Nowotny, Spindelegger Downplay Moody's Downgrade of Austrian Banks

By Neetha Mahadevan

FRANKFURT--European Central Bank Governing Council member Ewald Nowotny and Austrian Finance Minister Michael Spindelegger have downplayed the effects of the downgrade of several Austrian Banks by rating agency Moody's Investors Service Inc.

Mr. Nowotny, who is also Austria's central bank governor, said in an interview in Austrian magazine Profil, which is due to be published on Monday, that he doesn't expect the downgrade to have any major impact on the banks' actual funding costs.

On Friday, Moody's downgraded most Austrian Banks with a negative outlook on their long-term debt and deposit ratings following the Austrian government's proposal to enact legislation to allow it to wind-down the troubled nationalized lender Hypo Alpe-Adria-Bank International AG. The proposed legislation foresees some of Hypo Alpe-Adria's subordinate bondholders potentially taking a complete loss on their investments despite a pre-existing provincial government guarantee for the bonds.

Mr. Spindelegger said in a statement late Friday that he sees the downgrade as "incomprehensible."

"In recent years, Austrian banks have minimized their risks and are in a stable position. Both Erste Group and Raiffeisen have received support from the Republic during the financial crisis," he said.

Moody's said the move to place taxpayers' interests above the rights of creditors who had previously benefited from a public sector guarantee indicates that Austrian authorities are more willing to countenance bank resolutions in which losses may also be imposed on senior creditors.

"[The downgrade] shows that the creditors may have included the risks which the OeNB [Austrian central bank] has also pointed out before. The OeNB had also emphasized on the need for comprehensive information on the special character of the proposed measures," Mr Nowotny says. The central banker adds that guarantees provided by the Republic of Austria, as opposed to the provincial guarantees, were "fully recognized" by the proposed legislation.

Mr. Spindelegger said that bailing in investors will become a standard feature in European bank restructuring law and that Austria was bringing the practice forward for the "special case" of Hypo Alpe-Adria.

"The Austrian government has anticipated a European Union directive with the special law," Mr Spindelegger said. "From 2016 at the latest, this isn't the exception anymore, but the rule."

Amid criticism over rescuing the bank, Mr. Spindelegger promised in March to tap other sources for sharing the cost of shutting down Hypo Alpe-Adria, including junior securities and former owners.

Nicole Lundeen in Vienna contributed to this article.

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