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Small but Significant..

December 15, 2009

Would be the words to best describe Austria’s bank Hypo Group Alpe Adria.. for its business in Austria, Europe and the Balkans. News from Dow Jones shows how this weekend lack of liquidity drove HGAA into nationalization. Details below.

The deal required the personal intervention of European Central Bank president Jean-Claude Trichet, who called both Austrian Chancellor Werner Faymann and Horst Seehofer, governor of the German state of Bavaria, to ensure that the bank, 67% owned by Bavaria’s BayernLB, was rescued.

Trichet’s involvement underscores enduring worries in the highest circles about the stability of Europe’s banking system, after the crippling losses suffered by many banks in the financial crisis. With only EUR43 billion in assets, HGAA is by no means a large bank from a continental perspective, and operates mainly in southeastern Europe, outside the euro zone and even the European Union.

The deal averts an insolvency that would have strained Austria’s domestic banking market in its own right, and dealt a possibly damaging blow to the standing of other Austrian banks. They expanded rapidly in central and eastern Europe over the last decade, and are now accordingly stretched by problems with heavy loan and foreign-exchange losses in those markets.

The risk of contagion spreading from either the Austrian or the Balkan banking market appears to have been considered too large to ignore.

Before an emergency shareholder meeting at the weekend, neither Bavaria, nor the Austrian federal government, nor HGAA’s minority Austrian shareholders had been willing to inject extra funds to keep HGAA alive.

“In the end, ECB President Trichet called Chancellor Faymann, to make clear the seriousness of the situation,” an informed source said, requesting anonymity.

Trichet and Deutsche Bundesbank president Axel Weber also called Bavarian Governor Horst Seehofer to urge him to agree to a deal, people in the banking world told Dow Jones. The Bundesbank confirmed only that it “had participated in the background” to finding a solution.

Under the terms of the deal, the Austrian federal government will assume 100% of HGAA’s equity and underwrite EUR450 million in new equity, while the former shareholders will waive claims of just over EUR1 billion, and continue to extend EUR3.4 billion of liquidity support to the bank in place. Austria’s largest banks, including UniCredit SpA, Raiffeisen Zentralbank and Erste Bank AG, also agreed to provide another EUR500 million in contingency liquidity support.

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