Austria is fast becoming Europe's latest debt nightmare
Ah Austria, land of schnitzel, lederhosen, Mozart, alpine meadows and beer drinking. Less widely appreciated is its special place in the history of catastrophic banking crises.
It was the failure of Creditanstalt, a Viennese bank founded in 1855 by Anselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America.
No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right?
Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events.
In a nutshell, the Austrian government has had enough of funding the bank’s losses, and announced plans to “bail-in” external creditors to the tune of €7.6bn instead.
As such, this marks a test case of new European rules to make creditors pay for failing banks. About time too, you might say. What took them so long?
Only in this case, the bonds are notionally guaranteed by the Austrian state of Carinthia, which now theoretically becomes liable for the bail-in. It’s an echo of the mess Ireland got itself into at the height of the banking crisis, when it foolishly attempted to stem the panic by underwriting all Irish banking liabilities; the move very nearly ended up bankrupting the entire country. Hypo will bankrupt Carinthia.
Essentially, what the Austrian government is doing is cutting loose an entire region, rather in the way the federal authorities in the US allowed Detroit to go bust a number of years ago.
It’s a mini-Greece going off in the heartlands of Europe.
In Hypo’s case, the bail-in also threatens knock-on consequences for public bodies elsewhere, including Bayern Landesbank, a big holder of Hypo bonds which is owned by the German state of Bavaria, and the Munich based FMSW, which is again publicly underwritten.
All this is just the tip of the iceberg; Europe is awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off.
Massive creditor losses are in prospect. The European authorities had us all half convinced that Europe’s debt crisis was over. In truth, it may have barely begun.
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Frequently Asked Questions about this Article…
The failure of Hypo Alpe-Adria Bank is significant because it marks a test case for new European rules that require creditors to bear the losses of failing banks. This situation highlights the ongoing challenges in Europe's banking sector and raises concerns about potential knock-on effects for other public bodies and regions.
While Hypo Alpe-Adria Bank's failure is not as catastrophic as the Creditanstalt collapse that contributed to the Great Depression, it still poses serious risks. The Austrian government's decision to bail-in creditors echoes past crises, such as Ireland's banking troubles, and could have significant regional and international repercussions.
A 'bail-in' is a financial mechanism where external creditors are required to absorb some of the losses of a failing bank. In Austria, the government plans to implement a €7.6 billion bail-in for Hypo Alpe-Adria Bank, making creditors responsible for the bank's losses instead of relying solely on taxpayer funds.
Carinthia is involved because the bonds issued by Hypo Alpe-Adria Bank are notionally guaranteed by the state. This means that Carinthia could become liable for the bail-in, similar to how Ireland faced liabilities during its banking crisis. The situation threatens to bankrupt Carinthia, much like Detroit's financial troubles in the US.
The bail-in could have significant consequences for other European regions, particularly those with financial ties to Hypo Alpe-Adria Bank. For example, Bayern Landesbank and the Munich-based FMSW, both of which hold Hypo bonds, could face financial challenges due to their exposure to the bank's losses.
Despite some beliefs that Europe's debt crisis is over, the situation with Hypo Alpe-Adria Bank suggests otherwise. The interconnected nature of European banking and public liabilities means that many debts may never be repaid, indicating that the crisis may still be unfolding.
Everyday investors should be aware that the Hypo Alpe-Adria Bank crisis highlights the risks associated with investing in European banks and public bonds. The potential for creditor losses and regional financial instability could impact investment portfolios, making it important for investors to stay informed and consider diversification.
The Hypo Alpe-Adria Bank situation teaches us the importance of understanding the risks associated with banking investments and the potential for government intervention in financial crises. It also underscores the need for robust financial regulations and the careful management of public liabilities to prevent widespread economic fallout.
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