Austria
2009 Article IV Consultation-Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Austria
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This report is focused on the impact of the financial crisis on the Austrian economy and the financial sector, the authorities’ policy responses, and macrofinancial linkages and spillovers. The financial sector has been expanding rapidly, mostly outside Austria. This has brought substantial benefits, but also increased risks and vulnerabilities. Maintaining financial stability will be essential for ensuring macroeconomic stability, fiscal sustainability, and a return to growth, while also having important spillovers to regional financial stability. Austria traditionally benefits from a low unemployment rate compared with the euro area.

Abstract

This report is focused on the impact of the financial crisis on the Austrian economy and the financial sector, the authorities’ policy responses, and macrofinancial linkages and spillovers. The financial sector has been expanding rapidly, mostly outside Austria. This has brought substantial benefits, but also increased risks and vulnerabilities. Maintaining financial stability will be essential for ensuring macroeconomic stability, fiscal sustainability, and a return to growth, while also having important spillovers to regional financial stability. Austria traditionally benefits from a low unemployment rate compared with the euro area.

I. Context1

1. The Austrian economy performed well in past years. This was the result of a combination of solid economic policies, structural Austria: Growth and Unemployment reforms, wage moderation, and an early orientation Average over towards rapidly growing Central, Eastern, and Southeastern Europe (CESE). Since the introduction of the euro, Austria has shown better economic outcomes than the euro area average in terms of growth and unemployment. Economic growth over the past five years has been almost ¾ of a percentage point higher than in the euro area.

Austria: Growth and Unemployment

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Sources: Haver; and WEO.

2. However, the economy is now feeling the full impact of the global crisis. The economy’s openness, both in trade and financial relations, means that it cannot be insulated from foreign shocks. The transmission runs through two main channels: trade—in particular the negative impact on exports of the worsened outlook for the European region—and financial flows—including the impact of the slowdown in CESE on the returns on foreign investments of the Austrian banks and corporates. These real and financial shocks associated with the crisis have a major adverse impact on the outlook for the Austrian economy.

3. Maintaining financial stability will be key to Austria’s economic future. The financial sector has been expanding rapidly, mostly outside Austria. This has brought substantial benefits, but also increased risks and vulnerabilities. The latter have now become apparent as large exposures to countries in CESE have become a source of concern. Maintaining financial stability will be essential for ensuring macroeconomic stability, fiscal sustainability, and a return to growth, while also having important spillovers to regional financial stability.

II. Recent Economic Developments and Outlook

4. The current downturn is expected to be the deepest in its postwar history (Table 1, Figure 1). The economy started shrinking in the fourth quarter of 2008 as the global financial crisis intensified and world trade fell sharply. This process accelerated in the first quarter of 2009, with exports of goods declining by roughly a quarter compared with 2008. Consumption also declined slightly, but has held up relatively well so far (Figure 2)—due to substantial wage increases agreed to last year when inflation was high, and tax cuts—but as unemployment rises, household spending will lose momentum. Staff expects GDP to decline by 4 percent in 2009 and to recover in the course of 2010—depending on global developments. The authorities broadly agreed with this outlook and noted that the sharp downward revision of earlier projections reflects an unprecedented collapse in demand for exports and investment.

Table 1.

Austria: Basic Data, 2005-10

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Sources: Austrian authorities; Datastream; and IMF staff estimates and projections.

Contribution to GDP growth.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps.

Figure 1.
Figure 1.

Austria: Economic and Fiscal Developments

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Austrian authorities; IHS; WIFO; Haver; WEO; REO; and other IMF staff estimates.1/ Calculated as the y-o-y change in discretionary measures (source: REO Europe, May 2009).2/ Capital injections plus asset purchases and lending; in percent of 2008 GDP (source: REO).3/ Increase in government debt as a percent of GDP from 2008 to 2010 (percentage points).
Figure 2.
Figure 2.

