The US website Daily FX Market News and Analysis reported today that Austria may well be the next victim of the Euro zone debt crisis.
This has to do with Eastern and Central European countries having taken a good part of their debt in Swiss Francs to take advantage of Switzerland’s low interest rates.
Daily FX Market News and Analysis quoted Stratfor, a global intelligence advisory that pointed out that, “currently, 53 percent of outstanding mortgages in Poland and about 60 percent of those in Hungary are denominated in Francs”.
The majority of these loans were made by the top six Austrian lenders: Bank Austria AG (owned by Italy’s UniCredit bank), Erste Bank Group, Raiffeisen Bank International, Österreichische Volksbanken, BAWAG P.S.K., and Hypo Alpe-Adria International.
According to the site, foreign currency loans at present make up almost a third of Austria’s household debt.
With the Swiss currency settled at a very high level right now compared to its top counterparts, Central European borrowers among which many are Austrian, will find it hard to repay their obligations denominated in Swiss Francs. This would cause massive losses for Austrian banks.
If the government had to step in to bail out these banks – Hypo bank was already nationalized in 2009 – the rescue package could be of a considerable size.
Daily FX Market News and Analysis added that Central and Eastern European countries owe Austrian lenders about €230 billion, or 61.2 percent of Austria’s 2010 GDP.
Assuming the bulk of these liabilities would fall on the Austrian government, that would mean considerable funding stress as happened in Ireland.
Furthermore with Austria’s 4.6 per cent debt-to-GDP ratio, a rate already equivalent to that of Italy, the ultimate burden for a rescue would likely be falling on the already worn-thin European Financial Stability Facility (EFSF) and on the European Central Bank, Daily FX Market News and Analysis stated.