* Draft legislation to bail in some creditors due soon
* Government wants to ensure taxpayers don't pay entire bill
* Moody's cuts Hypo ratings on bail-in concerns
By Michael Shields
VIENNA, May 24 Austria will propose within weeks
draft legislation to make Hypo Alpe Adria's subordinated
creditors help pay for winding down the nationalised bank
despite ratings agency Moody's warning about the impact of
imposing haircuts on bondholders.
The legislation will focus on "bailing in" holders of nearly
900 million euros ($1.23 billion) of debt guaranteed by Hypo's
home province of Carinthia, not the 1 billion euros of debt with
federal guarantees, a finance ministry spokesman said on
Late on Friday Moody's cut to junk status its ratings for
Hypo's guaranteed subordinated debt, citing the government's
plan to hit up holders of subordinated debt backed by Carinthia.
Moody's also downgraded its guaranteed senior unsecured
ratings to non-investment grade "to reflect the heightened risk
to all bondholders arising from the government's apparent
willingness to impose losses on creditors notwithstanding the
existence of a statutory guarantee".
Austria decided in March not to let the ailing state lender
go bust, ending months of uncertainty that unsettled financial
markets and touched off a political storm.
Vienna instead will create a "bad bank" for nearly 18
billion euros of Hypo assets while pressing Carinthia and
holders of subordinated debt to contribute to the costs.
The government wants to ensure taxpayers do not end up
footing the entire bill for winding down Hypo and could use
special legislation to go after some creditors, ministers had
said at the time.
"We in the ministry are working intensely on the
legislation. We still expect it will be in parliament before the
summer break, which means we probably have to send it out for
comment in the next two weeks," the ministry spokesman said.
The draft law would set up the "bad bank" for Hypo and spell
out how to bail in subordinated creditors, he said, adding:
"We expect it will concern the (debt with) provincial guarantees
and not the federal guarantees."
He gave no details on the extent of any debt reduction - or
haircut - the government had in mind.
The government has demanded that Carinthia - whose generous
debt guarantees forced the state to take over Hypo in 2009 after
its breakneck expansion at home and in the Balkans drove it to
the brink of ruin - chip in at least 500 million euros.
Holders of 1.1 billion in non-voting participation capital -
more than 1 billion state-owned but also 55 million at a
Carinthia state holding company and 9 million at insurer Grazer
Wechselseitige - will also get drawn in, officials have said.
Creating a "bad bank" relieves Hypo's chronic need for fresh
capital but will also push up state debt to near 80 percent of
economic output and nearly double the budget deficit to 2.7
percent this year.
That will leave a rump business comprising its Balkans
banking network that is being sold ahead of a mid-2015 deadline
set by the European Commission.
Austria also seeks a settlement with former Hypo owner
BayernLB, which has 2.3 billion euros frozen at Hypo
and has a say on major strategic decisions at Hypo.
($1 = 0.7336 Euros)
(Reporting by Michael Shields; Editing by Stephen Powell)