Austrian Government Establishes Bank Rescue

UNCLAS SECTION 01 OF 02 VIENNA 001665

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: Austrian Government Establishes Bank Rescue
Holding Company; More Banks Resort To Government Funds

REF: (A) VIENNA 1619; (B) VIENNA 1601 and previous


1. SUMMARY: The GoA has established a bank rescue
holding company, known by its acronym as FIMBAG, to
administer the EUR 15 billion from the bank rescue
package available for GoA equity injections for banks
and insurance companies. Its first acquisition was
Kommunalkredit, which the GoA nationalized November 3.
Most or all large Austrian banks will apparently tap
GoA funds. Though domestic in intent, GOA equity
injections could provide additional breathing room to
shore up foreign subsidiaries (Austrian bank
subsidiaries hold 15.3% of the CEE/SEE/CIS banking
market, accounting for 26% of Austrian banks' total
assets). However, GOA reps see no need at present for
Austrian banks to supply additional equity to their
CEE/SEE/CIS subsidiaries. END SUMMARY.

Government Establishes Bank Rescue Holding (FIMBAG)
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2. On November 11, the GoA officially established a
bank rescue holding company to administer EUR 15
billion (from its EUR 100 billion bank rescue package)
available for GoA equity injections in banks and
insurance companies (ref B). The new company,
Finanzmarktbeteiligung AG (FIMBAG / in English,
Financial Market Participation Company) is a wholly
owned GoA enterprise established as a subsidiary of
OIAG (the GoA holding / privatization company).


3. The GoA appointed two experienced bankers as
FIMBAG's executive CEOs: former National Bank (OeNB)
Governor Klaus Liebscher and former OeNB Director
General / President Adolf Wala. The supervisory board
will consist of Veit Sorger (President of the
Association of Austrian Industrialists),Hannes
Androsch (industrialist and former Minister of
Finance),Stefan Zapotocky (OIAG supervisory board
member and former CEO of the Vienna Stock Exchange),
Herbert Kaufmann (CEO of the Vienna International
Airport),and two lawyers, Hellwigg Toggler and
Alexander Russ.

Troubled Kommunalkredit
--------------


4. FIMBAG's first acquisition was the troubled
Austrian banking group Kommunalkredit, which the GoA
nationalized on November 3 (ref A) by taking over the
Austrian Volksbanken AG's 50.78% share and the 49%
share of the Belgian-French Dexia Credit Local.
Volksbanken and Dexia were obliged to convert
unsecured Kommunalkredit papers worth EUR 173 million
and EUR 200 million, respectively, into participation
capital (thus contributing to Kommunalkredit's equity
base). That participation capital bears an interest
rate of 8% p.a. with a term of at least 5 years. The
GoA will have to pump additonal funds into the bank to
raise its Tier 1 equity ratio to 9% (reportedly a low
three-digit million EUR amount).

More Banks Will Use State Capital Injections
--------------


5. After Erste Bank (Austria's second largest banking
group) became the first large Austrian bank to request
a GoA capital injection (EUR 2.7 billion) via non-
listed, non-voting and non-transferable participation
shares, it appears now that most or all of the large
Austrian banks will tap GoA funds. Raiffeisen
Zentralbank (RZB),Austria's third largest banking
group, will decide on a GoA capital injection of up to
EUR 2 billion at a November 25 general meeting. After
its Kommunalkredit debacle, Volksbanken (Austria's
fourth largest banking group) will need at least EUR 1
billion to bring its Tier 1 capital ratio to 9%; it
is unclear how much will come from a capital increase
among shareholders and how much from a GoA capital
injection. Bank Austria, Austria's largest bank and a
member of the Italian UniCredit group, and BAWAG
(Austria's fifth largest bank, wholly owned by U.S.
private equity fund Cerberus Capital Management) are
still discussing the issue within their international
owners. Mid-sized financial institutions are also
being mentioned as possible beneficiaries of the fund,
including Hypo Alpe Adria, home loan savings bank

VIENNA 00001665 002 OF 002


Wuestenrot, and mortgage banks.

How does Austria's Rescue Affect Emerging Europe?
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6. A Finance Ministry (MoF) representative confirmed
that the EUR 15 billion available for equity
participation is designed for domestic use, but this
is not spelled out in the MoF's ordinance of October
30 (ref A) because it would violate EU regulations.
Banks and perhaps insurance groups will enjoy
additional liquidity through state equity, are
expected to provide loans to domestic businesses and
private individuals, and reportedly understand that
they cannot use the GoA money for equity injections
into CEE/SEE subsidiaries. However, money is fungible
and GoA money for domestic purposes will free up other
funds. Our MoF source foresaw no large-scale problems
in Austrian banks' in CEE/SEE/CIS subsidiaries and
thus no need currently for equity injections.


7. According to the OeNB's Financial Stability Report
of June 2008, 12 Austrian banks operated 73 fully
consolidated subsidiaries in CEE/SEE/CIS as of 31
December 2007. Of those subsidiaries, 38 are in the
12 new EU member states, 24 in other SEE countries and
11 in the CIS. Austrian banks have a 15.3% share of
the entire CEE/SEE/CIS banking market (22.7% excluding
Russia). In 2007, Austrian banks' CEE/SEE/CIS
business accounted for 26% of their total assets and
43% of consolidated profits before taxes. NOTE:
Unconsolidated bank assets of Austrian banks totaled
EUR 899.5 billion in 2007; total assets on a
consolidated basis (i.e. including CEE/SSS/CIS
subsidiaries) were EUR 1,073 billion, of which the
five largest Austrian banks accounted for 62.5%. END
NOTE.

GIRARD-DICARLO