Austria: GDP Growth and Leading Indicators

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Haver; WIFO; and IMF staff estimates.

5. Inflation is expected to remain subdued. As elsewhere in the euro area, inflation is projected to decline further in 2009, to about ½ percent for the year. However, it is expected to pick up again in 2010, and deflationary risks are considered limited. Core inflation has been more stable than headline (Figure 3) and is expected to remain above 1 percent in the period ahead. The authorities noted that Austria could temporarily experience some negative inflation during the second half of 2009, depending on developments in energy and commodity prices.

Figure 3.
Figure 3.

Austria: Inflation and Labor Market

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

1/ Excluding energy, food, alcohol, and tobacco.2/ Overall wage index deflated with CPI.

6. The brunt of the crisis on unemployment is still to be felt. Austria traditionally benefits from a low unemployment rate compared with the euro area. However, the absolute increase in registered unemployment (especially in manufacturing) is the largest in decades, due to the severity of the economic decline and the relatively flexible labor market. Unemployment is widely expected to increase to above 5 percent in 2009 and to continue rising into 2011 (Table 2). The authorities and social partners emphasized that subsidized short-term work schemes were an important instrument to preserve human capital during an economic downturn.

Table 2.

Austria: Medium-Term Macroeconomic Framework, 2005-14

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Sources: Austrian authorities; and IMF staff estimates and projections.

On ESA95 basis. The Maastricht Excessive Deficit Procedure (EDP) definition differs from this due to the inclusion of revenues from swaps.

7. The external position is expected to weaken somewhat, but to remain sound (Table 3). Market shares and the real effective exchange rate have been relatively stable over the past few years (Figure 4). Applying the CGER methodology to Austria also suggests that there are no major competitiveness issues.2 In 2009, imports—driven by private consumption—are expected to shrink by less than exports. This will have a negative impact on the current account surplus, which is nevertheless expected to remain positive. It was expected that unit labor costs will increase in 2009, due to relatively high wage increases and the use of short-term work schemes. However, there was no indication that these would have a permanent impact on Austria’s competitiveness and authorities and social partners were expecting moderate wage increases in the future.

Table 3.

Austria: Balance of Payments, 2005-14

(In percent of GDP)

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Sources: Austrian National Bank; WIFO; and IMF staff projections.
Figure 4.
Figure 4.

Austria: Competitiveness

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Austrian National Bank; Eurostat; World Integrated Trade System; WEO; and IMF staff calculations.

8. The uncertainties surrounding the outlook are considerable. The extent of economic decline hinges critically on developments in trading partner countries. An additional uncertainty is the impact of the crisis on Austria’s financial sector. Due to its large exposure to Eastern Europe, it would be hit hard by a further economic decline in the region, which could translate into deteriorating credit quality, declining profitability, and the possibility of a credit crunch. The authorities acknowledged these factors, but saw the risks as overall balanced, including in Eastern Europe.

III. Macro-Financial Linkages

9. The financial sector’s contribution to Austrian growth has been sizeable. Between 2004-2007, the banking and insurance sector contributed on average about 0.4 percentage points to real GDP growth (annually). The sector has been growing rapidly and financial intermediation represented about 6 percent of GDP in 2008 (Figure 5). Its share in recent growth was considerably higher than a decade ago (Figure 6), but dropped significantly in 2008.

Figure 5.
Figure 5.

Austria: The Role of the Financial Sector in the Economy

The finance and insurance sector generated 4 percent of GDP in 1995 …

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: WIFO; and IMF staff estimates.
Figure 6.
Figure 6.

Austria: The Financial Sector's Contribution to Growth

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: WIFO; and IMF staff estimates.1/ On average, agriculture subtracted 3 percent from growth between 1995 to 2003.
uA01fig01
Source: WiFo, IMF staff calculations.

