VZCZCXRO7585
OO RUEHIK
DE RUEHVI #1583/01 3500957
ZNR UUUUU ZZH
O 160957Z DEC 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3881
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUCNMEM/EU MEMBER STATES  PRIORITY
RUEHVB/AMEMBASSY ZAGREB PRIORITY 1806
RUEHBW/AMEMBASSY BELGRADE PRIORITY 0005
RUEHVJ/AMEMBASSY SARAJEVO PRIORITY 0200

UNCLAS SECTION 01 OF 02 VIENNA 001583 
 
SIPDIS, SENSITIVE 
 
TREASURY FOR FTAT, OCC/SIEGEL, AND OASIA/ICB/MAIER 
TREASURY PASS TO FEDERAL RESERVE AND SEC/E. JACOBS 
 
E.O. 12958: N/A 
TAGS: EFIN AU GM
SUBJECT: Austrian Government Takes Over Hypo Alpe Adria Banking 
Group after Crisis Weekend 
 
REF: VIENNA 1479 
 
VIENNA 00001583  001.2 OF 002 
 
 
Sensitive but unclassified -- protect accordingly. 
 
¶1. (SBU) SUMMARY: On December 14, the GoA nationalized Hypo Alpe 
Adria (HAA) -- Austria's sixth largest bank -- in concurrence with 
the bank's private shareholders.  HAA's troubles were increasingly 
evident (reftel) and the GoA took the step (in consultation with the 
ECB and the provincial governments of Carinthia and Germany's 
Bavaria) in order to prevent a collapse of confidence in the bank, 
ensure its long-term liquidity, and avoid broader fallout from a 
bankruptcy/liquidation.  While HAA is now safe, the GoA will have to 
restructure the group and may split it into "good" and "bad" banks. 
GoA FinMin Proell and central bank governor Ewald Nowotny criticized 
HAA's erstwhile owners, particularly the governments of Bavaria (the 
former owner of BayernLB) and Carinthia, for bringing a major bank 
to the precipice.  HAA subsidiaries are among the largest banks in 
southeast Europe; their future is now in GoA hands and subject to EU 
scrutiny of state aid.  END SUMMARY. 
 
An Extraordinary Step 
- - - - - - - - - - - 
 
¶2. (SBU) A weeks-long standoff over recapitalizing HAA (reftel) -- 
fought between Austria's Finance Ministry (MoF) and HAA's owners 
Bayerische Landesbank/BayernLB (67%), the provincial government of 
Carinthia (12.5%) and GRAWE insurance company (20.5%) -- culminated 
in a weekend of frenzied negotiations among Austrian, German, and 
ECB policymakers and bankers, resulting in agreement on GoA takeover 
terms.  FinMin Josef Proell announced the decision on the morning of 
December 14, less than an hour before HAA branches opened.  NOTE: 
Absent the GoA move, the bank might have been unable to open (if it 
had reported a Tier 1 capital ratio below the legal minimum of 4%) 
or could have experienced a run on deposits - END NOTE.  FinMin 
Proell said the move was closely coordinated with Austrian 
Chancellor Werner Faymann, Austria's Nationalbank, the German 
Bundesbank, and the ECB. 
 
¶3. (U) Details of the agreement: 
--  The GoA will take over 100% of the bank, paying each of its 
former owners (BayernLB, state of Carinthia, GRAWE insurance) a 
symbolic one Euro; 
--  HAA's three former owners will provide EUR 1 billion in fresh 
equity to HAA (BayernLB EUR 825 million, Carinthia EUR 200 million, 
GRAWE EUR 30 million).  The GoA will add EUR 450 million in equity. 
In sum, this gives HAA the EUR 1.5 billion it reportedly needs to 
put its Tier 1 capital ratio above 8% (the de facto minimum to 
obtain liquidity and do business internationally); without the 
injection, HAA would reportedly have fallen below the 4% regulatory 
floor. 
--  HAA's former owners will provide EUR 3.4 billion in liquidity to 
HAA (BayernLB EUR 3.075 billion, Carinthia EUR 227 million, GRAWE 
EUR 100 million). 
--  Austria's other large banks will together provide c. EUR 500 
million in liquidity.  If some of those funds are used for 
recapitalizing HAA, they will reduce the aforementioned EUR 450 
million GoA equity injection.  COMMENT: this kind of "collective 
rescue effort" is typical crisis behavior for Austria's close-knit 
financial sector.  END COMMENT. 
 
