Agreement with Heta creditors is a spectacular first for the European banking market – a case that sets a positive precedent
The Heta deal is in the bag. The vast majority of the creditors have given up their debt securities in return for bonds issued by the Carinthian Compensation Payment Fund. 98.71% of the creditors accepted the deal, so it is fair to say that it represents a broad consensus. Carinthia has been rescued from the brink of bankruptcy, and Austria’s debt has fallen thanks to the contribution of Heta’s creditors. With the deal signed, sealed and delivered, it is worth taking a look at the details for a moment.
During the emotionally charged and often heated debates between the federal and provincial governments and the creditors’ representatives, it became clear that all sides wanted to draw a line under the whole affair, so in the end a sensible solution won the day.
But what seems straightforward to the layman is in fact a spectacular first for Europe’s banking sector. A new EU resolution directive is now in place which explicitly requires that not only taxpayers but also creditors foot the bill for bailouts. Austria transposed the directive into national law at the end of 2014, under the rather unwieldy title of Bundesgesetz über die Sanierung und Abwicklung von Banken (Federal Act on the Recovery and Resolution of Banks), or BaSAG.
The whole of Europe is now keeping a close eye on Austria, which has applied the new framework to an internationally significant bank for the first time, in the shape of the Heta case. The Austrian regulator has created a precedent which is setting the tone for virtually every crisis meeting between banks and their regulators in Italy, Spain and Portugal.
Initially, the Austrian regulator enforced a moratorium on Heta’s debt repayments, followed by a haircut and as a result an orderly bank resolution that avoided insolvency. However, the question of the massive provincial government guarantees is still an issue, because the EU directive only regulates standard bank resolution situations. However, Carinthia extended guarantees that it would never have been able to honour without outside support.
The amended Finanzmarktstabilisierungsgesetz (Financial Market Stability Act) implemented a mechanism that has been standard practice for European bonds for years. Under what are known as collective action clauses, a supermajority of creditors is sufficient to take decisions that are binding on all creditors; unanimity is not required. This means that a querulous minority is no longer in a position to block or hinder an effective solution.
Fortunately, it was all but unnecessary to impose the resolution, because virtually every creditor voluntarily signed up to the deal. The only hold-out to go public, a Hanover-based German insurance company, explained to the press that it wanted to take legal action. We will be keeping a close eye on future developments, and are confident that the transaction will secure the approval of the courts as well as the creditors affected.
A full settlement was only possible thanks to the gallant efforts of all those involved. In the past, the chronic shortage of capital was addressed bit by bit using salami tactics, but the current finance minister has been committed to finding a comprehensive solution to the Heta question from day one, in some cases taking unpalatable steps instead of pushing the problem further down the road yet again.
As expected, after a deal had been reached a number of critics emerged, some of whom pointed out that Austria’s reputation had been damaged because we had not paid enough, while others argued that taxpayers had lost out because their bill had been too high. Neither of these arguments is convincing. Austria’s refinancing costs have never been lower than they are today, with loans even extended at negative interest rates.
Also, a consensus-based deal can only succeed with the approval of all parties. Heta’s creditors have now coughed up about EUR 2 billion, while Carinthia’s EUR 1.2 billion contribution pushed the province to its limits. Depending on the proceeds from the winding-up of Heta, there is a strong chance that the financing extended by the federal government will be fully repaid.
This has made it possible to reconcile the interests of the creditors, the province of Carinthia and the Republic of Austria – because a good compromise is one where everyone makes a contribution for the benefit of all concerned.
WILLI HEMETSBERGER and his consultancy Ithuba Capital advised the Austrian Ministry of Finance on the deal with Heta’s creditors. An investment banker, Hemetsberger has also been involved in resolving speculation scandals at Austrian Federal Railways (ÖBB) and the provincial government of Salzburg.