World Bank to Be Hit by Austrian Hypo Alpe Bond Wipeout Plan

Jul 16, 2014 11:34 am ET

(Updates with World Bank statutes in sixth paragraph.)

July 16 (Bloomberg) -- The World Bank is set to join a German money market fund and Austrian life insurers in facing losses as Austria prepares to write down the value of Hypo Alpe- Adria-Bank International AG’s junior debt.

The lender, whose goals are to fight poverty and help developing countries, is in talks with Austrian authorities about 150 million euros ($203 million) of Hypo Alpe junior bonds it holds, according to a World Bank spokesman, Derek Warren. The securities are part of 890 million euros in subordinated debt that will be wiped out once a law on Hypo Alpe’s wind-down, passed by Parliament’s lower house in Vienna last week, gets final approval.

The World Bank, based in Washington, has been in touch with the Austrian Finance Ministry about the Hypo Alpe law, asking whether its holding could be exempted, said Paul Trummer, a ministry spokesman. The government doesn’t see a legal option to do that, Trummer said.

Austria broke new ground with the law imposing losses on subordinated Hypo Alpe creditors as it’s effectively bypassing a guarantee by the state of Carinthia, the bank’s former owner. Finance Minister Michael Spindelegger proposed the move when he ruled out putting the nationalized lender into insolvency, sparing holders of the bank’s senior bonds. He pledged to seek contributions from “risk investors” instead, such as the junior creditors and former owners including Germany’s Bayerische Landesbank.

Funds, Insurers

Funds managed by Deutsche Bank AG’s mutual fund unit DWS held about 199 million euros of junior bonds due to be voided as of May 30, data compiled by Bloomberg show. They include the DWS Institutional Money Plus fund, advertised as a “cash parking lot” for investors. Austria’s Uniqa Insurance Group AG has 35 million euros of junior Hypo Alpe bonds, while Vienna Insurance Group AG holds 50 million euros.

Austria’s plan may be complicated by World Bank statutes that protect the lender’s assets from expropriation. The rules have been agreed to by the World Bank’s 188 member countries. Austria joined in 1948.

The Austrian upper house is due to vote on the law July 24. The governing parties ruling the lower house also have a majority in that chamber. After that, President Heinz Fischer has to sign the law. The bonds must then be voided by an order from the FMA bank regulator under the new law.

While about 70 percent of Austrians say they’d prefer to let Hypo Alpe go insolvent, the move to void state-guaranteed debt has drawn criticism from rating companies and the International Monetary Fund. The measure risks damaging trust in Austria more broadly, even as the government is presenting it as an isolated case, the IMF said July 1.

--With assistance from Alexander Weber in Vienna.