Austria Enacts Bank Rescue Package; Consortium

UNCLAS SECTION 01 OF 02 VIENNA 001571

SIPDIS

TREASURY FOR FTAT AND OCC/EILEEN SIEGEL
TREASURY ALSO FOR OASIA/ICB/VIMAL ATUKORALA
TREASURY PASS FEDERAL RESERVE, FINCEN, SEC/E.JACOBS

E.O. 12958: N/A
TAGS: EFIN AU
SUBJECT: Austria Enacts Bank Rescue Package; Consortium
Rescues Small Constantia Bank

REF: VIENNA 1534 AND PREVIOUS


1. SUMMARY: On October 21, the Austrian Parliament
unanimously approved an EUR 100 billion ($130 billion)
rescue package, with modest changes to the draft
announced last week (reftel). The GoA will guarantee
up to EUR 75 billion ($97 billion) in loans (down from
EUR 85 billion),will set aside EUR 15 billion ($19.5
billion) in equity to be injected into banks if needed,
and has earmarked EUR 10 billion ($13 billion) to cover
deposit guarantees. On October 17, the five major
Austrian banks agreed to bail out the small Constantia
Privatbank by injecting a GOA-guaranteed EUR 400
million ($520 million) into the bank. END SUMMARY.


2. Due to the crisis, the outgoing Austrian Parliament
convened a special session on October 21 to adopt the
EUR 100 billion rescue scheme for Austrian banks
(reftel). Parliament approved the package unanimously
but with a few changes following negotiations over the
weekend:

- The new state guarantee for interbank lending was
scaled back from EUR 85 billion to EUR 75 billion.

- The GOA can inject up to EUR 15 billion total into
banks and insurance companies in case of liquidity
problems. The GoA will have the option to buy shares
of banks and insurance companies and the Ministry of
Finance can even nationalize banks (partially or fully)
to avoid systemic damage (a "last resort" according to
FinMin Molterer). The GOA is more likely to raise bank
capital increase through preferred shares with no
voting rights, to minimize government influence. GOA
shares must be privatized as soon as market conditions
allow it, but there is no time limit.

- The GoA will earmark EUR 10 billion to cover
individual bank deposits. The new law foresees that
banks will guarantee assets of private and business
account holders up to EUR 50,000 ($65,000),including
accounts of SME's with sales up to EUR 9.7 million
($12.6 million). The GoA will guarantee unlimited
individual deposits until the end of 2009. As of 2010,
the GoA will guarantee individual savings up to EUR
100,000 ($130,000).


3. Most major Austrian banks still insist that
recapitalization is not needed -- nobody wants to be
the first one in line -- but experts expect the "big
five" (UniCredit-Bank Austria, Erste Bank, Raiffeisen
Zentralbank, Bawag and Volksbank) to take capital
injections in a concerted action soon. Only Erste Bank
has not ruled out a state capital injection to date.
On October 21, a member of the board of the National
Bank advised banks to take government financial
assistance.


4. The first Austrian bank to stake a guarantee claim
is the small "Constantia Privatbank" (CPB),mainly
active in private banking and real estate assets. CPB,
which was to be sold to Credit Suisse earlier this year
for around EUR 1 billion, suffered a liquidity collapse
in recent weeks. UniCredit, Erste, Raiffeisen (25%
each),Bawag and Volksbank (12.5% each) agreed to take
over CPB and will inject EUR 400 million into CPB,
which the GoA will guarantee. The National Bank added
another EUR 500 million ($650 million). NOTE:
Reportedly, the banks did not rescue CPB voluntarily
but only under GoA pressure, which feared negative
consequences. The "big five" have their own private
banking departments and have no use for the CPB's
assets, so they may liquidate CPB soon if they do not
find a buyer. END NOTE.


5. CPB had balance sheet assets of around EUR 1.2
billion ($1.5 billion),oversaw about EUR 10 billion
($13 billion) of client assets, and employed 260
people. The bank's majority owner, Christine de
Castelbajac, may be forced to pledge the assets of her
industry group Constantia Packaging (worth EUR 350
million) to CPB's rescuers. Observers debate whether
CPB was a victim of the financial crisis or collapsed
purely due to mismanagement. The bank's collapse
stemmed from its ties to two troubled real estate funds
("Immofinanz" and "Immoeast") led by CPB CEO Karl
Petrikovics and whose deposits CPB managed. The funds'

VIENNA 00001571 002 OF 002


share prices plummeted from over EUR 7 to less than one
euro within six months. Insiders including the bank's
owner reportedly withdrew their assets prior to CPB's
fall.

Modest Economic Stimulus En Route
--------------


6. The caretaker GoA has agreed on the outline of an
economic stimulus package that could be approved at the
first session of the newly elected Austrian parliament
next week. Proposed measures include expanding credit
guarantees for SME's (from EUR 2 to 3 billion),EUR 150
million ($195 million) in subsidized loans for SME's,
and commissioning infrastructure projects (primarily
rail/road construction) worth EUR 1 billion over the
next four years. The full package is worth about 1% of
Austrian GDP.

COMMENT
--------------


7. The EUR 100 billion financial rescue package is
huge, representing over a third of Austria's GDP (EUR
260 billion in 2006) if fully utilized. GoA
representatives insist their guarantees will not come
due, but the fact that the GoA rushed to enact the
package -- a week before the new parliament debuts --
might hint of unknown liquidity problems at banks. The
collapse of the small Constantia Bank should not be
overrated, but puts an additional burden on the other
banks. The Austrian banks' heavy involvement in
troubled Central and Eastern European states,
particularly in Hungary and Ukraine, will have
implications as will shrinking demand for Austria's
exports. As elsewhere in Europe, economic growth
forecasts for Austria are trending downwards (0.9 to
1.2 percent in 2009, per the Austrian Institute for
Economic Research) and there are clear signs that
Austria's strong labor market (3.6% unemployment in the
2nd quarter) will soon deteriorate.

GIRARD-DICARLO