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Austrian bank failure report

Kerry Skyring, Vienna
December 2, 2014

An investigation into Austria’s biggest banking scandal has criticized bankers and governments. Taxpayers, who've footed the bill, will find little comfort in the independent report, as Kerry Skyring reports from Vienna.

Österreich Wirtschaft Banken Filiale der Hypo Group Alpe Adria in Kärnten
Image: picture-alliance/dpa

The government appointed body, the so-called Griss commission, led by former judge Irmgard Griss, sets out a litany of failures in the Austrian banking and political system.

"The events surrounding Hypo are marked by failings and mistakes at both national and state government level," said Griss Tuesday while releasing the results of a year-long investigation. The report details how the late governor of the state of Carinthia, the far-right politician Jörg Haider, allowed this relatively small bank to go on a lending spree in south-east Europe while giving government guarantees for large numbers of bad loans.

At the peak of its profligacy in 2008, Carinthia had given guarantees for loans worth 43.3 billion euros, ($53.9 billion) according to the report.

Austrians taxpayers have already contributed 5.5 billion euros ($6.85 billion) to bailing out Hypo Alpe-Adria through a government initiated state takeover in 2009 and subsequent efforts to wind up its bad debts.

According to the Austrian Institute for Economics (WIFO) the total cost could run as high as 19 billion euros ($23.65 billion). Griss said the Austrian National Bank failed to sound an early warning of the banks dangerously high exposure.

"At the end of 2008 the Austrian National Bank described Hypo's condition as 'not distressed'" said Griss, adding that a chance to restructure the bank was missed. She describes a scenario where the bank was taking risks because it had guarantees from the Carinthian government while Carinthia believed its guarantees would be backed by the government in Vienna.

She said auditors regularly reported "major deficiencies" in risk management at the bank but that no consequences followed.

The Bavarian connection

In 2007 the German regional bank BayernLB took a majority share in Hypo Alpe-Adria in a deal which, at the time, seemed to suit both sides but which has ended in lawsuits and recriminations. BayernLB says its rights have been ignored in the break-up of the now nationalized bank while the Austrian state is trying to claw back funds from former shareholders and creditors, the largest being BayernLB. The independent commission sees failures in Austria's handling of the nationalization.

"When it was obvious that BayernLB would not come up with the necessary recapitalization" says the report about the period during the forced nationalization in 2009 "there should have been strategic considerations about the way forward."

Griss says that despite requests no government strategic paper has been provided to her commission. She says there were alternatives to a state takeover of the bank, including allowing it to become insolvent.

Tougher negotiations with the Bavarian shareholders could have meant they would have had a greater participation in the wind-up costs of Hypo Alpe-Adria and thus reduced the taxpayer burden, she concludes.

Hypotopia - outlet for taxpayer’s wrath

And those taxpayers are certainly aware of the money that's been wasted. In late October a small city in model form appeared on a square in central Vienna. Built by architecture students from the nearby University of Technology it was dubbed "Hypotopia" and replicated in miniature form a city where more than 100,000 people could live, work and play.

"We wanted to show what could be done with all of those billions" student Lukas Zeilbauer told DW.

He says the goal of his group is to end Austria's tolerance for "incompetent politicians."

Not only did the students build the city brick by brick, they calculated the cost of building it including its schools and transport systems. "Everyone knows the facts about the Hypo scandal, this report is just a summary,"says Zeilbauer, who supports a parliamentary enquiry as a follow-up to the independent commission.

Eventually the students dismantled Hypotopia and invited the public to help them carry it to parliament "just like we are carrying the burden of debt" they said.

Politicians duck the blame

The Hypo Alpe-Adria debacle has been handled by three different finance ministers, all of them from the conservative Austrian People’s Party. Current finance minister Hans Jörg Schelling was on an official visit to Berlin when the report was released but a statement from the ministry says there will be a reaction once the report has been analyzed.

The party's parliamentary chairman Reinhold Lopatka said "the origin of the scandal is Carinthia and the Hypo debacle is and remains a Freedom Party scandal." He was referring to the party of former Carinthian governor Jörg Haider.

Austria’s Social Democrats, who lead the federal government in coalition with the People's Party, also skipped over the report's criticisms saying "it's a Freedom Party scandal."

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