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Austria: The return of the debt crisis

Austria is feeling the pain from the Swiss National Bank's decision to unpeg the franc from the euro.

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Carinthia: the Swissie's first big casualty

"Everyone was wondering who the first big casualty of the [Swiss National Bank's] currency peg failure would be," says zerohedge.com. "We now know the answer."

An audit has uncovered a €7.5bn capital hole in Austria's Heta Asset Resolution, a "bad bank" created to wind down the bad debts racked up by the bankrupt lender Hypo Alpe Adria. Hypo had been based in the southern province of Carinthia.It was nationalised in 2009 after suffering heavy losses in eastern Europe.

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A key problem for European lenders in recent years has been a reliance on Swiss-franc-denominated mortgages in eastern Europe. As the Swiss franc strengthened, eastern European households owed more in local currency terms and many were unable to pay.

In January 2015, the Swiss National Bank suddenly abandoned its peg against the euro, sending the franc rocketing after three years of stability. This "appears to have been the last straw for Heta", says Ambrose Evans-Pritchard on telegraph.co.uk, triggering another wave of likely defaults in its loan book.

The Austrian federal government is tired of pouring taxpayers' money into Heta, and has ordered a 15-month moratorium for around €10bn of bonds owned by the bank. It plans to use newly introduced EU rules to force senior bondholders to contribute to the clean up, thus limiting the burden on taxpayers. The decision wiped around 50% off Heta bonds.

However, the federal government's tough attitude leaves the provincial government of Carinthia high and dry. It guarantees the €10bn, around five times its annual revenue. Thus Carinthia itself could go bust if Heta is declared bankrupt (as opposed to being in a moratorium).

This affair is already ricocheting through the financial system. Heta owes €1.24bn to Pfandbriefbank sterreich, which issues bonds on behalf of Austrian provincial banks. German banks are also emerging as key bondholders, notes Boris Groendahl on Bloomberg.com. Deutsche Pfandbriefbank has said it owns €395m.

All this adds up to is a nasty reminder that Europe's banking system remains "awash with interlinked banking and public liabilities, many of which will never be repaid", says Jeremy Warner in The Sunday Telegraph. That raises the spectre of "massive creditor losses". Europe's debt crisis, far from being over, "may have barely begun".

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