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Vulnerable in Vienna: Austria Feels Pinch of Eastern European Downturn

By Rüdiger Falksohn and Walter Mayr

Major Vienna banks wanted to capture the Eastern European market and benefit from its growth. Now they are waking up to the hangover caused by what could end up being a series of bad loans. The government, while trying to reassure the banks, is also seeking international assistance.

Vienna has felt like a changed place since the unmentionable words first began slipping off the tip of people's mouths -- terms like "crisis in Austria," and "impending government bankruptcy." The bad news seems to affect everything and everyone.

Vienna's Raiffeisenbank: "Is the Republic of Austria on the verge of bankruptcy?"
Corbis

Vienna's Raiffeisenbank: "Is the Republic of Austria on the verge of bankruptcy?"

The once-proud national airline Austrian Airlines? It's up for sale, because, among other problems, its managers miscalculated when they speculated on kerosene prices. If the European Commission approves the deal, German national carrier Lufthansa will soon acquire the Austrian airline, with the government in Vienna even throwing in €500 million ($625 million) in state aid as part of the dowry.

Vienna's old-fashioned streetcars, popular among local residents and tourists alike? It is said that they are only still running due to the fact the the US investor the city leased its streetcars to, in a deal worth millions, still wants the trolleys to operate.

And what about ORF, Austria's main public television station, which must provide politicians as well as bankers from among its advertising customers with a soap box from which they can paint conditions in Austria in a gentler light? It announced a loss of €79.8 million ($100 million) for 2008. The loss, as the general director hastens to add, was not as bad as expected, given the previously grim predictions for the broadcaster.

What is going on here -- in this, one of Europe's richest countries?

After 1989 Austria, which had developed its own economic miracle, transformed itself into a gateway between markets in the East and West. It became the commercial hub for the booming former communist countries and, within the European Union, positioned itself as the go-to specialist on Eastern Europe, a manager of sorts for its ancestral backyard (thanks to the blessed days of the Hapsburg Empire, which spread across much of the region).

Austrian bankers optimistically placed their bets on the East and issued loans to places like Hungary, Romania and Ukraine -- and to possibly dubious borrowers. Now these countries -- from Russia to Croatia -- are spiraling downward, and the Austrian lending industry is being criticized for taking on "aggregate risk."

The mood is gloomy in financial center Vienna, even more so following the recent publication of a report by Moody's, a leading credit rating agency. The document cites a "deteriorating macroeconomic framework for East European banks" that could threaten the credit ratings of Western European banks active in these markets. According to the report, "the Austrian banking system is most exposed as Eastern Europe accounts for nearly half of Austria's global bank claims."

Growth in Eastern Europe was built on borrowed foreign capital, in a system that often benefited the subsidiaries of Western companies, whose profits -- as long as they continued to be generated -- flowed back to the home countries. But now many investors are pulling out and taking their money to regions with even lower wages, leaving investment ruins behind. The sharp decline in orders and the global recession have crippled the East to the point of standstill, making it more difficult for borrowers there to repay their loans.

These concerns led the news magazine Profil to ask: "Is the Republic of Austria on the verge of bankruptcy?" Austrian daily newspaper Die Presse asked: "When, exactly, will Austria go into bankruptcy?" The rumor mill is filled with catastrophic scenarios, most of them based on the projection that Austria has outstanding accounts in the East worth €293 billion ($371 billion), which is roughly equal to the country's annual gross domestic product. If worse comes to worst, the government will be liable for repayment of much of that debt.

Graphic: Eastern Europe's credit black holes
DER SPIEGEL

Graphic: Eastern Europe's credit black holes

As a precautionary measure, the Austrian National Bank, the country's central bank, has performed "stress tests" akin to laboratory tests in the international financial market. The tests are being used to assess the resilience of banks whose Eastern European subsidiaries could face major loan defaults. According to their results, if "only" Ukraine and Romania, both countries recently facing the prospect of national bankruptcy "come crashing down," those banks with large lending portfolios in the East -- like Raiffeisen International, Erste Bank and Bank Austria -- could just about survive the crisis. The chances that EU member state Romania will fall into the abyss in the immediate future, however, diminished this week, as negotiations began with the EU and the International Monetary Fund for billions of euros in emergency loans.

Austrian banks, including Bank Austria, which is owned by Italy's UniCredit Group, hold about one-quarter of the €1.2 trillion ($1.5 trillion) in outstanding loans to Central and Eastern European countries (including Turkey). Raiffeisen and Erste Bank reacted to the Moody's report by moving up their balance sheet conferences for 2008. Nevertheless, their stock prices tumbled precipitously after the beginning of the year, with Erste Bank's stock falling a full 54 percent.

The branches of Austrian banks dominate the banking market in Eastern Europe, from Ukraine to Romania, Slovakia to Serbia and Bosnia-Herzegovina. Austrian banks hold €51.6 billion in outstanding loans in Hungary and Russia alone. Up to 10 percent of the outstanding loans are considered unrecoverable. Die Presse speculates that anyone who believes "that the key corpses from the banks cellars have already been flushed to the surface could be in for an unpleasant surprise soon."

The Austrian banks' practice of issuing so many loans to Eastern European customers in euros, Swiss francs and dollars has proven to have been a mistake, now that the Ukrainian hryvnia and the Hungarian forint have lost so much of their value in recent months. As a result, consumers are seeing their installment payments on items such as refrigerators and cars rise dramatically.

In Hungary, for example, 60 percent of all mortgages, as well as one in two business loans, were issued in foreign currencies. The country is "standing in stinging nettles with its trousers down," says György Jaksity, chief executive of Concorde Investment and a former chairman of the Budapest Stock Exchange.

The government in Vienna has approved a €100 billion bailout program. It also requested aid from the EU for at least as much money, but was turned down. Critics in Vienna assume that the charitable "Save Eastern Europe" mission is little more than a camouflaged effort to rescue Austria.

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© SPIEGEL ONLINE 2009
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