Austria no longer rules out Hypo bank insolvency

VIENNA Sun Feb 9, 2014 7:46am EST

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VIENNA Feb 9 (Reuters) - Austria's finance minister no longer rules out letting nationalised lender Hypo Alpe Adria go bust, he told a newspaper, softening his earlier position.

Michael Spindelegger said he would still prefer to get commercial banks to support a "bad bank" that would absorb toxic assets from Hypo, which Austria had to nationalise in 2009, but said he would now consider other options.

"If no solution is found with the banks, nothing is ruled out. For me, it's about finding the most favourable solution for taxpayers. There are no taboos here," he told Oesterreich newspaper in an interview published on Sunday.

The government wants to keep the bad bank's liabilities off Austria's public debt calculation by roping Austria's healthy commercial banks into a scheme to support it.

But Erste Group, Raiffeisen Bank International and Bank Austria are sceptical about taking part in such a venture.

Austria nationalised Hypo after the bank's breakneck expansion pushed it to the brink of bankruptcy. Taxpayers have provided 4.8 billion euros ($6.54 billion) in aid for Hypo so far.

A Hypo insolvency could entail government support for Hypo's home province of Carinthia, which cannot afford to make good on over 12 billion euros in outstanding guarantees on Hypo's debt.

On the other hand, it could save billions if Hypo creditors, including bondholders and former owner BayernLB, had to take haircuts on their claims on Hypo.

The Austrian central bank is reported to have warned the government a disorderly insolvency of Hypo could cost nearly 25 billion euros.

The central bank has said in public that such a move could trigger a chain reaction dragging in other banks and ruining Austria's reputation in the capital markets. ($1 = 0.7343 euros) (Reporting by Georgina Prodhan; Editing by Louise Heavens)

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