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