ÖVAG rescue followed by Kommunalkredit cash concerns

A finance institute the state rescued from ruin in 2008 is in need of more money, according to the finance minister.

People’s Party (ÖVP) Finance Minister Maria Fekter admitted yesterday (Tues) that Kommunalkredit – which was nationalised shortly after the collapse of US investment bank Lehman Brothers caused a global crisis – must be funded with another 500 million Euros shortly. Kommunalkredit’s condition is suffering under the considerable amount of Greek government bonds and credit default swaps (CDS) it holds.

The Republic of Austria took over Kommunalkredit around one year before Hypo Group Alpe Adria (HGAA) was nationalised. Viennese and Klagenfurt prosecutors are still trying to determine whose fault it was that the bank sustained immense losses after a quick and initially successful expansion in Southeast Europe. Bankers, businessmen but also politicians could face abuse of office and fraud charges over occurrences at HGAA.

Only on Monday evening, Fekter and Finance Secretary Andreas Schieder of the Austrian Social Democrats (SPÖ) announced that the state would dramatically increase its stake in Volksbank AG (ÖVAG). Austria will soon hold almost 50 per cent in the ailing financial institute, according to the government officials. ÖVAG received around one billion Euros from the state in the crisis but suffered a loss of the same amount in 2011 nevertheless. The contract of its CEO, Gerald Wenzel, will not be extended, according to business papers. Wenzel is expected to leave the bank in April.

Schieder said yesterday that the Austrian bank solidarity tax – a fee the government receives from the country’s leading banks since 2010 – will increase by around 25 per cent in the coming years. The state raked in half a billion Euros thanks to the bank tax in 2011, according to the finance ministry. Bankers criticised the decision to jack up the charge as a consequence to the partial nationalisation of ÖVAG. They branded the step as unjustified, unfair and counterproductive. Some CEOs already warned that lawsuits against the state could not be ruled out as they refused to accept higher taxation because of a rival’s struggles.

SPÖ Chancellor Werner Faymann defended the decision to rescue ÖVAG. He said Austria would have been confronted with costs of 13 billion Euros or more had the government allowed the Vienna-based finance institute to go bankrupt. The chancellor also claimed that customers would have been seriously unsettled had ÖVAG slid further towards ruin. The decision to spend hundreds of millions of Euros on ÖVAG shares will increase this year’s budget deficit. This development tempted the coalition to increase the bank tax to ensure that its budget consolidation project would not be affected despite the turmoil at ÖVAG.

Karl Aiginger, the head of the Viennese Institute for Economic Research (WIFO), said today the fact that ÖVAG needed another one billion Euros indicated that Standard & Poor’s (S&P) was not totally wrong in lowering Austria’s rating. The credit rating agency downgraded the country from the best possible estimation of AAA by one notch to AA+ last month. S&P identified Austrian banks’ intense engagement in Eastern Europe (EE) as an immense risk factor to the state’s budget. Speaking to the Kurier, Aiginger said Austria could be upgraded again “in some years – if it shows convincing determination for reforms”. He added that the budget consolidation package be turned into a reform package.