Austria says plans to play hardball in Hypo cost recovery

VIENNA, March 16 Sun Mar 16, 2014 8:02am EDT

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VIENNA, March 16 (Reuters) - The Austria government wants to ensure taxpayers do not end up footing the entire bill for winding down state lender Hypo Alpe Adria and could use special legislation to go after some creditors, government ministers said on Sunday.

Austria, which nationalised Hypo in 2009 to avoid a failure that would have sent shockwaves across the region, finally ruled out on Friday letting it go bust. Instead it will wind it down via an expensive "bad bank".

It wants Hypo's home province of Carinthia, subordinated creditors and former owner BayernLB to share the costs of the plan, which may push state debt above 80 percent of GDP and add 4 billion euros ($5.6 billion) to the 2014 budget deficit.

Justice Minister Wolfgang Brandstetter told the Kurier newspaper on Sunday he was confident the government could reach a reasonable settlement with Bavarian state bank BayernLB.

"A few lawsuits are pending with the Bavarians and in theory there could be even more. But it cannot be in their interests to tie up resources for years in court cases," he said.

"We are determined that creditors - via special legislation if needed - participate in the necessary restructuring of the bank."

He said the Austrian government was also looking to recoup the 500 million euros that Carinthia earned from selling its Hypo stake to BayernLB.

Hypo says it has nearly 1.9 billion euros worth of subordinated debt, including 1 billion euros in bonds guaranteed by the federal government.

Central bank Governor Ewald Nowotny has said the federal guarantees will be honoured.

Hypo says another 890 million euros worth of subordinated bonds and notes is guaranteed by the province of Carinthia.

The bank has received 4.8 billion euros in state aid since 2008 and needs more to be able to meet minimum capital levels when it finalises its 2013 accounts.

RAISING THE DEFICIT

Finance Minister Michael Spindelegger told Oesterreich newspaper on Sunday that the cost of winding down Hypo would boost the budget deficit by 1.2 percent of gross domestic product (GDP), but called this a one-off effect.

The coalition government that took office in December after elections last year will unveil its 2014 budget next month.

"My plan is that the Maastricht deficit cannot rise above 3 percent. Savings efforts will be required," he said, referring to the EU criteria that national budget deficits cannot surpass 3 percent and state debt 60 percent of GDP.

He said it was regrettable the government had to adopt savings measures as a result of the Hypo "disaster" triggered by unaffordable debt guarantees granted by Carinthia, under the former government led by the Freedom Party.

He said Austria could not invest additional resources in research and infrastructure as a result of the Hypo costs.

In a separate interview with Die Presse, Spindelegger said he was upset that Hypo management had been unable so far to present him with exact details of how much more state aid the bank now needed, and indicated heads could roll.

He said talks with BayernLB would start this month.

The Bavarian state bank has alleged in court it was duped into buying Hypo and is also trying to get back 2.3 billion euros in loans to Hypo that have been frozen.

Austria says the money has to be treated as equity for now.

"The Bavarians' 2.3 billion (euros) is lying in the bank and won't be repaid. So who has the worse negotiating position?," Spindelegger asked.

($1 = 0.7181 euros) (Reporting by Michael Shields; Editing by Sophie Hares)

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