Austria must cut debt, wean banks from aid-OECD

Mon Jul 11, 2011 4:00am EDT

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* Wants exit strategies for bank support

* Recommends cutting debt to below 60 pct of GDP

* Calls for curbing incentives for early retirement

* Wants shake-up of good but costly health care system

By Michael Shields

VIENNA, July 11 (Reuters) - Austria needs to cut state debt, curb early retirement and lay out a path for strengthening banks to ensure its export-dependent economy prospers, the OECD club of industrialised nations recommended on Monday.

"The authorities should seize the opportunity to strengthen reforms and maintain high growth, which in the past has been considerably boosted by European integration effects which are likely to fade out in the future," its economic survey found.

The Organisation for Economic Cooperation and Development report noted the country's financial sector was recovering from the financial crisis, during which Austria provided a 100 billion euro safety net and nationalised two lenders.

"While the support should stay in place as long as needed, clear exit strategies would lift uncertainty and enhance market confidence," the OECD said.

It pointed out that Austrian banks continued to have below-average capital adequacy that will be addressed by new Basel III rules on how much and what kind of capital banks hold.

"The total size of newly required capital due to Basel III and the repayment of government support is estimated at between 15 and 18 billion euros... until 2020, which might lead to a cumulative decline in GDP growth by 0.23 percentage points over three years..." it said, citing academic studies.

"Raising new capital might be difficult, however, given the importance of the multi-tier decentralised sector in Austrian banking," it said.

The weak local equity market could also be problematic given increased risk-aversion among international investors, a national bank tax and a strong competition for equity among European peers, it added.

"It would be advisable to require all major banking groups to present a clear medium-term strategy of capital strengthening, including a gradual repayment of government capital."

Major Austrian banks include Erste Group Bank , Raiffeisen Bank International , UniCredit unit Bank Austria, and Oesterreichische Volksbanken AG (OTVVp.VI). Bank Austria got no state aid during the crisis.

Other OECD recommendations included:

* Eliminating all subsidised avenues into early retirement

* Expanding early child care and full-day schooling

* Enhancing competition in areas like rail, post and electricity

* Bringing the debt-to-GDP ratio below 60 percent

* Moving tax hits away from labour toward less distorting taxes

* More clearly assigning performance, financing and spending responsibilities for health care.

(Editing by Toby Chopra)

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