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Austria Bank Capital Needs Decisive for Aaa Rating, Moody’s Says

February 15, 2012

Feb. 14 (Bloomberg) -- Austria’s top debt ranking is most threatened by the potential for another round of state aid for the nation’s banks, Moody’s Investors Service said, the second such alarm from a rating company in as many months.

Moody’s cut Austria’s outlook to “negative” and may strip its Aaa rating if lenders require a second bailout, given the nation’s finances have worsened since 2008, the company said yesterday. The outlook could return to “stable” if banks can bolster capital without state help, Moody’s said. Standard & Poor’s cited bank risks when it cut Austria to AA+ last month.

“We don’t think the Austrian debt level is worrisome or out of sync with debt levels in other European countries, but the potential contingent liability is bigger than in other countries, and the debt ratio is at the higher end of the triple-A rating category,” Kathrin Muehlbronner, Moody’s head analyst on Austria, said in an interview.

The nation’s biggest banks, including Erste Group Bank AG, Raiffeisen Bank International AG and UniCredit SpA’s Bank Austria unit, are the biggest lenders in eastern Europe and face major losses in Hungary. Austria nationalized two banks on the brink of collapse in 2008 and 2009, and will remain saddled with their non-performing or unsellable assets of more than 30 billion euros ($40 billion) as they are wound down for years.

Moody’s says Austria’s debt-to-gross-domestic-product ratio was about 75 percent in 2011, compared with a median of 52 percent for Aaa-rated countries. The government has responded to the debt crisis with a 26.5 billion-euro plan to raise taxes and cut spending.

‘Volatile Countries’

Austria was among nine European sovereigns to have ratings cut or their outlook changed yesterday. Bond investors shrugged off the reports from Moody’s today, with borrowing costs falling at Spanish and Italian debt auctions on optimism the crisis is easing. Austrian bonds were little changed, with the 10-year yield rising 1 basis point to 2.88 percent at noon local time.

“Investors are making up their own minds, and the low yields we are seeing shows that our measures have an impact,” Austrian Chancellor Werner Faymann said today.

Austria still has more work to do, Muehlbronner said.

Its banking system is “relatively large, has a very large exposure to the more volatile countries in central and eastern Europe, and is also reliant on wholesale funding,” with lower credit ratings than banks in other Aaa countries, she said. “Austria is not necessarily out of the woods.”

Erste, Raiffeisen and the other Austrian banks have lent a combined $266 billion to borrowers in eastern Europe, about 70 percent of the Alpine nation’s gross domestic product. That figure doesn’t include the Italian-owned Bank Austria.

Repaying Aid

A large part of the banks’ loans are refinanced with local deposits, limiting the risk for the parent company, though that’s not the case in Hungary and Romania, which has prompted the Austrian central bank to issue new rules for lending in eastern Europe.

“We take note of the attempt by the Austrian regulator to reduce the funding mismatch in the central and eastern European countries where it is present, but we think that this is going to take a while,” Muehlbronner said.

Erste has shelved plans to repay 1.2 billion euros in state aid after writing down assets that will lead to a loss for last year. Raiffeisen hasn’t given a date to repay its 1.75 billion euros in state aid, while Bank Austria didn’t get any aid.

All three institutions have ruled out asking for more, and Finance Minister Maria Fekter said today that no other bank has done so.

“We’re monitoring the overall situation of banks and whether they are on a sound footing,” Fekter told journalists, calling Moody’s outlook change “regrettable.”

Volksbanken, Kommunalkredit

Austria nationalized Oesterreichische Volksbanken AG’s Kommunalkredit unit in 2008. The state will back its “bad bank” KA Finanz AG for years to come as it winds down 24 billion euros of assets including credit-default swaps on Greece. That bank may need fresh capital this year, depending on the terms under which Greece swaps its debt.

The state also nationalized BayernLB’s Hypo Alpe-Adria-Bank International AG in 2009. That institution’s wind-down unit is holding about 10 billion euros of assets that are non-performing or unsellable.

Volksbanken, which was relieved of Kommunalkredit in 2008 and received 1 billion euros of state aid in 2009, will report another loss of at least 825 million euros for 2011 and has failed to repay 300 million euros of state aid last year.

The bank is planning to spin off a wind-down unit, which some of its owners would like to foist on the government, Format magazine reported last year. Fekter has said her desire to nationalize Volksbanken is “very limited.”

Budget Package

While the concerns about Austria’s banks are “not new,” Moody’s said that the country’s debt level is higher than when it last supported banks in 2008 and 2009 and is on an “upward trajectory.”

“Some of the measures in the Austrian budget package haven’t been confirmed yet, such as the financial transaction tax or the tax treaty with Switzerland,” Muehlbronner said. “There is some uncertainty whether everything will be in place.”

France and the U.K. also had their top ratings put on a negative outlook by Moody’s yesterday, while Italy, Malta, Portugal, Slovakia, Slovenia and Spain’s ratings were cut.

“This Moody’s report does not just refer to Austria, it refers to a significant part of the overall developments of Europe,” European Central Bank Governing Council member Ewald Nowotny said today in an interview broadcast by state-run ORF radio. “The savings package is part of the overall perspective, but it shows it was important to conclude this package.”

--With assistance from Jonathan Tirone and Zoe Schneeweiss in Vienna. Editors: Keith Campbell, Jon Menon.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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