Kommunalkredit To Be Nationalized; More

UNCLAS VIENNA 001619

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: Kommunalkredit To Be Nationalized; More
Austrian Banks Likely to Take State Capital

REF: (A) VIENNA 1601; (B) VIENNA 1571 and previous


1. SUMMARY: The GoA will take over 99.78% of the
troubled Austrian bank Kommunalkredit (which provides
state/municipal financing) in an 11th-hour move to
rescue the bank. Other large Austrian banks and
insurance companies appear better off, but rumors are
that most will eventually make use of state capital
injections. The GoA will charge interest and fees for
its equity participation and guarantees, and
individual contracts will stipulate additional
conditions covering issues such as executive
compensation. END SUMMARY.

Kommunalkreditbank To Be Nationalized
--------------


2. On November 3, the GoA moved to nationalize the
troubled Austrian banking group Kommunalkredit.
Kommunalkredit's owners -- the Austrian Volksbanken AG
and the Belgian-French Dexia Credit Local) -- approved
the move. The GoA will take over the 50.78% share of
Austrian Volksbanken AG and the 49.0% share of the
Belgian-French Dexia Credit Local, paying a symbolic
one Euro each to Volksbanken and Dexia. The Austrian
Association of Municipalities will keep its 0.22%
share in Kommunalkredit. In addition, Volksbanken and
Dexia must contribute to Kommunalkredit's rescue by
converting some of their unsecured liabilities (EUR
173 million for Volksbanken and EUR 200 million for
Dexia) with Kommunalkredit into participation capital.
The GoA will provide additional equity to raise
Kommunalkredit's equity ratio to 8-9% and provide
state guarantees to help Kommunalkredit to acquire
credit. Personnel changes in the bank's management
are pending.


3. The Kommunalkredit rescue was reportedly an
emergency operation precipitated by problems in
servicing bonds and high money market rates which
caused Kommunalkredit's refinancing costs to double in
recent months. The bank faced a liquidity crunch with
a EUR 1 billion refinancing deal become payable today
(November 3) and another EUR 10 billion to be
refinanced through December.

More Austrian Banks Likely to Resort to GoA Capital
-------------- --------------


4. Volksbanken, now faced with the complete write-off
of its reported EUR 400 million stake in
Kommunalkredit, will likely become the next large
banking group to resort to GoA rescue funds. After
Erste Bank availed itself of a GoA capital injection
(reftel),reports are that all large Austrian banks
(including Raiffeisen Zentralbank, BAWAG, Volksbanken,
and Hypo Alpe Adria) will make use of available GoA
capital and that insurance companies will follow in
due course. Bank Austria, Austria's largest banking
group and a member of the Italian UniCredit group,
would also be eligible for GoA capital, but has not
yet shown public interest in taking part.

More Details on the GoA Bank Rescue Package
--------------


5. On October 30, the Ministry of Finance (MoF)
issued regulations for banks and insurance companies
that resort to Austria's EUR 100 billion rescue
package. GoA help comes at a price: the GoA will
charge interest and fees both for state equity
participation and for state guarantees of interbank
lending. The MoF ordinance stipulates that institutes
resorting to GoA money are obliged to use these funds
in part to provide loans to businesses and private
individuals, with special emphasis on loans for small
and medium-sized enterprises. Each bank or insurance
company receiving GoA capital or guarantees will enter
an individual contract setting out conditions and
terms, potentially with penalties for violating GoA
conditions. Still unclear is whether Austrian banks
can use state funds to support their extensive
subsidiaries in central and southeastern Europe.

GIRARD-DICARLO