February 21, 2014 / 6:32 AM / 4 years ago

UPDATE 4-Austria's Nowotny takes on Hypo as task force head quits

* Austria weighs debt haircut for some bondholders - finmin

* Hypo chairman Liebscher resigns amid policy split

* Fitch backs Austria’s top AAA rating, cites sound state finances (Recasts with Liebscher exit, Nowotny named head)

By Michael Shields

VIENNA, Feb 21 (Reuters) - Austria named central bank governor Ewald Nowotny to lead an advisory task force on Hypo Alpe Adria on Friday after its previous head quit following public splits with the government over how to deal with the bailed-out bank.

Klaus Liebscher, a former central bank governor, resigned as head of the task force set up to advise the government on how best to wind down the lender after he came under criticism from the public and politicians. He also quit as Hypo chairman.

Liebscher, Nowotny and the FMA market watchdog have warned the government not to play with fire by letting the nationalised bank go bust - but Finance Minister Michael Spindelegger again refused to rule this out on Friday.

Spindelegger also said some Hypo bondholders may face a debt haircut - something Liebscher has warned could ruin euro zone member Austria’s reputation as a borrower.

The split has highlighted market worries about the dangers posed by Hypo, which Austria had to take over in 2009 after breakneck expansion at home and in the Balkans pushed it to the brink of insolvency.

Ratings agency Fitch maintained its top rating and stable outlook for Austria on Friday but said Vienna’s failure to lay out a clear strategy for Hypo raised “concerns about policy coherence and credibility in the near term”.

Spindelegger told reporters he may ask holders of bonds guaranteed by Hypo’s home province of Carinthia to share the costs of winding down the bank, whose chronic need for capital has been a drain on state finances.

“We have to look at this and see from a legal perspective whether it is possible to go in this direction,” he said.

Spindelegger hired ex-Morgan Stanley banker Dirk Notheis to join a separate team of financial, legal and insolvency experts to advise the government on the best way forward, including whether some bondholders could take a haircut.

“We have part (of the Hypo debt) with federal guarantees that we will of course service,” he added, reiterating that Carinthia had a moral obligation to contribute.

Carinthia guarantees cover around 12.5 billion euros ($17.1 billion) of Hypo debt and federal guarantees around 1.2 billion.


Unlike Greece and Cyprus, where international lenders insisted some private creditors take losses as part of government bailouts, Austria is among the euro zone’s stronger states financially.

However, it has had to bail out some of its banks which had overstretched themselves and lent heavily in central and eastern Europe in the run-up to the global financial crisis.

It has taken a tough line on bailouts for other euro zone states and Spindelegger’s comments reflect common sentiment in a financially conservative country where media often equate people who buy stocks or bonds with ruthless speculators.

The task force, set up last year, is drawing up proposals by early March on creating a “bad bank” that may absorb up to 19 billion euros of assets from Hypo, a step that could boost state debt to around 80 percent of economic output.

Spindelegger said he did not prefer the bad bank model over other options and that the government had to be open to various possibilities as it decides by end-March how to proceed.

“An insolvency scenario is not on the table, but as I have always said there are no taboos,” he added.

He said negotiations with former Hypo owner BayernLB - which is fighting to get back 2.3 billion euros in funds frozen at Hypo and which has a say in creating any bad bank - had not begun.

“At the moment there is nothing to negotiate yet. First we need to know what we want,” he said.

The finance ministry had said on Thursday that Hypo creditors should contribute to the costs of winding down the lender, perhaps via insolvency or voluntary debt haircuts even though state guarantees cover most of the debt.

Reporting by Michael Shields and Wayne Cole; Editing by Ruth Pitchford and Pravin Char

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