VIENNA, March 9 Austria's central bank governor recommends putting nationalised bank Hypo Alpe Adria's toxic assets into a limited company without blanket state guarantees, he said on Sunday.
Rather than a state-owned "bad bank" that could continue to be a drain on public finances, Ewald Nowotny said Hypo's 17.8 billion euros ($24.7 billion) in non-performing assets should be transferred into a wind-down vehicle.
The vehicle would have no banking licence and would no longer enjoy the unlimited backing of the Austrian government, which has already put 4.8 billion euros into the bank to shore up its capital, Nowotny said.
Nowotny chairs a task force charged with making an expert recommendation to the Austrian government on how to wind down the loss-making bank that was nationalised in 2009. He said it had handed its report to the government on Friday night.
"There would be no blanket state guarantees," Nowotny told ORF television. "Still, it will naturally have an effect on the budget... state debt will rise by 17.8 billion euros."
The Austrian government wants to decide by the end of March on how to wind down Hypo, which was nationalised after years of breakneck expansion in the Balkans pushed it to the brink of bankruptcy.
Finance Minister Michael Spindelegger has repeatedly refused to rule out letting the bank go insolvent, or bailing in creditors who include Bavarian state bank BayernLB, a former owner of Hypo.
Nowotny said his recommended solution would push state debt to around 80 percent of gross domestic product from currently 74.4 percent, but did not believe this would endanger Austria's credit ratings, as the agencies had already priced this in.
He said, however, it could push Austria's state deficit slightly over its Maastricht target of 3 percent of GDP. "It would not be serious to rule it out," he said.
Nowotny said it was possible that Austria would have to inject more capital into Hypo to boost its balance sheet for 2013, which was not yet finalised.
Nowotny again urged the government not to allow Hypo to go insolvent, which would trigger 12.5 billion euros in guarantees given by the Austrian province of Carinthia, the bank's home province, and most likely send Carinthia into bankruptcy.
He said those guarantees would remain with the wind-down vehicle, in his recommended solution.
Hypo's Balkan banking network, with 8.3 billion euros' worth of assets, would remain in the bank with the aim of being sold off, Nowotny said.
Hypo's chief executive said last week said there were five parties seriously interested in bidding for the Balkan network.
Nowotny also urged Austria and Bavaria to come to a general settlement over several lawsuits they are fighting about whether BayernLB was duped into buying Hypo, and the extent to which BayernLB was responsible for Hypo's disastrous strategy.
"It's not good to have so many open questions just at the time the ECB is investigating," he said, referring to a series of health checks the European Central Bank is making on euro zone banks before taking over as financial sector supervisor. ($1 = 0.7214 euros) (Reporting by Georgina Prodhan, editing by Louise Heavens)