Hypo creditor plan casts shadow over Austrian borrowers

By Michael Shields

VIENNA (Reuters) - Austria's plan to wipe out some Hypo Alpe Adria [HAABI.UL]creditors, despite guarantees from the nationalised bank's home province of Carinthia, could drive up borrowing costs for other state-backed firms, including utilities and health agencies.

Vienna insists its move, set to be approved by the lower house of parliament on Tuesday, is a one-off step tailor made to ensure that investors in Hypo - not just taxpayers - help to shoulder the financial burden of winding down a bank that has sucked in 5.5 billion euros (4.37 billion pounds) in public aid so far.

But ratings agencies, some in the financial sector and now the International Monetary Fund warn that Vienna has set a dangerous precedent which may undermine investor confidence in other state guarantees that underpin billions of euros in debt.

Guarantees from provinces and communities totalled around 77 billion euros at the end of 2011, mostly for commercial - or Hypo - banks under the wing of the provinces.

If investor confidence is shaken, borrowing costs may rise for these banks and for companies such as utilities and health care agencies that enjoy direct or at least implicit state backing.

"There are market players who are already seeing the effect more than clearly," said Stefan Pichler, head of the Institute for Finance, Banking and Insurance at the Vienna University of Economics and Business.

"The higher refinancing costs alone are more than what you might save with this debt haircut," he added.

State Hypo banks cannot under EU law get fresh public guarantees, so the focus is on assumptions of public backing for companies such as regional energy providers that many investors had seen as politically immune from going bust, Pichler said.

"This is where the most impact will be," he said, citing the risk that states and municipalities will lose their reputation as iron-clad supporters of such enterprises.

"For the first time here we are saying no, we are not. Sometimes we say 'no' and don't pay, and this is what makes everyone afraid that he can be affected," Pichler added.

ONLY BAD

The Hypo bank in Lower Austria, for instance - which typically borrows around 2 billion euros a year - would say only it was following the situation. The main power utility in Vienna declined to comment given the topic's political sensitivity.

"It can only be bad," one senior banker said of the potential market impact, although he said domestic banks would not take ratings agencies' warnings to the ultimate conclusion that public guarantees for such borrowers may be worthless.

Public guarantees for the Hypo banks will mostly expire around 2017, mitigating the impact, he pointed out.

"For the Hypos it's very tangible but temporary. For the companies it's very real, and they probably don't fully realise that," he said on condition he not be named.

Austria's nine provinces can duck the blowback by continuing to raise money by piggy backing on federal bond tenders. They arrange nearly all their borrowing this way.

Officials use the Hypo case to stress that assumptions by ratings agencies and investors that Vienna will help out ailing states such as Carinthia - which at one stage had Hypo guarantees worth more than 10 times its annual budget - are simply wrong.

"The Republic (of Austria) will of course honour its commitments in the Hypo case but ... does not automatically back all the guarantees the provinces have entered," Finance Minister Michael Spindelegger told a parliamentary debate last month.

"And thank God, because otherwise we would look different and that would not be good for Austria as a financial centre."

BAD TASTE

Spindelegger, head of the conservative People's Party that is junior partner to the centre-left Social Democrats, has faced public furore over the mounting costs of dismantling Hypo Alpe Adria, which Austria had to nationalise in 2009 to avoid a collapse that would have sent a shock wave across the region.

He toyed with the idea of letting Hypo go bust - which would have bankrupted Carinthia given the state's unaffordable guarantees - but decided in March this path was too risky.

Instead he wants to impose losses on holders of 890 million euros of Carinthia-guaranteed Hypo debt and seize another 800 million from former Hypo owner BayernLB of Germany. The law could take effect in August if all goes to plan.

Spindelegger insists that Carinthia - which made millions by selling its Hypo stake to BayernLB - contribute around 500 million to Hypo's costs, which the province is fighting.

The Hypo draft legislation does not force Carinthia to contribute, as Spindelegger had originally threatened, only to relent at the last minute to allow more time for negotiations.

That threat prompted Standard & Poor's to put four provinces on CreditWatch negative for fear Vienna could be on the verge of tampering with a system in which the federal government collects nearly all tax revenue, then distributes some to provinces.

"The discussion on holding back a share of revenue leaves a bad taste, even if the measures might not come to fruition," S&P analyst Alois Strasser said.

(Reporting by Michael Shields; Editing by Alexander Smith and Mark Potter)