Government Rescues BAWAG - Gets "Thanks" From

UNCLAS SECTION 01 OF 02 VIENNA 001270 SIPDIS SIPDIS, SENSITIVE TREASURY FOR OCC/EILEEN SIEGEL TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA TREASURY PLEASE PASS TO FEDERAL RESERVE AND SEC/E.JACOBS JUSTICE FOR DOJ/CRM/ATMLS AND FOR OIA/RICHARD OWENS FBI FOR CID E.O. 12958: N/A TAGS: EFIN PGOV ELAB AU SUBJECT: Government Rescues BAWAG - Gets "Thanks" From Abashed Union Chief REF: VIENNA 976 Summary -------------- ¶1. (U) In a May 1 meeting, the GoA and the Austrian financial sector agreed on a rescue package for Austria's fourth largest banking group, BAWAG P.S.K. (BAWAG). The GoA will provide a temporary Euro 900 million government guarantee to BAWAG to stop massive withdrawals and to reassure BAWAG customers about the bank's stability. In addition, major Austrian banks and insurance companies will provide Euro 450 million in fresh capital to BAWAG to enable the institution to meet the Banking Act's strict equity requirements. The immediate trigger for BAWAG's current problems was a class-action lawsuit, which creditors from the bankrupt U.S. futures and commodities brokerage firm Refco, filed against BAWAG in U.S. bankruptcy court on April 25. Revelations in March (reftel) that BAWAG lost Euro 1 billion in speculative transactions through offshore centers had previously precipitated criticism of the bank's 100% owners, the Austrian Trade Union Federation (OGB). At a joint press conference with Chancellor Schuessel announcing the rescue package, new OGB President Rudolf Hundstorfer could only say "thanks." ¶2. (SBU) While there was apparently no risk of BAWAG's insolvency, the rescue package clearly aimed to bolster the reputation of Austria's financial sector. The political consequences from the scandal and lawsuit will probably be more far-reaching. The governing center- right People's Party will seek to use BAWAG as an issue in autumn elections, highlighting the economic and managerial ineptitude of the OGB and its ally, the opposition Social Democrats. End Summary. Government and Financial Community Rescue BAWAG -------------- -- ¶3. (U) In a late night emergency meeting on May 1, Chancellor Wolfgang Schuessel, Finance Minister Karl- Heinz Grasser, and Austrian National Bank (ANB) Governor Klaus Liebscher met with representatives from Austria's financial community to devise a rescue package for Austria's fourth largest bank, BAWAG P.S.K. (BAWAG). The GoA agreed to provide a Euro 900 million ($1.2 billion) 
guarantee to BAWAG, valid through July 1, 2007, to reassure BAWAG customers that deposits are safe. The move came after customers made withdrawals reportedly totaling as much as Euro 60 million per day last week. This did not include withdrawals by institutional investors. Under these circumstances, the guarantee of BAWAG's 100% owner, the Austrian Trade Union Federation (OGB),was no longer sufficient because of the OGB's own financial problems. ¶4. (U) In addition to the GoA guarantee, major Austrian banks and insurance companies will provide BAWAG Euro 450 million ($563 million) in fresh capital. The capital, in the form of debtor warrants, will enable BAWAG to meet the Banking Act's strict equity requirements and to submit a balance sheet for 2005. BAWAG will have to repay these warrants as soon as its economic situation stabilizes. ANB Governor Liebscher acknowledged that BAWAG had liquidity and equity problems, which the emergency measures would address. Liebscher stressed, however, that there was no danger of insolvency. BAWAG's Problems - The Aftermath of the Refco Bankruptcy -------------- -------------- ¶5. (U) BAWAG's current problems result from its involvement in the bankruptcy of the U.S. futures and commodities brokerage firm Refco in October 2005. In this connection, BAWAG also suffered from March 2006 revelations that the bank had incurred Euro 1 billion ($1.3 billion) in losses due to speculative transactions with offshore centers in 2000 (reftel). On April 25, a group of Refco creditors filed a $1.3 billion lawsuit VIENNA 00001270 002 OF 002 against BAWAG in U.S. bankruptcy court, alleging BAWAG aided and abetted Refco CEO Philip Bennett in fraudulent activities that led to Refco's collapse. (Note: A BAWAG lawsuit against Refco in the U.S. is also pending. End Note.) ¶6. (U) On May 1, BAWAG reached a preliminary agreement with the creditors' lawyers on an out-of-court settlement. Details are still not public, but BAWAG's original offer of $500 million seems to have been insufficient. Until both sides agree on a final agreement, a U.S. court has blocked BAWAG's U.S. assets ($1.1 billion) as collateral. The preliminary agreement allows BAWAG to continue its business in the U.S. Most importantly for BAWAG, the agreement increases the possibility that the OGB can proceed with the sale of BAWAG. Comment -- Economic and Political Fallout -------------- ¶7. (SBU) The GoA needs parliamentary approval for the BAWAG guarantee. This should come during a special parliamentary session on May 8. As part of the guarantee, the OGB will have to disclose its financial position, which has historically been nebulous, to the ANB. Moreover, the OGB will have to transfer its own (8%) and BAWAG's (12%) shares in the ANB to the GoA at face value. While ANB Governor Liebscher's comments about no danger of insolvency were most probably correct, it took a concerted rescue effort by the GoA, the National Bank and Austria's banks and insurance companies to avoid damage to the reputation of Austria's financial sector. ¶8. (SBU) The domestic political fallout from BAWAG's problems will likely be much more consequential than any financial repercussions. BAWAG's and the OGB's woes overshadowed the opposition Social Democrats' (SPO) traditional May Day celebrations. SPO leader Alfred Gusenbauer publicly blamed "neo-liberalism" for the BAWAG speculation losses. However, OGB President Rudolf Hundstorfer sheepishly thanked the GoA for the guarantee. ¶9. (SBU) The governing center-right People's Party (OVP) has missed no opportunity to highlight the economic and managerial incompetence of the OGB, and implicitly the SPO. Schuessel admitted that the OVP would make BAWAG a campaign issue in the autumn elections. The OVP has also underscored the unusual situation of a right-of-center government bailing out a bank associated with the labor unions and the Social Democrats. The clear implication that the OVP would like to draw is that the OVP protects the interests of the Austrian worker better than the SPO does. MCCAW