VZCZCXRO8405
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHVI #0642/01 1531406
ZNR UUUUU ZZH
P 021406Z JUN 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC PRIORITY 2638
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 VIENNA 000642 
 
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 Financial Market Update 
 
REF:  (A) VIENNA 0484; (B) VIENNA 0365; 
      (C) VIENNA 60 
 
¶1. SUMMARY.  This cable updates recent issues in Austria's banking 
sector: 
-- Solvency / Liquidity:  A fourth large Austrian bank (BAWAG) has 
accepted state equity capital.  Bank Austria's negotiations on a GoA 
capital injection are complicated by signs that Italian parent 
UniCredit may move business from Vienna to Milan.  Raiffeisen 
International (RI) has set aside large loan loss provisions but is 
adamant it will stay invested in Central/East Europe (and may get 
equity capital for those subsidiaries from the EBRD). 
-- Central Bank Health: the Austrian National Bank (OeNB), which 
reported a meager profit for 2008, cannot create increase reserves 
because the GoA takes (by law) 90% of its after-tax profits. 
-- Credit Markets: recent data show few indications of a credit 
crunch in Austria.  The GoA will soon reallocate EUR 10 billion from 
its interbank lending guarantee facility to guarantee industry 
loans. 
-- Bank Medici fraud case:  Austrian prosecutors are investigating 
the leadership of now-defunct Bank Medici (a conduit for Madoff 
funds) for crimes ranging from fraud to money laundering.  In late 
May, Bank Medici lost its Austrian banking license.  END SUMMARY. 
 
GoA Equity for Banks 
- - - - - - - - - - - 
 
¶2. Since Post's last financial market update (ref A), BAWAG (a 
subsidiary of U.S. private equity fund Cerberus Capital Management) 
has reached agreement on a EUR 550 million GoA equity injection. 
The GoA will also provide a 5-year guarantee for troubled BAWAG 
assets at a book value of EUR 400 million.  Owner Cerberus will 
provide EUR 205 million in fresh capital to BAWAG, and the bank will 
issue a Tier II bond of EUR 50 million.  BAWAG posted a larger than 
expected loss of EUR 547.5 million in 2008 (after a loss of EUR 
452.5 million in 2007), mainly from exposure to Lehman and Iceland. 
 
¶3. Bank Austria/BA a subsidiary of the Italian UniCredit group, has 
launched negotiations on a GoA equity injection.  BA is eligible for 
up to EUR 2.7 billion from the GoA (on top of EUR 3.8 billion for 
UniCredit from the Italian government), but Austrian authorities 
have signaled they will provide at most EUR 2 billion (i.e., half of 
the capital increase for the whole group).  Negotiations have 
reportedly stalled due to UniCredit signals that it would move its 
profitable CESEE business and other responsibilities from Bank 
Austria to UniCredit headquarters in Milan (NOTE: this is not the 
first time UniCredit has sought to centralize the group).  In late 
May, BA CEO Erich Hampel announced his resignation, effective 
September 30, under pressure by UniCredit headquarters (his contract 
would have expired in April 2010).  FinMin Proell is reportedly 
engaged on the question of BA's role within the UniCredit group and 
Hampel's departure may have been an Austrian "concession" in the 
negotiations (Hampel was also reportedly tainted by the Bank Medici 
affair as detailed below).  The GoA is seeking new private equity 
from Unicredit's owners or other investors (Note: GoA equity bears a 
lower interest rate if private investors subscribe at least 30% of 
the capital increase / see ref A). 
 
¶4. Nationalized Kommunalkredit has not applied for GoA equity but is 
expected to apply once its survival is assured under a restructuring 
plan (to be presented soon).  Since the bank underwent emergency 
nationalization in November 2008, the GoA has budgeted EUR 1.5 
billion to cover lost subsidies, according to FinMin Proell.  In 
April, the GoA extended a EUR 1.2 billion guarantee to cover its 
balance sheet for 2008, showing a loss of "only" EUR 1.5 billion. 
 
Raiffeisen: Higher Loan Loss Provisions, But Staying in the Game 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶5. Raiffeisen International (RI) will raise up to EUR 2 billion in 
new equity on the capital market.  (NOTE: as a holding company with 
no separate banking license, RI is not directly eligible for GoA 
equity; instead, RI parent Raiffeisen Zentralbank/RZB will give RI 
part of RZB's EUR 1.75 billion GoA equity injection and EUR 915 
million private capital increase.  END NOTE)  RI's operating profit 
for Q1/2009 was EUR 536 million (up 7.1% from Q1 2008) but 
consolidated net profit dropped 78% to EUR 56 million, mainly 
because of a quadrupling of loan loss provisions to EUR 445 million 
(Q1 2008: EUR 93 million); the non-performing loan ratio rose 2.5 
percentage points to 4.8%. 
 
