Austrian Government Bank Rescue - Update

UNCLAS SECTION 01 OF 02 VIENNA 001751

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E.O. 12958: N/A
TAGS: EFIN AU
SUBJECT: Austrian Government Bank Rescue - Update

REF: (A) VIENNA 1665; (B) VIENNA 1619 and previous


1. SUMMARY: As expected, more large Austrian banks
(Raiffeisen Zentralbank, Volksbank, and Hypo Alpe
Adria) have applied for GoA equity injections; no
insurer has showed interest so far. Volksbanken AG,
after its Kommunalkredit flop and other write-offs,
will likely show a loss for 2008. Hypo Alpe Adria
bank (HAA) has a low equity ratio and problems
stemming from troubled majority shareholder Bayerische
Landesbank. The Austrian Financial Market Authority
(FMA) is endorsing GoA equity injections and
monitoring whether foreign owners plan to withdraw
capital from Austrian banks. Credit is still scarce,
even with GoA-guaranteed interbank lending auctions
underway(an EUR 85 billion program). The GOA's EUR 15
billion equity injection program has not yet received
EU Commission approval and has not paid out a single
Euro. Banks complain that regulators are trying tack
on conditions to equity contracts and have not defined
the role of FIMBAG (which will administer GoA funds).
END SUMMARY.

More Banks Resort to State Capital
--------------


2. After Erste Bank's request for state equity
(reftels),on November 25 Raiffeisen Zentralbank (RZB)
decided to raise about EUR 2 billion in fresh equity
in form of participation shares. Existing
shareholders will raise EUR 700 million, with RZB
requesting GoA capital for the rest.


3. Volksbanken is negotiating with the GoA for
participation capital of about EUR 1 billion to bring
its Tier 1 capital ratio up to 9%. Volksbanken will
try to secure the entire amount from the GoA: no
equity increase by existing shareholders is planned,
rather current shareholders would at a later date buy
the GoA's stake in the form of common shares.
Volksbanken faces a difficult period and will likely
show a net loss for 2008 due to its Kommunalkredit
debacle (prompting write-offs of almost EUR 400
million) and losses of at least EUR 300 million from
business with Lehman Brothers, Iceland, and structured
products.


4. Another problem bank is Hypo Alpe Adria (HAA --
Austria's sixth largest bank) which has made headlines
repeatedly in recent years due to scandals and high-
risk ventures. Since mid-2007, HAA's majority
shareholder (at least 57.5%) is now troubled
Bayerische Landesbank. Other shareholders include the
Carinthia provincial government (16%),Grazer
Wechselseitige insurance (26.5%). With its Tier 1
capital ratio reportedly only 5.6%, HAA needs EUR 2
billion of which EUR 1.3 billion would come from the
GoA and EUR 700 million from current owners. The
Bavarian state government's rescue package for
Bayerische Landesbank reportedly includes fresh equity
for HAA (its largest foreign subsidiary),but since
one of the Bavarian government's conditions is a
massive cut-back of Bayerische Landsbank's
international business, rumors are that it may try to
sell HAA.


5. So far, no insurance company has shown interest in
GoA money. Speaking for one of Austria's three
largest insurers, Uniqa CEO Konstantin Klien recently
remarked that 8% is too high a price.


6. Austrian Financial Market Authority (FMA) co-CEO
Helmut Ettl has suggested that most or all large
Austrian banks could tap the GoA EUR 15 billion pot --
since the market is demanding higher capital ratios --
but opposes expanding GoA protection to related
industries such as funds. The FMA does not see signs
that foreign owners want to withdraw capital from
Austrian banks, but is monitoring the situation.
NOTE: Ettl's remark primarily concerns BAWAG (100%
owned by U.S. fund Cerberus Capital Management) and
Bank Austria (97% owned by the Italian UniCredit
group),and Hypo Alpe Adria cited above. END NOTE.

Show Us the Money
--------------


7. Even though auctions have started under the EUR 85

VIENNA 00001751 002 OF 002


billion guarantee of interbank lending, entrepreneurs
say loans are unavailable or very difficult to get.
Austrian National Bank Governor Ewald Nowotny has also
said that credit availability remains a pressing
problem.


8. The GoA's EUR 15 billion equity injection program
has not paid out a single Euro, even though the GoA
decided on it six weeks ago and Parliament approved it
October 21. The GOA is still waiting for EU
Commission approval after a reported communication
breakdown between Brussels and the Austrian Ministry
of Finance (MoF) and the Commission's reported
questioning of the fixed annual interest of 8% as too
low. RZB CEO Walter Rothenteiner, chairman of
Federal Economic Chamber's Bnking and Insurance
Division, complained publicl that if the package
"does not kick in soon, the hole thing was not really
helpful."

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


9. Frictions over GOA capital particiption extend
beyond the marked delays. Bank intelocutors say
regulators are trying to attach mor and more
conditions into quity participation contracts.
Unclear is the role of the new FIMBAG, created to
administer GoA funds (ref A). FIMBAG co-head Hannes
Androsch, a respected Social Democratic industrialist,
has signaled that FIMBAG will take an activist role --
something banks will probably resist. With Austrian
bank holdings in southeastern/eastern Europe (about
$290 billion) now weakening, now is not the time for
an ideological battle over state interference,
especially if it keeps the GOA from delivering on its
existing promise to shore up bank capital. END
COMMENT.

GIRARD-DICARLO