UPDATE 1-Hypo insolvency dangerous but not ruled out -Austria

Mon Feb 17, 2014 4:21am EST

Related Topics

* Finance Minister Spindelegger says all options still open

* Chancelllor Faymann cites contagion risk

* Debate comes after Moody's downgrades Hypo, Carinthia province (Combines stories, adds quotes and background)

VIENNA, Feb 17 (Reuters) - Austria has not ruled out letting nationalised lender Hypo Alpe Adria go bust even though this option poses many risks, Finance Minister Michael Spindelegger told parliament on Monday.

He was speaking after ratings agency Moody's fired a shot across the government's bows late on Friday by downgrading the bank and its home province of Carinthia.

"I do not exclude any option but I warn against shooting from the hip," Spindelegger told a debate about the government's handling of the bank it had to nationalise in 2009. "An insolvency is associated with all kinds of dangers which have to be exhaustively and thoroughly analysed."

The government plans to create a state "bad bank" that may absorb up to 19 billion euros ($26 billion) in assets from Hypo, a step that would relieve its chronic need for capital but could boost state debt to around 80 percent of economic output.

It favours that route after healthier commercial banks this month rejected appeals to support a bad bank majority-controlled by the private sector so that its debts could stay off state books.

Chancellor Werner Faymann cited the contagion risk that Hypo posed for other Austrian banks given 12.5 billion euros in debt guarantees still held by Carinthia. The province could not honour them if a Hypo bankruptcy triggered them all at once.

"There is still a risk that investors could lose trust in Austrian banks so it is our task to achieve the opposite: to increase trust and do a wind-down that shows we have drawn the proper consequences," Faymann told the televised debate.

Spindelegger and Faymann said it was impossible to say how much Hypo would cost taxpayers on top of the 4.8 billion euros in support they have provided since 2008.

Appealing for national unity in the face of scathing opposition criticism, Spindelegger said the government would hear back from an advisory Hypo task force soon and enter an "implementation phase" for its strategy by the end of March.

Moody's cited the government's refusal to rule out bankruptcy for Hypo as the driver of its downgrades.

Austrian National Bank Governor Ewald Nowotny criticised the government for the time taken to restructure Hypo after the 2009 takeover from Germany's BayernLB, the state bank owned by Bavaria.

Spreads on Austrian 10-year debt were litle changed at 29 basis points over benchmark German Bunds.

($1 = 0.7307 euros) (Reporting by Michael Shields; Editing by Georgina Prodhan)

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