EU raises concerns about Austria bank bail-out

Published: November 11, 2008

The EU commission on competition has raised concerns about the Austrian government’s €2.7bn bail-out of Erste Bank at the end of October. Erste Bank is one of the largest banks in Austria and in central Europe.

Jonathan Todd, spokesperson of the competition commission, said on November 12: “The principle is that aid must be sufficient to offset the problems caused by the current financial crisis but not put banks in an advantageous position. This means that they are not allowed to get business they cannot otherwise have.”

The commission is worried that the terms of the bail-out, which require Erste Bank to pay just 8% interest on the €2.7bn five-year loan, may be insufficiently punitive for an emergency bail-out. Todd says: “The 8% is not sufficient because the principle is that, when banks receive state capital, the rate of interest payable should be sufficiently high to act as a strong incentive to pay the money back to the state as quickly as possible.”

He adds: “We’re still waiting for additional information and commitments from Austrian authorities concerning the rescue scheme. We still haven’t approved it.”

Erste has called an emergency shareholder meeting on December 2 for its shareholders to approve the state bail-out. Its shares rose 16% on the day news of the bail-out was announced.

Ronny Rehn, banking analyst at Morgan Stanley, says the bail-out came in the nick of time for Erste Bank: “The bank was highly leveraged, and its core tier one capital was just 6%, which is a lot lower than its peers. This puts it in a better position.”

Other Austrian banks may also seek capital from the state. Raiffeisen Zentralbank, parent bank of Raiffeisen International, may be the next to seek state funds. A spokesperson told the Austrian media: “We are looking very closely at developments and will make the best choice for our customers and shareholders”.