A default on sovereign debt is potentially even more disastrous than last year’s subprime meltdown because it has the potential to lead to geopolitical volatility, social unrest and even war. Investors who have purchased sovereign debt - which typically is perceived as safer than corporate debt because countries can raise taxes and increase tariffs to raise cash to pay their debts - could see some extremely poor returns. In a book entitled This Time Is Different: Eight Centuries of Financial Folly, authors and economists Ken Rogoff of Harvard and Carmen Reinhart of the University of Maryland state that “Since 1970, nearly half of sovereign defaults have occurred in nations with debt-to-GNP ratios of 60 percent or more. This makes sense: As a country’s debt starts to approach the size of its total economy (or GNP), it gets harder to make their payments, just like an individual whose debts start to eat up all (or most) of their salary.” Banks and Finance Finance minister Josef Pröll said the government had been forced by fast-moving events to take a 100pc stake in the bank, Austria's sixth biggest lender with assets of €42bn (£38bn). "The risk situation of this bank has created an enormous threat to Austria, to its future as a financial centre, and to the whole economic region in recent days and weeks," he said, speaking after a 14-hour emergency session overnight on Sunday. Chancellor Werner Faymann sought to calm the fury of Austrian citizens and opposition leaders, saying there would have been "catastrophic consequences" if the bank had been allowed to fail. Austria's press said that Mr Faymann was under intense pressure from Jean-Claude Trichet, the head of the European Central Bank, who feared a "domino-effect" that would undermine other banks and damage Austria's sovereign rating. Samir Patel from the consultancy BH2, who advised clients this Autumn to prepare for a Balkan storm, said the Hypo rescue was unlikely to prove an isolated event. "We see this as the beginning. Things are still getting worse in the Balkans," he said. Under the Hypo deal, majority shareholder Bayern Landesbank has agreed to surrender its 67pc stake for a token €1 and to waive a further €825m in liabilities. The Austrian state will provide up to €450m in fresh capital. The state-owned BayernLB bought Hypo during an expansionist spree at the height of the bubble in 2007. Its Austrian venture has cost Bavaria €3.8bn. BayernLB was itself rescued by German authorities in a €10bn bail-out last year. While the bank is in no danger itself, the latest losses will force it to tighten lending to boost capital ratios, risking a further credit squeeze over coming months. The Hypo rescue casts doubt on assurances by Vienna's authorities that Austrian lending to Eastern Europe and the Balkans poses no threat to the banking system. Austrian banks have lent €230bn to the region, equal to 70pc of Austria's GDP, the highest exposure of any EU country. This led to jitters at the height of the crisis in February, prompting Mr Pröll to canvass EU states for a pan-European rescue. The G20 restored confidence at the London Summit in April, agreeing to triple the fire-fighting budget of the International Monetary Fund to $750bn. While this staved off a liquidity crisis, it has not solved the slow-burn problem of rising defaults on East European loans books. Helmut Ettl, head of Austria's financial watchdog (FMA), said Hypo had kept its risks in the Balkan region "well hidden". The full exposure came to light recently in an "Asset Screening" by the FMA. Tim Ash from RBS said revelations that Hypo had lost almost €4bn would create fresh skittishness about the region. "This is not going to be credit-friendly for Eastern Europe," he said. Social Democrats called for the resignation of the Right-wing coalition in Carinthia, calling the debacle the "greatest financial scandal in the history of the state". Austria's hard-Left KPO party called for the total nationalisation of Austria's banks and insurance companies.Sovereign Debt Could Be 2010’s Subprime
ECB orders Austria to nationalise Hypo bank, fearing domino crisis
Austria has nationalised the Carinthian lender Hypo Group after it ran into trouble on hidden losses in Eastern Europe, offering a stark reminder that Europe's banks are not yet out of the woods.
Monday, 29 November 2010
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