¶6. Like other large Austrian banks, the Raiffeisen group shows no 
signs of pulling back from eastern Europe.  On May 26, RI joined ten 
other Western banks at a European Banking Group Coordination Meeting 
(chaired by the European Commission and IMF) at which banks pledged 
to maintain their exposure to Romania and Hungary, including prudent 
capitalization of their subsidiaries.  RI is reportedly among twelve 
European banks CESEE subsidiaries may receive equity injections from 
 
VIENNA 00000642  002 OF 002 
 
 
the European Bank for Reconstruction and Development (EBRD). 
 
Austrian National Bank Tightens Its Belt 
- - - - - - - - - - - - - - - - - - - - 
 
¶7. The financial crisis has reached the Austrian National Bank 
(OeNB).  As a result of the decline in key interest rates, high 
volatility in foreign exchange markets, the depreciation of some 
reserve currencies against the euro and higher risk provisions, the 
OeNB's net profit for 2008 was only EUR 47 million, well below the 
EUR 247 million it earned in 2007.  Since by law the federal 
government gets 90% of OeNB profits, all but about EUR 4 million 
will go to the GoA treasury (NOTE: In 1997, the GoA raised its 
profit take from 73.6% to 90% -- since then the OeNB has transferred 
EUR 8 billion in profits to the GoA). 
 
¶8. As a result, the OeNB has increasing difficulty raising reserves. 
 OeNB reserves have fallen from EUR 5.8 billion in 2000 to EUR 2.8 
billion in 2008 -- too low according to OeNB Governor Ewald Nowotny 
and the bank's auditors, who in 2007 recommended the central bank 
form additional reserves of EUR 2 billion over the next ten years. 
In 2008, the OeNB could not allocate the necessary EUR 200 million 
to reserves, according to Nowotny. 
 
GoA to Guarantee Bank Loans to Austrian Industry 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶9. In May, the GoA announced it will reallocate EUR 10 billion (from 
its EUR 75 billion interbank guarantee facility) to cover guarantees 
for loans to industry (pending Parliamentary approval, which is very 
likely).  The GoA will not provide additional funds, but rather 
guarantee bank loans to industrial enterprises.  The new program 
comes in reaction to industry complaints that bank capital is 
unavailable at reasonable conditions.  The GoA hopes that Parliament 
will approve the program before its summer recess in mid-July. 
NOTE: state guarantees will cover only bank loans, not commercial 
bond issues.  The GoA would guarantee 30-70% of the loan amount, 
depending on the company's credit rating and other criteria to be 
defined (such as number of jobs at stake).  END NOTE. 
 
Medici Bank Investigation for Fraud, Money Laundering 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶10. On May 28, Austria's embattled Bank Medici had its banking 
license annulled by the Austrian Financial Market Authority (the 
bank itself suspended its use of the license in March).  Bank 
Medici, which is 75% owned by Sonja Kohn and 25% by Bank Austria, 
was deeply involved in the Madoff affair as a conduit for 
investments in those funds (ref C).  Austrian authorities are 
reportedly investigating Bank Medici management for potential crimes 
including fraud, embezzlement, money laundering, and violations of 
the Security Supervision Act and the Investment Funds Act.  Issues 
include Bank Medici's role as a Madoff conduit, questionable 
payments from Madoff to Kohn, alleged money laundering in connection 
with Herald Asset Management (Cayman Islands), and Kohn's alleged 
contact to Robert Allen Stanford (like Madoff, accused of 
large-scale financial fraud).  The Bank Medici case has been a major 
headache for 25% owner Bank Austria and was reportedly a factor in 
CEO Hampel's early departure from BA. 
 
Central Bank: Rescue Measures are Working, No Credit Crunch 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶11. The OeNB has said since late March that there is no "credit 
rg^QQ[;xHwcrunch" in Austria (despite anecdotal evidence that lender scrutiny 
and terms remain tight -- ref B).  A recent OeNB study of financial 
market indicators concludes that since mid-March, money markets have 
largely normalized, interest rates are falling, the Vienna Stock 
Exchange is rallying, and the GoA's bank rescue package has proven 
itself effective.  Austrian central bankers now see the downturn as 
a demand-side, real-sector phenomenon rather than a financial crisis 
inhibiting credit supply. 
 
ORDWAY