10. The Austrian banking system is not overly large relative to the economy. Austria’s banking sector assets accounted for about 330 percent of GDP at end-2007. This is close to the euro area average and considerably less than the size of the banking sectors in some other countries with internationally active banking systems.

uA01fig02
Source: ECB, Haver, IFS, and country authorities.

11. However, the banking system’s exposure to CESE is large, which makes the system vulnerable to regional shocks.3 The financial system’s rapid expansion into European emerging markets has brought significant benefits but also increased vulnerabilities (see also section V). The CESE exposures of Austrian banks are large relative to the domestic economy (roughly 70 percent of GDP) and bank capital (350 percent), with profits from the CESE operations accounting for 30-40 percent of total profits in 2005-07. These exposures are also large in relation to the size of the economies of the host countries. About half of lending is denominated in foreign exchange. The authorities emphasized that for the Austrian banking system as a whole, the portfolios are relatively well-diversified, and that three-quarters of all assets in CESE represent claims on EU member countries.

uA01fig03

Austrian Banks' Exposures to Eastern Europe and CIS (in billion euros) 1/

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

uA01fig04

Austrian Banks' FX Lending (in billion euros)

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Source: Austrian National Bank.1/ Figures refer to exposure through cross-border lending and via subsidiaries, but exclude interbank loans or lending to sovereigns. Figures include the exposure of foreign owned banks that are licensed in Austria.

12. Household balance sheets are in a relatively good shape (Figure 7). The lack of a housing boom-bust cycle contributed to lower cumulative credit growth in recent years than in some other European countries. This helped prevent an unsustainable rise in debt-financed private consumption. Household debt stood at 90 percent of disposable income at end-2008, compared with 100 percent in the euro area. There was agreement that relatively low levels of debt are enabling Austria to avoid the sharp household deleveraging that has occurred elsewhere with its negative impact on consumption and growth.

Figure 7.
Figure 7.

Austria: Household Balance Sheets

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Austrian authorities; Global Insight/Datainsight; OECD; IMF, IFS; and WEO.1/ Refers to claims on other resident sectors in country; for GBR, series refers to claims on private sector.

13. The drop in stock markets will have an impact on savings. The erosion of wealth in financial assets as well as precautionary motives are expected to induce an increase in the savings rate.4 To some extent this impact is cushioned by the guarantees that insurance companies offer, including on retirement savings. However, a sizeable share of savings is held in mutual funds, where investment losses are passed on to investors. Private pension funds have been hit hard by the crisis and further reductions in benefits or increased contributions will be hard to avoid, although this sector is relatively small.

14. The corporate sector did not enter the crisis highly indebted. While corporate debt to GDP increased by 8 percentage points between 2007Q1 and 2008Q4, the level is much lower than the euro area average. Since the onset of the crisis, Austrian enterprises have found it more difficult to finance themselves through profits or new equity and have resorted to loans. Insolvencies increased in 2008, but surveys show that this reflects a drop in demand for output more than a lack of financing.

uA01fig05
Source: Austrian National Bank and ECB.

15. Although credit conditions are tightening, there is little evidence of a credit crunch so far (Figure 8). Credit growth to households has fallen substantially (to 1 percent in April 2009), but bank lending surveys indicate that this trend is mostly associated with demand factors. In particular, demand for consumer loans has dropped sharply. For the corporate sector, credit standards have been tightened since the third quarter of 2007. While the year-on-year growth rate of loans to nonfinancial enterprises slowed somewhat to 6 percent in April 2009, it is not far from earlier averages. The authorities are closely monitoring credit conditions.

Figure 8.
Figure 8.

Austria: Monetary Conditions

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Austrian National Bank; Haver; IMF, IFS; ECB; and Eurostat.1/ Weighted average of changes in interest and exchange rates relative to their average values in a base period. An increase (decrease) indicates a monetary tightening (loosening).2/ Based on bank lending survey data. Minus means tightening/decreased.

