A six-year old bank failure in Austria has been thrust into the news this week, as financial regulators there decreed a bail-in for Heta Asset Resolution AG. This is the remnants of the failed Hypo Alpe Adria Bank, that the government took over in 2009.
Senior bondholders of the bank have been told that they will only receive 46% of the face value of their investments, under laws to prevent taxpayer bailouts of bad banks. In addition to the 54% “haircut,” the maturity of the bonds has been extended to 2023, and coupon payments suspended, retroactive to March 2015.
A Bad, Bad, Bank
Hypo Alpe Adria traces its roots back to 1896. The bank was owned by the provincial government of Carinthia, which underwrote much of its debt. In the 1990s, it went on an acquisition spree, spreading into the former Warsaw Pact countries, as well as the Balkans. This expansion was allegedly aided by the personal contacts of the ultra-right-wing governor of Carinthia, Jörge Haider. The Economist, in a 2010 article, insinuated all sorts of wrongdoing by Haider and the bank during the breakup of Yugoslavia.
By 2007, Hypo was running into trouble. To save the bank, the Carinthian government sold a controlling stake in the bank to German bank BayernLB for €1.6 billion. This bank was owned by the Bavarian government. In 2008, BayernLB found itself on the verge of collapse from bad bets on US subprime mortgages. It received a €10 billion taxpayer bailout from the German and Bavarian governments, €700 million of which went to Hypo.
Vienna Steps In
The global financial crisis put the final nail in Hypo’s coffin. In December 2009, BayernLB, the Carinthian government, and Hypo’s insurer sold their stakes in Hypo to the Austrian government for one euro each.
The investigations and lawsuits then began in earnest. Several Hypo bank officials were convicted of various financial crimes. Investigators uncovered secret bank accounts, and attempted to find missing sports cars and yachts purchased with Hypo loans.
By 2014, the Austrian government had poured €5 billion into the bailout, but it wasn’t enough.
Bondholders Battle Bail-in
Creditors went after the provincial government in Carinthia, which had underwritten more than €11 billion in Hypo debt. The Carinthian government, backed by loans from Vienna, offered bondholders a deal where they would receive 75% of the face value of their holdings. Even holders of subordinated debt would have received something, though it was only 30%.
The deal was rejected by creditors, including PIMCO and Commerzbank. A full restitution by Carinthia of the bonds it overwrote would plunge the small province into an unprecedented bankruptcy. As things worked out, the creditors should have taken the deal.
The Bail-In Hammer Comes Down
The Austrian government declared this week that Hypo bank will be bailed in. This means that creditors will have to bear the costs of rescuing the bank, up to the full value of their investments. These bail-in laws, mandated by the European Union, went into effect this January. They are designed so that a bank’s stockholders shoulder the debt by marking the bank’s shares to zero. If more money is needed, subordinated bondholders lose some or all of their investment. If that still isn’t enough, senior bondholders are on the hook.
If THAT still isn’t enough, then deposits by bank customers over the insured amount are seized, in whole or in part. Only after all this can taxpayer money be used to bail out the bank.
Under these laws, the Austrian government announced that senior bondholders would have 54% of the value of their bonds taken away (called a “haircut.”) This number is based on an estimate of what the sale of Hypos assets will bring. If there is money left after the bank is totally wound down, the remainder will be returned to the senior bondholders. Regulators say that €8 billion is needed to close the books on the bank. Bond maturities have also been pushed out to 2023, and periodic interest payments stopped.
Subordinate bondholders will get nothing, and stockholders, of course, are left with worthless paper.
Lawyers for a consortium of creditors are meeting with the Carinthian government over the latest development. They say that the “haircut” imposed by Vienna means that they are entitled to go after Carinthia to make them whole.
The tiny province of 560,000 people has an annual budget of only €2 billion. It is impossible for it to cover the €6.4 billion loss that the bondholders will suffer under the bail-in. That said, it will still be on the hook for a substantial amount of money. The national government has indicated that it isn’t going absolve the province from the consequences of its actions.
Another possible settlement is creditors’ proposal that the Austrian government take on Carinthia’s liabilities, and give creditors 92 cents on the dollar. In any case, the lawsuits will doubtlessly last for many years. Even if there were no lawsuits, senior bondholders would still have to wait until the new maturity date 2023 to get paid.
That said, any European government that tried to implement another taxpayer bailout of a bank would likely see it driven from power in short order.
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