Austria is being pressured by the European commission to sell the nationalized banks

The European banking crisis is becoming increasingly interesting. Two Austrian banks have begun appearing increasingly often in the headlines of the press agencies, accompanied by losses of billions of Euros which they can cause to the state's budget.

The two banks are Hypo Alpe-Adria-Bank and Kommunalkredit, both of them nationalized in 2009, and 2008, respectively, amid a major liquidity crisis.

The funds injected directly in to them for recapitalization, as well as the government guarantees for the bonds issued by the two banks, were conditionally accepted by the European Commission.

Five years later, the truth about the state of the two banks is increasingly hard to conceal. It has been proven that the problem was one of solvency, and that the restructuring programs did not produce the funds expected to come from the divestment of assets. Now, "nobody wants to help Hypo Alpe-Adria", according to German financial newspaper Handelsblatt.

But who is Hypo Alpe-Adria? The bank was created in 1896 and has remained a regional financial institution until the end of the 80s, according to the presentation in its annual report for 2012. Then came its regional and international ambitions, which led to "a period of aggressive growth, without any risk limitations and far too optimistic assessments of the potential, in the context of serious operating deficiencies, on all the bank's segments", according to the annual report.

At the end of 2012, Hypo Alpe-Adria had total assets of 33.8 billion Euros, of which 24.4 billion were the loans granted to customers. The main financing sources were the issued bonds (14.8 billion Euros), customers' deposits (8.4 billion) and loans from other financial institutions (5.25 billion Euros).

But why should Hypo Alpe-Adria be helped? Because the European Commission is pressuring the government in Vienna to ask for the immediate repayment of the aid offered to the bank four years ago, and this would cause the bank to default, which would lead to losses of approximately 16 billion Euros, according to the estimates of Bank of Austria, quoted by Bloomberg.

In March 2013, Joaquin Almunia, the European Commission commissioner for competition has announced that the plan for the restructuring of Hypo Alpe-Adria is not enough to justify the maintaining of the state aid of 2.2 billion Euros. But the sale of the assets is going very slowly, as the bank has a great exposure to the markets of former Yugoslavia.

In mid-2013, Bloomberg said that the sale of the Austrian branch of the group is in its final stages. Just a few days later, the Austrian group has announced that the negotiations with the Indian group SREI due to the misunderstandings over the value that the assets would be acquired at. It would seem that the desire of Srei Group which wanted to obtain a European banking license, was not strong enough to go over the overvaluation of the "assets" owned by Hypo Alpe-Adria.

The Austrian group has tried to deal with the situation of Hypo Alpe-Adria through a "bad bank", and it asked Erste Bank and Unicredit Bank Austria to participate in its recapitalization, according to the news by Reuters. The leaders of the two banks refused. The executive director of Erste Bank, Andreas Treichl, said that "we are already paying the biggest bank tax of Austria, and the contribution to supporting the banking sector is fully covered by that", according to a Bloomberg article.

"We will not cave under the pressure of the politicians", Raiffeisen Bank International bank said, even though it wasn't asked to participate directly. How far does the lack of patriotism and European spirit of the leaders of the biggest bank of Austria go? Or will they be forced to radically revise their stance under the pressure of the "times"?

As if Hypo Alpe-Adria wasn't a big enough headache for the government in Vienna, the sale of another nationalized bank, Kommunalkredit Austria AG, failed, and it has halted the opening of new accounts and the granting of new loans.

The governmental agency that handles the state aids to the banks, said that it was impossible to sell the bank in a manner which would "preserve its value", according to a piece of news by Bloomberg. In other words, the offers were far below the face value of the assets, and such a deal would have placed a huge burden on the state budget. The figures of the Austrian and international press show that the bids have included "adjustments" of 50% - 70% of the assets' book value.

Those losses would be added to the capital injections of about 2.6 billion Euros for Kommunalkredit and KA Finanz (author's note: "the bad bank" already created for taking over the non-performing assets of Kommunalkredit) and of some guarantees of about 6.4 billion Euros for the assets of the bank and the bonds issued by it.

According to the published financial statements, Kommunalkredit had assets of 15.85 billion Euros at the end of 2012, of which 8 billion Euros were the face value of the loans granted to customers. The main financing sources were the issued bonds (8.78 billion Euros), the loans obtained from other financial institutions (3 billion Euros) and the customers' deposits (1.6 billion).

The cumulated assets of the two banks amounted to about 50 billion Euros at the end of 2012, which represents 16.1% of Austria's GDP of 310 billion Euros.

The structure of the main financing sources shows that the restructuring of the two nationalized banks can not be done without the creditors suffering a significant "haircut". Since it is hard to believe that anyone is going to give them a buzzcut, the "adjustment" of the customers' deposits seems inevitable.

But Austria's economic issues aren't confined to the financial system. Alpine Holding GmbH, the second largest construction company in the country, with multiple foreign operations, is facing major troubles in its restructuring process, after avoiding entering insolvency in March 2013. The creditor banks have accepted the reduction of debts by about 150 million Euros, as the losses of the company amounted to about 450 million Euros in 2012. According to data by Bloomberg, the company has over 16,000 employees, and the owner, Spanish company Fomento de Construcciones & Contratas SA, doesn't seem to convinced of the need of a new share capital increase.

The bonds of Alpine Holding with a 2017 maturity were trading yesterday in Frankfurt at 52% of their face value, and bonds with a 2015 and 2016 maturity at 61%, and 55% of the face value respectively.

When reviewing Austria's economic and financial issues, one also needs to consider that the general elections to be held in autumn, when 183 seats in the lower chamber of the Parliament will be made available, and the current coalition can not present itself before the voters with a new increase of the public debt. Especially since, despite the citizens' support of the idea, the MPs didn't agree to reducing their numbers to 165, to show their solidarity with the austerity measures they were asking of their citizens.

By the end of this month, Austria is expected to present the new plans for the restructuring of the nationalized banks. The uncertainties over their true worth make it far less probable to reach a definitive solution.

Thus, Austria is coming hot on the heels of Spain, Slovenia or Cyprus, and may even surpass the "leaders" of the European bank defaults to the tune of billions of Euros.

After all, we shouldn't forget that another Austrian bank, Creditanstalt, decisively contributed to the prolongation of the economic depression of the 30s, after its bankruptcy in May 1931. And that bank benefited from imperial privileges since its creation in 1855, by Anselm von Rothschild.