Why Government Takeover, Not Receivership? 
- - - - - - - - - - - - - - - - - - - - - 
 
¶4. (U) As Austria's sixth largest bank, HAA was designated "system 
relevant" by Austrian authorities (i.e. "too big to fail") and 
court-supervised receivership (or outright collapse) would have had 
unforeseeable consequences for Austria's banking system, along with 
repercussions for other banks in the Euro-zone and in southeast 
Europe -- particularly in Croatia and Bosnia/Herzegovina (HAA is the 
largest bank in both countries).  At a press conference attended by 
an Embassy representative, central bank governor Nowotny said that 
liquidating HAA would have threatened market confidence in banks 
serving the entire CESEE area.  NOTE:  besides Bosnia-Herzegovina 
and Croatia, HAA is heavily engaged in Slovenia, Serbia, and 
Montenegro.  Of HAA's total assets, only 46% are in Austria and 12% 
in Italy, while 16% are in Croatia, 11% in Slovenia, 6% in 
Bosnia-Herzegovina, 4% in Serbia and 5% in other countries. 
 
GoA Pans States of Bavaria, Carinthia 
- - - - - - - - - - - - - - - - - - - 
 
¶5. (U) FinMin Proell and Governor Nowotny had harsh words for HAA's 
owners -- particularly the Bavarian state government (as owner of 
BayernLB) and the Carinthian government -- for irresponsible 
behavior in leading HAA to the edge of bankruptcy.  Nowotny 
 
VIENNA 00001583  002.2 OF 002 
 
 
criticized BayernLB and the Bavarian government for trying to simply 
drop a system-relevant subsidiary on a foreign government's doorstep 
(a "moral hazard" issue in his words) -- and opined that the GoA had 
shown responsibility, a view Nowotny said was shared by ECB 
President Trichet.  Nowotny also criticized Carinthian authorities 
(who controlled HAA until its majority sale to BayernLB in 2007), 
acknowledging that many of HAA's financial problems date back to 
that era. 
 
Criminal Investigation Ongoing 
- - - - - - - - - - - - - - - - 
 
¶6. (SBU) According to media reports, Austrian investigators are 
looking into possible criminal behavior at Hypo Alpe Adria -- 
including potential fraud connected with the 2007 sale to BayernLB 
and criminal connections in southeast Europe.  A prosecutorial 
spokesperson said the investigation "is just starting," and would 
not speculate on timing or targets.  Governor Nowotny called 
publicly for an "in-depth" criminal investigation and appropriate 
prosecution. 
 
How We Got Here: An Insider View 
- - - - - - - - - - - - - - - - 
 
¶7. (SBU) On December 1, in the lead-up to HAA's takeover, Governor 
Nowotny told the Ambassador that HAA would likely be rescued in 
consultation with its shareholders including the state of Bavaria. 
Nowotny admitted that the central bank had known of Hypo's troubles 
for some time -- and opined that there may well have been criminal 
behavior -- but argued that bank regulators cannot "go public" with 
such knowledge ("the bank would collapse instantly") and instead has 
to work behind the scenes to reach a solution.  Nowotny said that 
some of Hypo's problems likely date from before 2007, but Bavarians 
bear responsibility too for their "hubris" in over-reaching during 
the financial boom. 
 
COMMENT 
- - - - 
 
¶8. (SBU) HAA is safe for now, but likely faces radical 
restructuring.  Although no details have been announced, Nowotny has 
floated the prospect of splitting HAA into "good" and "bad" banks. 
Also unclear is what will happen to HAA's foreign subsidiaries, some 
of which are market leaders in southeast Europe.  As 100% owner of 
HAA, the GoA will have to make these decisions -- but will have to 
justify its behavior to European Commission competition authorities, 
who may take issue with HAA careening from one form of state aid 
(Bavaria/BayernLB) to another. 
 
¶9. (SBU) After years of sweeping HAA's problems under the rug, the 
Austrian banking system is now stuck with the most serious de facto 
failure in decades (even more costly than the BAWAG/Refco accounting 
fraud debacle in 2005).  While a radical step, this takeover is 
still likely to be the least costly solution for the GoA given the 
Carinthian state government's EUR 18-19 billion in guarantees for 
HAA assets -- guarantees that could have come due if HAA had been 
allowed to collapse, and would surely have landed in the GoA's lap. 
With this negotiated approach, the GoA has also managed to extract 
more capital and liquidity from HAA's former owners, most of all 
BayernLB, reducing the risks to HAA, Austrian banking generally and 
the GOA's fiscal position.  END COMMENT. 
 
EACHO