or bond guarantees to prohibit additional 
funding to foreign subsidiaries.  The only relevant 
condition is that a bank receiving a GoA equity 
increase or bond guarantee has to show that it 
provides a defined amount (in some cases, twice the 
amount received) in the form of loans or lease 
financing to Austrian SMEs and other businesses over 
a certain period, e.g. 3 years.  Even so, "money is 
fungible," and GoA funds earmarked for lending in 
Austria free up other capital for helping 
subsidiaries elsewhere.  Leading Austrian banks 
continue to say they will not pull out of markets in 
CEE. 
 
¶9.  Conditions for GoA support are not generally 
onerous.  The GoA fee for issuing its guarantee does 
not seem to be a deterrent (e.g., Erste Banks pays 50 
basis points plus the median of the CDS spread over a 
certain period, totaling now some 90 basis points). 
Other conditions such as not using the money for 
aggressive growth strategies or a prohibition on non- 
conforming conditions for loans do not seem to create 
problems.  The GoA floor for lending to Austrian 
entities may limit the amount of state support that 
banks choose to take. 
 
¶10.  Post will continue to report Septel on details 
of the GoA EUR 15 billion capital injection fund for 
banks and insurance companies. 
 
KILNER