By far the most notable news of the past week, which has still gone largely unnoticed by the greater investing community whose focus instead was on whether algos would ramp the Nasdaq to 5000, and keep the S&P above 2100, even before Mario Draghi finally began buying bonds that nobody wants to sell, was the “Spectacular Development” In Austria, whereby the “bad bank” of failed Hypo Alpe Adria – the Heta Asset Resolution AG – itself went from good to bad, with its creditors forced into an involuntary “bail-in” following the “discovery” of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.
This shocking announcement promptly sent the price of Heta bonds crashing as creditors, no longer enjoying the explicit guarantee of the state, scrambled to get out of “northern Europe’s” first Lehman moment.
But while the acute pain came and went for Heta bondholders who have seen a nearly 50% loss in just a few short months, the bigger and far more diffuse pain is only just starting, or as Bloomberg put it,”Austria’s decision to wind down Heta Asset Resolution AG sent ripples through the financial system, causing credit rating downgrades in Austria and bank losses in Germany.”
The first casualty: the beautifully picturesque southern Austrian province of Carinthia.
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Why and how was one of the 9 Austrian provinces just sacrificed? Telegraph explains:
[The Heta] bonds are notionally guaranteed by the Austrian state of Carinthia, which now theoretically becomes liable for the bail-in. It’s an echo of the mess Ireland got itself into at the height of the banking crisis, when it foolishly attempted to stem the panic by underwriting all Irish banking liabilities; the move very nearly ended up bankrupting the entire country. Hypo will bankrupt Carinthia.
Essentially, what the Austrian government is doing is cutting loose an entire region, rather in the way the federal authorities in the US allowed Detroit to go bust a number of years ago.
It’s a mini-Greece going off in the heartlands of Europe.
Specifically, to quantify the Carinthian exposure vis-a-vis its guarantee which will now be put in play: Carinthia provides deficiency guarantee on Heta’s senior debt: the total is equivalent to €10.2 billion, or nearly five times the state’s 2014 operating revenue. Carinthia’s budgeted revenue in 2015 is just €2.36 billion, and as such the southern province of 556,000 would be unable to honor the guarantees if they came due now or in a year’s time, Governor Peter Kaiser told Austrian radio ORF on Tuesday.
In other words, we now have a waterfall bailout chain whereby the state guaranteeing the debt of the insolvent entity that guaranteed yet another insolvent entity, will itself need to be bailed out by the sovereign, Austria! Or perhaps not: Finance Minister Hans Joerg Schelling has said repeatedly that the Austrian government isn’t liable to cover Carinthia’s guarantees.