16. Financial sector developments also have a bearing on fiscal outcomes, through direct and indirect channels. The direct contribution of the financial sector to tax revenues has been limited, as financial institutions have benefited from relatively generous carryforward rules for past losses. Financial sector support, however, has substantially worsened public finances. Under current projections, capital injections under the financial sector support program may account for some 4½ percent of GDP in general government debt by 2010. In addition, concerns about the Austrian financial sector have spilled into sovereign bond and CDS markets.

IV. Fiscal Policy

A. Fiscal Developments and Outlook

17. The fiscal stance was broadly neutral in 2008 despite some stimulus measures. In September 2008, the authorities passed a stimulus package that envisaged a fiscal impulse of 0.3 percent of GDP in 2008 and additional stimulus in 2009-10. For 2008, the package increased family and pension benefits and reduced unemployment insurance contributions. More than offsetting this, however, were earnings-related tax receipts that increased on the back of strong labor market performance. As a result, the general government balance improved by some 0.2 percentage points of GDP to -0.5 percent of GDP (Table 4, Figure 9). This deficit, combined with the issuance of bonds to pre-fund financial sector support of almost 3 percent of GDP, raised the stock of debt to 62.6 percent of GDP at end-2008.

Table 4.

Austria: General Government Accounts, 2005-14

(In percent of GDP, unless otherwise indicated)

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Sources: Federal Ministry of Finance; Austrian Stability Program; and IMF staff estimates and projections.

Negative of the change in the structural balance.

The Maastricht Excessive Deficit Procedure (EDP) definition is used by the Austrian authorities. The difference from ESA95 is due to the inclusion of revenues from swaps.

Figure 9.
Figure 9.

Austria: Fiscal Trends 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: IMF, WEO (April 2009); and staff calculations.1/ WEO (April 2009) forecast from 2009 onwards.2/ Negative of the change in the structural balance.

General Government Accounts

(Percent of GDP)

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Source: IMF staff projections.

18. The 2009/10 budget includes a stimulus package of 1.5 percent of GDP in 2009 and an additional 0.4 percent of GDP in 2010. In contrast to other packages, the Austrian package consists mostly of personal income tax (PIT) cuts (Box 1). Since only the top half of income earners is subject to PIT, the multipliers of the package will be relatively low. Public investment, which has the highest multipliers if rapidly implemented, represents less than 5 percent of the package. As part of the package, Parliament recently approved a specific stimulus (of 0.2 percent of GDP) aimed at supporting employment through the extension of short-term labor benefits and old-age part-time work benefits.

Austrian Fiscal Stimulus Measures in 2008-09

Austria passed a series of fiscal stimulus packages:

  • September 2008: increase in pension and family benefits, removal of university fees, and a cut in VAT on pharmaceuticals.

  • Stimulus package for 2008: support for SMEs, investment in broadband access, and increase in housing subsidies.

  • Stimulus package for 2009: tax cuts and investment incentives for 2009, the latter mainly through advantageous depreciation rules.

More than half of the total stimulus for 2009 is accounted for by the tax reform that had originally been planned for 2010 and was brought forward. The tax reform reduces the personal income tax (PIT) in the two middle tax brackets by 0.3 and 1.8 percentage points, and raises the tax-exempt minimum by 10 percent and the income threshold for the highest income bracket by 15 percent. In addition, a tax exemption per child was introduced and the exemption for profits was raised. Tax deductibility of church and charitable contributions was increased and a deduction for child care expenditures introduced.

Additional stimulus will be provided by the decision of state-owned railway and highway companies to bring forward infrastructure investment. These plans amount to about 0.3 percent of GDP.

Composition of Fiscal Stimulus Package (Percent of GDP)

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Source: Austrian Stability Program 2008-13; IMF staff calculations.

Figures reflect the budgetary cost of the stimulus packages in each year compared with baseline of 2007.

Excludes accelerated investment by state-owned companies.

