After Dubai – where next?
Try Austria.
Immediately after the Dubai incident, I mentioned in my blog that while the incident in itself is not as important, it does reflect the deeper malaise afflicting the global financial market and is merely a tip of the iceberg. Immediately thereafter, Greece and Portugal were put under rating watch due to severe financial strain and Greece was downgraded, for the second time during the year by S&P, from A- (which incidentally was a downgrade from A in January 2009) to BBB+. Even the new rating can be downgraded further.
With forecast for fiscal deficit being doubled from 6% (as given the previous government) to 12.7% of of the GDP, and a debt to GDP ratio expected to hit 126% by 2010, the downgrade is a no brainer. Not surprisingly, it’s Credit Default Swap (CDS) spread increased from a low of 100.27 basis points (BPs) to 267.72 BPs. What is even more disturbing is that their banking sector has huge exposure to Eastern Europe, which is a highly vulnerable region. The Greek banks have close to USD 57bn exposure this region out of total exposure of USD 101 bn (source: BIS). Not surprisingly, the ratings of their major banks have also been downgraded.
Recently the Austrian government has nationalized the insolvent bank Hypo Group Alpe Adria (HGAA). The financial institution, which has 40 billion Euros in assets, is the country’s sixth largest bank. The announcement came after a deal was reached for HGAA's owners – Bavaria's BayernLB bank, Austrian mutual insurer Grazer Wechselseitige and the province of Carinthia – to contribute over a billion Euros (1.46 billion dollars) to the troubled bank. Last month, the group announced that massive risk provisions (more than € 1bn) would wipe out the capital injections it received from the Austrian state and shareholders over the past 12 months.
“Increased risk provisions and the expected impairment at HGAA will weigh significantly on… earnings in the fourth quarter. It is not yet possible to quantify it exactly, but it can be expected that as a result of these effects, the group will report a loss of well over €1bn,” BayernLB said in a statement.
According to the Austrian Finance Minister Josef Pröll said the move was necessary to save the country’s sixth largest bank from bankruptcy. "The risk situation of this bank has created an enormous threat for the Republic of Austria, Austria as a financial centre and the entire economic area in the past days and weeks," said Pröll
And why not? The Austrian banking sector has now become quite vulnerable, given its huge exposure to the Eastern European economies, whose purely credit driven scorching pace of growth resulted in disastrous consequence during the current recession.
The total exposure of the banking sector to the Eastern European economies (at about US$ 224bn, as per BIS or Bank for International Settlements data) is more than 60% of the GDP. And the exposure in all developing economies taken together, it is around 65%. Clearly we have not heard the last about rescue act carried out on the Austrian banks.
Austria’s budget deficit is likely to clock 4.3% of GDP this year, and is expected to go upto 5.5% in next (2010) and 5.8% in 2011, as per OECD estimate. With an external debt that is more than 200% of the GDP, the Austrian economy remains susceptible to downgrade. Not surprisingly, the CDS spread of Austria’s sovereign bonds are moving up quite fast. Currently it is as 85.3, more than 30 basis points above its September low of 54 basis points.
