VIENNA, June 17 Austria's decision to wipe out holders of subordinated debt in nationalised lender Hypo Alpe Adria despite guarantees from its home province could increase banks' borrowing costs by up to 1.5 billion euros ($2 billion) a year, the bank industry warned.
Willibald Cernko, head of the Austrian Bankers Association and chief executive of UniCredit Bank Austria, cited that figure to reporters based on central bank estimates from 2010 on the impact of removing implicit state backing for banks.
While the exact figure may have changed since then, banks will face higher interest rates on new debt as a result of the planned move, the industry believes.
Cernko launched a blistering attack on the draft law on Hypo Alpe Adria unveiled last week, saying the government had made an "an unforgivable mistake" by unilaterally eliminating a public debt guarantee.
"This is not just breaking confidence, it may also cause substantial collateral damage," he told the association's annual news conference on Tuesday. "I can only urge the people in charge to reconsider whether it is responsible to place the highest asset of trust in jeopardy."
Austria broke new ground for debt markets last week by deciding to annul 890 million euros of subordinated Hypo Alpe Adria debt guaranteed by Carinthia.
The move aims to ensure that investors - not just taxpayers who have pumped more than 5 billion euros into Hypo so far - share wind-down costs for the stricken lender, officials said.
Getting junior bondholders to share the pain in bank bailouts is not new in Europe, but imposing losses on holders of debt with an official guarantee has credit rating agencies and investors worried about the reliability of state backing for debt in Austria.