19. The stimulus, the unrestricted operation of automatic stabilizers, and support to a distressed bank will widen the deficit to 4.2 percent of GDP in 2009 and 5.6 percent of GDP by 2010. Overall, automatic stabilizers are similar to the euro area average. In particular, the strong progression in PIT rates by international comparison generates large stabilizers. Initial unemployment benefits are less generous than elsewhere in the OECD, but their entitlement period is longer. Whereas unemployment benefits in OECD countries typically fall steeply after 12-24 months and are replaced by lower social assistance, the Austrian net replacement rate remains virtually constant for the five years following employment loss.

Automatic Stabilizers: Elasticity of Budget Items to Output Gap

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Source: OECD (2005).

Elasticity of PIT revenues to tax base, as a measure of the progressivity of the tax code.

uA01fig06
uA01fig06

Net Replacement Rates Five Years Following Job Loss, 2007 (Percent of average wage)

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: OECD Benefits and Wages; and IMF staff estimates.1/ Unweighted average.

B. Fiscal Sustainability

20. The underlying fiscal position has deteriorated significantly as a result of recent policy measures. Absent consolidation measures, current policies put fiscal sustainability at risk. Under current policies, deficits are projected to be above the Maastricht reference value of 3 percent of GDP throughout the forecast horizon; this compares with medium-term deficit projections of 1 percent of GDP that formed the basis for earlier long-term projections. Aging-related costs for social security pensions, health, and long-term care will add to these deficits about 4-5 percent of GDP annually in the medium and long term. Without a consolidation to deficits below 1 percent of GDP by the middle of the next decade, the stock of debt could rise above 300 percent of GDP by 2050.5

uA01fig07

21. With debt projected to rise above 80 percent of GDP by 2012, the authorities and the mission agreed that fiscal consolidation was the key challenge once the economy recovers. The mission recommended that—to put debt again on a downward path—specific consolidation measures be agreed later this year, to be implemented when the economic recovery begins. While the authorities agreed with the need for consolidation, they warned against a premature exit from the stimulus. They noted that consolidation measures should be expenditure based. In the administration of lower-level governments and in the health and education sectors, there remains substantial potential for efficiency gains without curtailing service quality. A Working Group on Fiscal Consolidation has been created to identify specific measures for expenditure consolidation. Members of the working group described 10 areas chosen for further study, including education, health, pensions, subsidies, the revenue sharing arrangement, and improvements in administrative efficiency. In education, the working group has completed its recommendations and submitted them to the government. With regard to improvements in administrative efficiency, recommendations were expected to be finalized soon.

22. There is room to raise certain nondistortionary taxes, but these are unlikely to generate significant revenue increases. Most taxes are above or at OECD and EU averages. The authorities noted that a further increase in labor taxation would run counter to the long-term need to reduce the tax burden on labor. Fuel taxes, in contrast, are low in comparison with neighboring countries, encouraging cross-border arbitrage. However, even assuming no behavioral response, the mission estimates that additional revenues from raising taxes to comparable levels are likely to be less than ¼ percent of GDP. Increased property taxes could provide an additional source of income for municipalities and, hence, encourage more accountability compared with the current system of fiscal federalism. Additional revenues may amount to some ½ percent of GDP.

Tax Revenues, 2007

(Percent of GDP)

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Sources: EC; and IMF GFS.

Average Excise Duty Rates on Petrol, 2009

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Source: EC, Excise Duty Tables, 2009.

C. Structural Fiscal Issues

23. The mission welcomed the long-awaited introduction of a medium-term budgeting framework (MTBF), but noted that the expenditure ceilings could have been more ambitious. The budget for 2009/10 includes binding rolling four-year expenditure ceilings—currently to 2013—for five broad categories of expenditure. 6 Within each broad category, indicative ceilings are set but expenditures are fungible. To allow full operation of automatic stabilizers, the nondiscretionary element of the expenditure ceilings, including pension and unemployment benefits, is automatically modified according to objective criteria. The discretionary element of the expenditure ceilings can only be modified by parliament. The authorities highlighted the removal of disincentives for cost savings by allowing budget entities to save unused funds at the end of the year. The mission cautioned, however, that the medium-term expenditure ceilings have to be sufficiently ambitious for them to be an effective tool for ensuring fiscal sustainability. The authorities agreed that the currently envisaged expenditure path does not accomplish this goal and will be revised once the economic recovery is underway. To ensure that expenditure ceilings are consistent with long-term sustainability, the mission suggested that the authorities explicitly take into account long-term aging cost estimates.

