Tags: IMF | bond | contagion | Austria

IMF Warns Austrian Hypo Alpe Bond Wipe-out May Cause Contagion

Tuesday, 01 Jul 2014 10:04 AM

The International Monetary Fund told Austria to reconsider a plan to force losses on owners of state-guaranteed bonds issued by Hypo Alpe-Adria-Bank International AG because it may call other public guarantees into question.

Austria’s move to void 890 million euros ($1.2 billion) of junior Hypo Alpe bonds guaranteed by the state of Carinthia is hitting investors who trusted in the public guarantee, Bas Bakker, the IMF’s mission chief to Austria, told reporters in Vienna today. While the government is presenting it as a special and isolated case, breaking the promise once risks damaging trust more broadly, he said.

Austria last month proposed a law bypassing the Carinthia guarantee and forcing losses on subordinated bondholders of Hypo Alpe, a bank that has cost taxpayers billions to bail out. In March, Finance Minister Michael Spindelegger ruled out putting the nationalized lender into insolvency, sparing holders of about 11 billion euros of the bank’s senior bonds, and pledged instead to seek contributions from junior creditors and Hypo Alpe’s former owners, among them Bayerische Landesbank.

“Our issue is not that subordinated debt could not be bailed in,” said Bakker, who was briefing reporters after the IMF concluded its annual review of the Austrian economy. “The issue was that there was a guarantee on this debt, and this guarantee is wiped out. We fear this is calling into question similar guarantees issued by other subnational bodies.”

‘Unforgivable Mistake’

The wipe-out has drawn the ire of other Austrian banks, whose ratings were cut by Moody’s Investors Service and may also be downgraded by Standard & Poor’s. Willibald Cernko, the head of the Austrian Bankers’ Association and chief executive officer of UniCredit Bank Austria AG, said last month it was “an unforgivable mistake.”

“Subordinated debt guaranteed by a state government has been seen so far as fairly safe,” Bakker said. “Investors always expected such a guarantee to remain in place.”

Hypo Alpe has cost Austrian taxpayers 5.5 billion euros since its rescue in 2009, and more than 3 billion euros are still expected to be needed to fund its wind-down.

The IMF welcomed Austria’s plan to sell the bank’s business in the former Yugoslavia and wind down the remainder in a “bad bank.”

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The International Monetary Fund told Austria to reconsider a plan to force losses on owners of state-guaranteed bonds issued by Hypo Alpe-Adria-Bank International AG because it may call other public guarantees into question.
IMF, bond, contagion, Austria
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2014-04-01
Tuesday, 01 Jul 2014 10:04 AM
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