UPDATE 1-Creditors should help cushion Austrian Hypo blow -finmin

Thu Feb 20, 2014 12:35pm EST

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VIENNA, Feb 20 (Reuters) - Creditors of Hypo Alpe Adria should contribute to the costs of winding down the nationalised Austrian lender, the finance ministry said on Thursday, listing insolvency or voluntary debt haircuts as possible options.

The comments widen a split between the government and bank supervisors over how to handle Hypo, whose chronic capital needs have required 4.8 billion euros ($6.6 billion) in taxpayer support since 2008.

A ministry spokesman said Austria had commissioned outside experts to review the situation, adding: "The political goal is that not just taxpayers bear all the costs, but that others such as creditors or the province of Carinthia do their part."

Carinthia is Hypo's home province and still has 12.5 billion euros in guarantees on Hypo debt. The central bank and FMA market watchdog have warned the government not to let Hypo go under. Such an eventuality would triggering guarantees that Carinthia - with an annual budget of around 2 billion euros - cannot honour on its own.

The government at this stage favours creating a "bad bank" to absorb toxic assets from loss-making Hypo, which it had to take over from BayernLB in 2009, but has refused for weeks to rule out letting the bank go bust.

BayernLB has 2.3 billion euros in funds stuck in Hypo, which has refused to repay the money that it says must be treated as equity rather than loans until it gets back on its feet. BayernLB is trying to get the money back in court.

The Puls 4 broadcaster released comments from an interview it said it would air with Finance Minister Michael Spindelegger in which he takes the same line when asked about an orderly insolvency.

"I believe that creditors as well have to contribute, and Carinthia too has a moral obligation because the provincial government there caused the problem," he was quoted as saying.

Spindelegger was referring to the previous Carinthian government under far-right leader Joerg Haider, which provided generous debt guarantees that let the bank embark on breakneck expansion at home and in the Balkans that pushed it to the brink of insolvency

He said it was a political decision to determine to what extent creditors and Carinthia should be asked to support Hypo's resolution costs, but a decision to be taken only after the government had a chance to review all its options.

Questions about the solidity of Austrian public guarantees given the Hypo debate has already prompted Moody's to slash its ratings on Hypo and downgrade Carinthia. It downgraded more debt of Austrian banks this week on these concerns.

Fitch will release its latest sovereign review of Austria on Friday, and Moody's follows on Feb. 28.

($1 = 0.7293 euros) (Reporting by Angelika Gruber and Michael Shields; Editing by Georgina Prodhan and Pravin Char)

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