24. Important supporting elements of the medium-term budgeting framework have been postponed until 2013. In 2006, the authorities embarked on an administrative reform that encompasses a wide range of structural reforms, many of them reaching into the responsibilities of subnational governments. The authorities confirmed their commitment to implementing these reforms. In both the education and health system, Austria ranks below average in efficiency. At the level of the federal government, loopholes remain in the disability insurance system that de facto assumes some of the functions of the pension and unemployment insurance systems. An expenditure review in these areas could benefit from benchmarking against comparator countries, along the lines of the indicators published in the European Commission’s Catalogue of Quality of Public Finance Indicators (2008). Similar benchmarking will also be helpful in preparation for the move to performance-based budgeting, which was postponed to 2013 as was the introduction of a more comprehensive accounting framework.

25. A simplified federal equalization law for 2008-13 reduces some inefficiencies in the fiscal federalism system. In particular, it converts some earmarked federal transfers into general transfers. The mission acknowledged that, to the extent that earlier earmarking had been enforced, this could enhance expenditure efficiency at the local and state government level. Room for additional efficiency gains remains, however, since take-up of incentives for municipalities to cooperate has been low. The federal equalization law is complemented by an internal stability pact that limits deficits for each level of government. Enforcement of these deficit limits, however, has not yet been tested because the trigger clause for sanctions was based on general government balances, which had outperformed expectations recently. In the authorities’ views, the pact nevertheless provided a useful framework for discussion and a tool for raising awareness of the need for fiscal discipline.

V. Financial Sector

26. The key challenges in the financial sector stem from risks related to the economic downturn—both in Austria and CESE—and the financial crisis. While Austrian banks have access to a solid base of domestic deposits and have had relatively little exposure to U.S.-based structured securities, vulnerabilities arise from:

  • Their significant involvement in CESE (Figure 10), which has exposed them to economic downturn in the region, directly through their subsidiaries and through the impact on major Austrian corporate customers who are exposed to the region. A particular risk arises from the extent of foreign currency loans made by their subsidiaries in CESE countries. This exposes them to indirect credit risk through the foreign exchange exposure taken on by unhedged borrowers.

  • Credit risk on loan portfolios in Austria at a time of economic downturn, including rising unemployment. A particular risk arises from Austrian borrowers’ extensive use of financial vehicles (“Tilgungsträger”) for the repayment of bullet loans. As these relied on growth in underlying investments to provide the funds for repayment, funding gaps arose when markets fell and these could lead to impairments of the related loans. Foreign currency loans (in SFR) have also been made to Austrian customers, although their share of total loans is lower than in CESE countries (Figure 11).

  • The need to secure medium-term funding in markets that remain challenging for banks. Government guarantees are currently facilitating the rollover of funding, but new guarantees are scheduled to be withdrawn by the end of the year.

Figure 10.
Figure 10.

Austria: Banks' CESE Exposure

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Austrian National Bank; BIS; and WEO.1/ Based on unconsolidated figures, end 2008. NMS04 and 07 stand for the new member states that joined the EU in 2004 and 2007, respectively.
Figure 11.
Figure 11.
Figure 11.
Figure 11.
Figure 11.
Figure 11.
Figure 11.

Austria: Banking System 1/

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Source: Austrian National Bank.1/ If not specified otherwise, the data refers to the whole Austrian banking system, including foreign owned banks.2/ Refers to Austrian owned banks (banks with domestic ownership of more than 50 percent). RWA stands for risk-weighted assets.3/ Including foreign owned banks.

