German banks face big losses from Hypo

German banks could face substantial losses from a looming haircut on their loans to Austria’s so-called “bad bank” Heta, but the losses will be manageable, rating agency Fitch said on Thursday.

German banks face big losses from Hypo
The Hypo Alpe Adria building in Klagenfurt. Photo: APA/Gindly

"German banks have larger exposures than Austrian banks to Heta Asset Resolution AG," Fitch said in a note to investors.

"Losses are likely to be material for German banks but should be manageable," the rating agency said.

Heta was set up to ring-fence bad debts from Austria’s Hypo Alde Adria (HGAA).

HGAA, the local public bank in Carinthia, ran into trouble after embarking on a breakneck expansion into the Balkans as well as Italy and Germany via acquisitions and risky investments.

Austria nationalised the bank and split it up. However, at the beginning of this month, Austria's financial regulator decided to impose a 15-month moratorium on Heta's debts, freezing debt repayments until 2016.

Fitch, which said it expected Austria to impose a 50-percent haircut on the debt, calculated that German banks hold around 40 percent of Heta's liabilities that are affected by the moratorium.

The business daily Handelsblatt reported on Thursday that German banks' exposure to Heta is more than €5 billion.

The list of German creditors includes Pimco, a unit of insurer Allianz, the regional bank NRW Bank and the state-owned bad bank FMS. Handelsblatt described Heta as a time bomb for the German financial sector.

On Thursday Austria’s Freedom Party and the Greens called a special session of parliament to discuss the Hypo Alpe Adria bank settlement.

The opposition parties are calling on Chancellor Werner Faymann to explain the government's strategy for dealing with Heta, following the discovery of new liabilities totalling between four and seven billion euros.

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Agreement reached on failed bank bailout

Austrian Finance Minister Hans Joerg Schelling said Wednesday an agreement in principle had been reached with the stricken Hypo bank's creditors that had threatened to bankrupt the state of Carinthia.

Agreement reached on failed bank bailout
Hypo Group Alpe Adria headquarters. Photo: HGAA Website

“We're drawing a definitive line under the Hypo affair” the minister told journalists, referring to state bank Hypo Group Alpe Adria (HGAA), which has saddled Carinthia with 11 billion euros in debt.

The deal will see creditors receive 75 percent of the face value of the HGAA bonds they own. They will be offered to buy that value of Austrian government bonds at 75 percent face value.

The proposal is better than the one creditors rejected in March as the Austrian government bonds mature in 13 instead of 18 years.

Schelling said an agreement in principle has been signed with a portion of creditors and compensation could be launched in September.

The creditors include Germany's Commerzbank and a Dexia unit, according to Bloomberg.

The saga is a legacy of late Austrian far-right political Joerg Haider, formerly premier of Carinthia, who died in 2008.

Under Haider, HGAA expanded into the Balkans as well as Italy and Germany via acquisitions and risky investments, expanding its balance sheet fourfold to some 40 billion euros.

Bavaria's state lender BayernLB bought a majority stake in 2007 in HGAA but two years later, as the global financial crisis raged, the bank came close to collapse and Austria nationalised it.

After a long and bitter dispute, Austria finally agreed last November to pay Bavaria 1.23 billion euros to put an end to the feud.