VIENNA, Jan 29 (Reuters) - The parliamentary leader of Austria’s ruling Social Democrats (SPO) rejected as “playing with fire” speculation the country could let troubled state bank Hypo Alpe Adria go bust while propping up its home province of Carinthia.
The government said this week it wanted commercial banks to support a “bad bank” that would absorb toxic assets from Hypo, which Austria had to nationalise in 2009 to avoid a collapse that would have sent shock waves across Europe.
The alternative would be establishing a state-owned vehicle to wind down around 13 billion euros ($17.8 billion) in toxic assets, which could boost state debt to around 80 percent of economic output and set off alarm bells at ratings agencies.
The Wiener Zeitung paper has reported that another scenario - letting Hypo go bust while providing long-term loans to Carinthia to help the province handle nearly 13 billion euros in Hypo debt guarantees - was also under discussion despite earlier assurances from the government that this was ruled out.
Andreas Schieder, a former finance ministry state secretary who now heads the SPO group in parliament, told the Wiener Zeitung this was too dangerous a path to consider.
“I see this as playing with fire. There are no contained bankruptcies. Questions about deposits, guarantees and spillover effects cannot be answered in a controlled way,” he said, echoing concerns from the central bank and other lenders.
He said quickly setting up a bad bank - which in fact would not have a banking license and thus not have to fulfil strict capital ratios for lenders - was the best way forward.
“There is a danger that this would have an impact on the deficit and debt ratio, but this does not get any smaller by putting off a decision,” he added in an interview printed on Wednesday.
$1 = 0.7319 euros Reporting by Michael Shields; Editing by Mark Potter