CEE contamination: Austria seeking for help.

Dear readers,

Building further on our report from last week where we pointed out the problems the CEE region is facing we would like to have a brief look at the contamination risk that is now spreading into the EU.

The whiff of worry has been wafting in the wind for a long time now on CEE and Russia, and yesterday the news stepped up a notch as the Austrian Chancellor said he wants to approach the EIB for assistance in protecting its banks exposures to CEE + Russia (CEE-R), and that Austria will call for a European Union initiative to support these banks with the possibilities offered by the European Investment Bank, the ECB and the cohesion fund.

This Austrian move looks ostensibly to be designed to bail out Erste and RZB which are massively exposed to the CEE region : 40 % of Erste and 51 % of RZB’s loan book is exposed to CEE-R. Next to the Big 2 Austrian banks we also have Bank Austria (part of Unicredito) which Bloomberg reckons to be EUR 230 bio exposed to CEE. At present the Austrians have offered a EUR 75 bio repo facility with its banks on very flexible terms (low hair cuts and low rated paper) and a 5 year guarantee on senior debt for up to only EUR 15 bio. Bear in mind that Austria’s GDP is only EUR 285 bio.

The latter is the core of the problem. Similar like Iceland their banks grew above their heads. In the hype of bank bail-outs Austria, with a debt / GDP ratio of around 50 % will need to look for external help because its banking sector’s liabilities are too large. That it is seeking a loan facility over funding its own way out of the problem is a clear indication that this is going to be an EU problem (and probably at a later stage a joint intervention alongside the IMF) and not just a domestic issue country-by-country.

As a consequence we will see the EU, via the EIB, being presented the bill for the repair of Europe and even CEE.

The one million dollar question will be how long they can be put up with this? Other questions to be raised are, what will Italy and Greece do, who have sizeable exposures to the CEE region. Will they be asking for a bail out as well?