VIENNA Dec 11 Austrian-German relations could become strained this week if Austria goes to court to cancel its purchase of Hypo Alpe Adria from German public-sector lender BayernLB.
The nationalised Austrian bank was bought for a symbolic 1 euro ($1.29) three years ago, but it has since cost taxpayers billions of euros in aid and guarantees to keep it afloat.
With the statute of limitations for legal action looming, the government in Vienna has to decide this week whether to try to have the deal unwound, claiming that the Bavarians misled it over the severity of Hypo's problems.
"The deadline is Friday. We will decide in time," a spokeswoman for Finance Minister Maria Fekter said, adding the that Fekter would liaise closely with Chancellor Werner Faymann on the politically sensitive topic.
Austria took over Hypo in 2009 to avoid a collapse that would have sent shockwaves through central and eastern Europe. The bank is now trying to shrink itself back to health and sell off units in Austria, Italy and southeastern Europe - a tough task in the current economic climate.
BayernLB had bought Hypo from the Austrian province of Carinthia and a group of private investors in 2007 for 1.7 billion euros ($2.2 billion) - a purchase it later claimed it was duped into making.
The German bank ended up taking a 3.7 billion euro hit on the acquisition and is still pursuing legal action over the deal.
A separate legal fight could be brewing over more than 2.6 billion euros in funds that BayernLB pledged to keep with Hypo at the time of the Austrian nationalisation.
Hypo is examining expert opinion that it commissioned, which suggests that the money should be viewed as equity that must remain with Hypo rather than as a loan that has to be repaid to BayernLB, as the German bank argues.
More news on this could emerge on Thursday, when Hypo holds a special shareholder meeting with its sole shareholder, the Austrian government, to approve the injection of a further 500 million euros in state aid.
This is on top of a 1 billion euro state-guaranteed hybrid bond it set up this month.
Hypo needs the 1.5 billion euros by the end of this year to meet demands by Austrian financial regulators for it to build a bigger buffer against recession and jittery markets.
The bank has also been told by supervisors to raise a further 700 million euros in capital by March 31, 2013. It is trying to negotiate a lower amount or an extension to the deadline. ($1 = 0.7693 euros)
(Reporting by Michael Shields and Angelika Gruber; Editing by David Goodman)