Austria in trouble because of bad company

Austria looks like a boy from a good family got into trouble because of bad company.

In its latest economic surveys dedicated to this small country nestled between Italy and Germany, the OECD reminds that Austria “has considerable material well-being and quality of life.” “The steady growth of the GDP-per capita – he adds – it is combined with a low level of inequality in the distribution of wealth, with high environmental standards and rising expectations of lifetime”. In this terrestrial paradise there are also “favorable conditions for a dynamic business sector” and “generous cash benefits for families” to which is added a robust supply of public services.

All this with unemployment around 4.5%, yet at the price of a structural work to low-income and with the increase in part-time jobs, a fiscal deficit well below the 3% of GDP, public debt that, although growing, is expected does not exceed 75% of GDP (which in 2012 was € 309 billion at current prices) and a positive current account balance that in 2012 was the 1, 8% of GDP and is expected to come at 2.9% in 2014.

An enviable macroeconomic situation.

“The people of Austria – concluded the OECD – has combined his vocation for stability with a thriving economy capable of pursuing an active strategy of globalization.”

Before you make the case for moving to, I suggest you take a look at another document, this time written by the Austrian central bank and published recently: the Financial Stability Report of June 2013.

Reading it turns out that Austria has its PIIGS, only they call CESEE. They are not the countries of the South Europe, such as those that have made us suffer Germany. But those middle eastern (Central, Eastern and South-Eastern Europe), to commence with Hungary. They are the bad companies that have messed the good guy Austrian since the days of the Habsburg Empire. The same OECD writes that “a severe shock in one or more of these countries, to which Austrian banks are substantially exposed, may deteriorate credit conditions within the country”.

Even Austria, in short, has to deal with a banking sector “relatively large in relation to the economy of the country” (380% of GDP), which has replicate to the countries of central and eastern countries the game that Northern Europe has done with the PIIGS (now Gipsi). Austrian banks have lent a lot of money and are now hostage to such loans.

The data tell us that in 2012 the Austrian banks were exposed for just a 5.1% against the PIIGS, approximately 16 billion Euros, while exposure amounted to ten times as much against the CESEE EU members (Bulgaria, Estonia, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, Czech Republic, Hungary): 150.67 billion, 48.6% of GDP. Another 35 billion, 11. 3% of GDP, were provided to non-EU member CESEE (Bosnia and Herzegovina, Croatia, Montenegro, Macedonia, Serbia and Turkey). Other 19 billion, 6.1% of GDP went to Azerbajian, Kazakhstan, Russia and Ukraine.

The top of the exposure, however, is in the Czech Republic, over 47 billion, 15.3% of the GDP, followed by Romania (26.8 bn, 8. 7% of GDP), the Slovak Republic (24.5 billion, 7.5% of GDP) and Hungary (19.8 billion, 6.4% of GDP).

This situation has forced Austrian government to introduce measures to defuse the bomb of these loans, granted with great generosity, that now are like a loose cannon that scares the Austrian paradise. Among other things, were nationalized two banks of medium size, after the explosion of the crisis, and have been adopted measures to prevent the formation of a bubble in loans. In May 2013 it was approved a bill to regulate the procedure and the possible restructuring of the banks.

These measures have slightly improved the leverage ratio of banks, fell from its peak in 2008 (24), but still high (16). Until now, the Austrian state has spent 8 billion euro in order to strengthen the capital of its banks and provided guarantees for another 12 billion.

But there are still problems, because exposure continues unabated.

The central bank report gives us some more information. While domestic credit is improving , “the quality of credit in the banking subsidiaries in CESEE continues to deteriorate.”

In particular, the share of non-performing loans (NPL) has increased a lot between late 2011 and late 2012 in almost all countries in Central and Eastern, with a peak in Romania, where it has gone from 23.3% to 29.9% , Ukraine (from 14.7 to 19.8%) and Slovenia (11, 3 to 14.5%). This deterioration was placed in a context of economic slowdown, which has seen growth in the CESEE switch from +2.7% in the second quarter of 2012 to 0.9% in last quarter. Four of these countries have even reported a negative growth and employment has been affected, rising over 10% in more than half of them.

Here, too, is replicated what happened to the PIIGS: unemployment rises, real wages and real estate prices fall as well. And if all this can be good for competitiveness, for sure are not good for household budgets. Having fewer resources makes it harder for them to repay their debts. And this is why increase the NPLs. And at the same time drops the private consumption. Which is why the GDP decreases .

To pay the bill for this potential instability are banks in the area, many of which are directly controlled by the Austrian banks, which have to contend with heavy indebtedness and a profit margin that is reduced each year.

In Romania, the profitability of banks is even negative since August 2011 due to the rising cost of funding, while in Hungary the same situation was caused by the policies of the government, which has discouraged foreign currency borrowing of households. Banking sector also at a loss to Slovenia for the whole of 2012, while Ukraine has returned to profit, albeit small (0.4% of assets).

The problems imported from abroad, are part of a healthy financial environment inside yet, but undermined by the still high share of debt contracted in foreign currency, mostly in Swiss francs, from families and Austrian companies on the total respectively account for 23% (since 2013, 8% less than in 2008) and 7%. Level of household debt reached 90% of the income and worth 168.6 billion. A factor of financial instability that has recently joined the growing trend of real estate values, which in the last quarter of 2012 increased by 8, 4% and even 12.7% in Vienna.

In short, the world around him is becoming dangerous, but the good guy Austrian is still safe.

Just do not leave the house.


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