Austrian Banks’ Dangling Swiss Sword

Austrian banks with large Swiss Franc portfolios at home and in transition economies absorbed debt and equity blows from the end of the appreciation limit, as ratings agencies warned of pressure on the prime sovereign rating on further possible rescues as post-2008 lines come due. The four main lenders—Erste, RBI, Unicredit and Volksbank—have EUR 30 billion in exposure with household CHF borrowing at one-fifth the total. They also have EUR 40 billion in outstanding loans to Russia and Ukraine at risk with recession and war and a EUR 5 billion injection so far into Hypo-Alpe-Adria could not stave off bankruptcy. RBI’s credit default swaps on junior instruments that will take losses under new EU bail-in rules show 70 percent event odds over 5 years. Its Polish mortgages are one-third Swiss Franc-denominated, as conversion has entered the thick of political campaigning on imminent parliamentary and presidential elections. The opposition Law and Justice party favors a forced Hungary-type switch at the previous exchange rate which could cost banks almost $3 billion, the central bank estimates. A compromise which would only partially preserve the original level may involve half that sum but would still exact a balance sheet toll even if the economic outlook stays positive, according to Moody’s. Erste and Raiffeisen are big in Croatia where mostly retail CHF credit amounts to 7.5 percent of GDP. The outgoing parliament voted to freeze rates for individuals along with small businesses, and poor customers can apply under a separate program for cancellation. Volksbank Romania has volunteered to hold the CHF/leu trade constant for three months as officials there aided by an IMF precautionary facility reject sweeping solutions. Lawmakers may however extend relief to the poorest by raising the income threshold as monetary authorities fear write-downs will endanger system capital. Serbia has EUR 1 billion in CHF-linked mortgages and just revived its Fund arrangement, but with the 25 percent NPL ratio further bank losses would be unsustainable and the draconian budget plan affords no forgiveness room. In Bosnia Hypo-Alpe-Adria dominated personal foreign currency activity and agreed to work out viable terms with over 5000 clients. The group is in the process of final sale to private equity firm Advent and the EBRD winding up decades of operation and Austria’s contingent liability with debt/GDP already at 85 percent.

Denmark with its 30-year currency peg also felt backlash from the Swiss National Bank’s jettisoned ceiling and sold a record $15 billion equivalent to preserve the 7.5/euro relationship within a narrow fluctuation band. Bond auctions were suspended and the benchmark deposit rate went further negative to –0.75 percent. Despite the cursory speculative inflow invitation, the krone could depreciate in the long run with high household and financial sector leverage if the structure collapsed according to analysts. Other Scandinavian banks suffered in the maelstrom with their huge Baltics footprint reflected in capped stock market performance.