Bank rescue dough ‘gone for good’

The money the state poured into nationalised banks is lost, according to an economic expert.

Franz Hahn of the Institute for Economic Research (WIFO) said today (Weds) that the Republic of Austria might not see the billions of Euros it had poured into Hypo Group Alpe Adria (HGAA), Kommunalkredit and Volksbank AG (ÖVAG) ever again. All three finance institutes were taken over by the state during the current crisis.

The partial nationalisation of ÖVAG only occurred last February. The decision causes a gap in the government’s budget path for the coming years. This consequence of the move tempted the Social Democrats (SPÖ) and the People’s Party (ÖVP) to jack up the bank tax. The state raked in 500 million Euros thanks to the charge last year.

ÖVP Finance Minister Maria Fekter made clear that Austria’s biggest banks must pay more this year. She said bank solidarity tax revenues should rise to 625 million Euros in 2012. ÖVAG made a loss of 1.2 billion Euros in 2011 – despite having received one billion Euros of participation capital from the state since 2008.

Hahn made clear that the invested money was gone but also justified the decision to carry out nationalisations. He told the Kurier that the steps had been needed to lower “systemic risks”. The WIFO expert explained that the state would have faced much higher costs had it allowed one of the rescued banks to go bust. SPÖ Chancellor Werner Faymann defended the government’s costly strategy with similar arguments.

Hahn warned that Austria’s biggest banks might get in trouble due to a decline of profits in Eastern Europe (EE). Erste Bank Group AG (Erste Bank) and several rivals have focused on expanding in EE for years. The various finance institutes benefited from the recovery of the region’s economy following the fall of the Iron Curtain before the situation worsened during the recent crisis.

The WIFO expert said that these banks were now vying for clients in Austria. But Hahn claimed that it was impossible to make money on the domestic market since it was overbanked. The financial market expert told the Kurier that there were too many branches in Austria.

“The prospering Eastern European activities distracted from domestic difficulties for a long time,” he added. These circumstances mean that international interest in taking over the nationalised banks will be low, according to Hahn. European Union (EU) rules mean that Austria must sell the rescued financial institutes within the coming years.

SPÖ Finance Secretary Andreas Schieder recently said the SPÖ-ÖVP government nominated “renowned financial sector personalities” to work on concepts for an insolvency law for banks. Schieder said the plan was to make the new bankruptcy law legally effective by autumn. Schieder criticised that the state was currently forced to keep out for too long from getting involved if banks struggled. He explained that the upcoming financial sector insolvency regulations would be similar to some other countries’ laws.