* Government scraps plan to have lenders support "bad bank"
* Next-best option would be state-run wind-down vehicle
* Finance minister, central bank head at odds on insolvency
* FMA calls letting Hypo go bust "incalculable adventure"
(Adds comments from finance minister, central bank chief)
By Michael Shields
VIENNA, Feb 10 Austria scrapped its plan to have
healthy commercial lenders back a "bad bank" for toxic assets at
nationalised Hypo Alpe Adria and will look now at
creating its own wind-down vehicle, which would increase state
debt, officials said.
Resistance from other banks and problems with setting up a
bad bank in a way that would keep its debt off state books under
European rules scuppered the plan, Finance Minister Michael
Spindelegger said after a high-level meeting at the chancellery
"It became clear that this bank involvement and
privatisation model de facto is not possible," Spindelegger
said, ditching the option of bringing in lenders like Erste
Group, Raiffeisen or Unicredit's
He told reporters that letting Hypo go bust remained an
option if all else failed. The central bank and FMA markets
watchdog vehemently rejected that move, saying it posed too
great a risk of sweeping Austria itself up in the contagion.
The least bad option now is considered the creation of a
state vehicle absorbing up to 19 billion euros ($26 billion) in
assets from Hypo. That would relieve the bank's chronic need for
capital, which is a drain on state finances.
Hypo has got 4.8 billion euros in state aid since being
nationalised in 2009. It was taken over to avoid a collapse
whose consequences would have been felt through the southeastern
European region, where it had expanded at breakneck speed.
Just how much a state bad bank would cost was not
Officials have estimated such a step could boost state debt
as a percentage of economic output by 5 or 6 points, to near the
80 percent level that sets off alarm bells at ratings agencies.
But it would mirror the tested model that neighbour Germany
adopted to wind down its ailing banks.
"If done quickly, this is a clean and transparent solution,"
said Austrian National Bank Governor Ewald Nowotny. Financial
markets, European regulators and ratings agencies should handle
it well, he said.
"In Germany it was the same. State debt of course clearly
rose temporarily and then was consistently brought down. That is
the second part that is important for us," he told reporters
after attending the talks at the chancellery.
Asked about the impact on spreads for Austrian state debt
over benchmark German Bunds, he said: "I assume that they will
certainly not go up, because for the ratings agencies this is
not a new problem, just greater transparency."
Austria had to nationalise Hypo after a decade of expansion,
fuelled by debt guarantees from its home province of Carinthia,
had pushed the bank to the brink of bankruptcy. Carinthia still
guarantees around 12.5 billion euros on Hypo debt - far more
than it can cover all at once - which complicates the matter
The federal government and the banks have been haggling over
the problem of Hypo for about a year, closely watched by the EU
competition commissioner. The central bank and the FMA markets
watchdog are urging an agreement by the end of March.
The FMA warned the government earlier against letting Hypo
go bust, saying it was impossible to gauge the risks and calling
insolvency "an incalculable adventure".
Spindelegger refused to exclude an insolvency, the threat of
which boosts Austria's leverage in negotiations with former
owner BayernLB over who should pay to clean up the
mess at the Klagenfurt-based lender.
"Nothing can be ruled out. We remain open for all options
and the goal remains to burden taxpayers as little as possible,"
But Nowotny warned him not to tempt fate. "I don't think the
insolvency of a province is something that a country of
Austria's stature should even play with," he said.
Klaus Liebscher, a former central banker who is now Hypo
chairman and heads a task force advising the government, took
the same line as talk of a possible Hypo insolvency weighed on
Austrian state bonds.
"I hear from investors in London, for example, that they are
seriously questioning investments in Austria. That cannot be our
future," he said.
($1 = 0.7327 euros)
(Editing by Georgina Prodhan and Mark Potter, Larry King)