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Banks in Austria Highly Exposed in Eastern Europe, Analysts Fear Effects of Wave of Defaults

The traditional Opera Ball at Vienna's Opera House attracted hundreds of partygoers last month, but most of Austria's financial elite were absent.
The traditional Opera Ball at Vienna's Opera House attracted hundreds of partygoers last month, but most of Austria's financial elite were absent. (Herwig Prammer/Reuters)

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By Craig Whitlock
Washington Post Foreign Service
Thursday, March 19, 2009

VIENNA -- Times are so bad here that bankers can no longer afford to waltz.

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With bank share prices plunging and public bailouts mounting, Austrian financiers were conspicuous no-shows at last month's Vienna Opera Ball, an annual social extravaganza that traditionally has been a place for the country's business elite to cut deals when they're not dancing.

One of the few bankers to attend was Andreas Treichl, chief executive of Erste Bank. His wife, the ball's chief organizer, made him go. "I went for 30 minutes," he said, citing heavy demands at the office. "I needed a good night's rest because we have very long days for the moment."

Austria's banks exert an outsize influence beyond the country's borders. In the 1990s, after the fall of communism, banks based in Vienna expanded eastward and came to dominate finance in Eastern Europe.

Today, however, Hungary, Romania and Ukraine -- where Austrian banks nearly cornered the market -- have sought emergency aid from the International Monetary Fund. Foreign investors are fleeing Eastern Europe, worried that the problems could spread.

Credit-rating agencies have warned that Austrian banks are highly exposed if Eastern European borrowers trigger a wave of defaults. Furthermore, some analysts have questioned whether the Austrian government -- which has already approved a bailout package worth $130 billion -- has the resources to intervene in a worst-case scenario. In recent weeks, Austrian media have openly questioned whether the country could go bankrupt.

Analysts and regulators in Vienna said the probability of a meltdown remains low. In interviews, they said that Austrian banks in general are solidly capitalized and that the government bailout has provided a strong dose of insurance.

But they said that if Eastern Europe gets sucked into a tailspin like the one that overwhelmed Asian economies in 1997, Austrian banks and taxpayers could face a challenge unseen since the Great Depression.

"If the crisis unfolds like we hope -- that these countries might face a recession but not too severe a recession -- then I guess the Austrian banking system can survive as it is," said Franz R. Hahn, an analyst with the Austrian Institute of Economic Research. "But if things get out of control, then the crisis becomes very, very bad, similar to the dimensions of what we know happened in the 1930s -- total disaster."

Memories of that era are still keen. In 1931, the Austrian government's inability to rescue a failed Viennese bank, Creditanstalt, helped trigger a series of bank closures around the world.

Austrian bank executives said that such fears are overblown and that their companies remain sound. Raiffeisen Bank and Erste Bank -- both of which have extensive operations in Eastern Europe -- reported record earnings in 2008. Unlike their competitors in the United States, Britain and Germany, Austrian bank officials said that their balance sheets are clean of toxic securities and that they are well positioned to ride out the crisis.

"Everybody is saying, 'Huge drama! Austria is in danger because of these crazy debts in Central and Eastern Europe.' I'm saying, 'Wait a minute,' " Treichl said in an interview. The situation, he added, "is a bit more complicated and complex than it has been portrayed."

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