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Moody's: Austria's Law on Hypo Alpe Adria is credit negative for Austrian banks and has mixed credit implications for the sovereign

July 28, 2014

On 8 July, the Austrian Parliament passed legislation that allows the government to bail-in the subordinated debt holders of nationalised Hypo Alpe-Adria-Bank International AG (HAA)

and void the deficiency guarantee of the State of Carinthia (A2 stable)

on that portion of the bank's debt. From Moody's perspective, the

government's decision to place taxpayers' interests above the rights of

creditors is unprecedented to the extent that it reneges on a

public-sector guarantee.

The law has material negative implications for the support assumptions

underlying Moody's analysis of the Austrian banking system as reflected

in the rating agency's recent rating actions on 20 June 2014. For the

sovereign, this legislation has mixed credit implications and is credit

negative for Austria's investment climate. The two new reports: "Austrian

Banks: Lower Support Assumptions Post Hypo Alpe Adria Law Are Credit

Negative" and the cross-sector report "Implications for Austrian Credits

of Hypo Alpe Adria Law" take stock of Moody's assessment of the

implications for credits in Austria.

The HAA law demonstrates that the Austrian government aims to contain

public costs of bank restructuring and resolution. The implications for

Austrian banks are credit negative. In Moody's opinion, Austrian

authorities are now generally more willing to countenance bank

resolutions in which losses may also be imposed on senior creditors.

Moody's therefore lowered its support assumptions for the Austrian

banking sector, and also significantly lowered the value placed on other

deficiency guarantees for Austrian banks.

In the cross-sector report, Moody's highlights mixed credit implications

for the Austrian sovereign (Aaa stable). The federal government's

decision to enact legislation to bail in certain creditors of HAA is

credit positive to the extent that it underlines the government's stance

to contain current as well as future costs of bank restructuring on its

balance sheet. At the same time, the law raises questions about policy

predictability at times of political stress and thus is not conducive to

supporting the investment climate in Austria, adds the rating agency.

The above-mentioned consequences notwithstanding, Moody's considers

implications for other credits in Austria to be limited. Given the only

marginal benefit of the law for Carinthia, Moody's affirmed Carinthia's

rating at A2 with a stable outlook on 23 June. Since Moody's considers

the law to target a situation in the Austrian banking sector, in the

rating agency's view the legislation has no material effect on the

creditworthiness of other credits benefiting from government support in

Austria, to the extent they operate in other industries.

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Source: EMBIN (Emerging Markets Business Information News)

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