washingtonpost.com
Banks in Austria Highly Exposed In Eastern Europe
Analysts Fear Effects of Wave of Defaults

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.

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."

He noted that Erste has a strong deposit base and foresees little trouble in Eastern European countries, such as the Czech Republic and Slovakia, that have been relatively untouched by the global crisis. Only a full-blown depression or panic in the region could drive Erste Bank under, he said.

"I could go bust, yes, but every bank in the world goes bust if 50 percent of its loans go bust," he said.

After predicting since last fall that they would emerge unscathed, however, Erste, Raiffeisen and Bank Austria -- owned by Italy's UniCredit Bank -- have been forced to seek multibillion-dollar bailouts from the Austrian government. Erste and Raiffeisen have also laid off hundreds of employees in Hungary and Ukraine in recent weeks.

Hannes Androsch, a former Austrian vice chancellor and finance minister, said the banks should survive and even prosper in the long run. But he said they ignored warnings for years about risks in the fast-growing Eastern European markets.

"Until recently, they said, 'We don't have a problem; we don't need any money,' when it was clear they would need money," Androsch said. "They've unnecessarily delayed the process, and they created a situation where fewer and fewer people believed them."

The banks' insistence that Eastern Europe remains a good place to do business has also been undercut by the actions of the Austrian government, which has lobbied the European Union to pony up a $260 billion rescue package for member states in the region. Germany and other countries have shot down the proposal, with some officials calling it a thinly veiled attempt to get the rest of Europe to pay for the mistakes of Austria's banks.

Economists said the banks expanded so far and fast -- Raiffeisen Bank, which was founded to help Austrian farmers, now operates in 20 countries, including Russia -- that regulators couldn't keep up.

In 2003, Austrian financial regulators warned that the country's major banks were handing out too many loans in foreign currency, such as Swiss francs and Japanese yen, instead of euros. Borrowers might have trouble repaying their debts, officials predicted, if those currencies rose sharply in value.

The banks complied with the advice at home in Austria. But they ignored it in their Eastern European markets, where consumers could borrow at much lower interest rates in Swiss francs or euros than they could in Hungarian forints, for example. Since last summer, the value of many Eastern European currencies has nosedived, making it much more expensive for borrowers to repay their debts.

"We were not in a position to forbid the subsidiaries of Austrian banks from granting these loans outside the country," said Kurt Pribil, executive director of the Austrian Financial Market Authority. "It is one of the reasons why we need a system of European banking supervision."

Although the European Union dictates commercial quality standards for a variety of things, including vegetables and highway construction, banking supervision in Europe is still restricted to the national level.

Herbert Stepic, chairman of the managing board for Raiffeisen's international operations, said the bank gave foreign-currency loans only to low-risk customers. He also pointed the finger at regulators in Eastern European countries, saying they should have intervened earlier to rein in the practice. He said his bank had to keep lending in foreign currency for competitive reasons.

"I can't go it alone," Stepic said in an interview. "That is impossible. You have to bark with the wolves, whether you like it or not."

Austrian lawmakers said they remained concerned about the potential for economic troubles in Eastern Europe to spill across the border. "There is certainly some danger for Austria," said Werner Koenigshofer, a member of parliament from the opposition Freedom Party. "If Eastern Europe crashes, a huge market for us will collapse."

But he warned that the government might not take further steps to save Austrian banks if the recent $130 billion bailout package proves insufficient. "That's the limit," he said. "You cannot do everything for everybody."

Staff researcher Robert E. Thomason in Washington and special correspondent Shannon Smiley in Berlin contributed to this report.

View all comments that have been posted about this article.

© 2009 The Washington Post Company