A. The Authorities’ Response to the Crisis

27. The events of Fall 2008 had a large impact. Against a background of rising concerns over exposure to CESE countries, the banks suffered sudden losses from significant exposures to Lehman and the Icelandic banks. Their participation in the European syndicated loan markets led to credit losses as well as funding challenges. The widespread lack of confidence that accompanied the market turmoil at that time caused interbank markets to dry up and liquidity positions to come under pressure. Share prices dropped and CDS spreads increased, while spreads on Austrian government paper were negatively affected as well (Figure 12).

Figure 12.
Figure 12.

Austria: Selected Financial Market Indicators

Citation: IMF Staff Country Reports 2009, 295; 10.5089/9781451802474.002.A001

Sources: Thomson Financial/DataStream and Bloomberg.

28. The authorities moved swiftly to deal with the crisis. The Financial Market Authority (FMA) and the Austrian National Bank (ANB) worked together on a rapid response to the significant liquidity shortages facing banks. One small bank was subject to intervention and sold to its creditors, while another, of systemic importance in its market niche, was nationalized. Parliament enacted an extensive support package (Box 2) that included funding for state capital injections and a state guarantee scheme for new debt issues, available to both banks and insurance companies. A clearing bank supported by a public guarantee was set up to reduce liquidity pressures in the interbank markets. Finally, to address depositors’ concerns, and in response to similar actions taken by other EU members, the authorities introduced a blanket deposit guarantee. The approach has been comprehensive, although implementation with regard to the capital injections has been drawn out.

Financial Sector Support Measures

In October 2008, in response to tensions in financial markets, the authorities took several measures to support the banking sector. The package amounted to €100 billion in total or about 35 percent of GDP and contained the following support measures:

Capital injections, asset guarantees. The Financial Market Stability Act allows the Ministry of Finance to recapitalize banks and insurance companies. The measures taken under this law include government guarantees for assets and the acquisition of shares. As of mid-June, the government is guaranteeing assets of two banks worth €1.6 billion. The authorities have also purchased participation capital in four of the six biggest banks, worth €4.9 billion as of mid-June. Negotiations for capital injections into the other two big banks were ongoing as of that time. The conditions attached to these injections require viability reports of the corporate model, limits on staff remuneration and dividend payments, and a certain provision of credit. Public sector support for banks requires approval from the EU competition authorities and may be subject to conditions regarding the scope of activities conducted by the institutions receiving such support. If capital injections and asset guarantees in excess of the limit of €15 billion were needed, funds to support the interbank market (see below) could be used.

Austria: Banking Support Package

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Source: Austrian authorities.

Interbank market. Under the Interbank Market Support Act, the Ministry of Finance can provide guarantees for bonds issued by banks and for liabilities of and losses incurred by the Oesterreichische Clearingbank AG (OeCAG). Originally, €75 billion were pledged for this purpose of which €4 billion are reserved for the OeCAG. As of mid-June, €17 billion were outstanding in government guaranteed bank bond issues (used by four different banks) and €2.4 billion guarantees through the clearing bank. Out of this €75 billion, €10 billion have been redesignated to secure funding of nonbank corporations (see below).

Deposit insurance. Deposits of natural persons are guaranteed without limit until end-2009 and thereafter up to €100,000. The government pledged an amount of €10 billion to back this guarantee.

Funding of non-financial corporates. Parliament has recently passed a law that allows the government to guarantee debt of nonfinancial corporations up to a combined volume of €10 billion. Eligible companies had to be profitable before the summer of 2008, have more than 250 employees, and a turnover of more than €50 million.

29. Despite the wide range of intervention measures, market sentiment has been volatile. The government support package enabled the banks to maintain a relatively strong capitalization—with Tier 1 capital ratios averaging 9 percent for the system at end-December (Table 5)—while meeting refinancing needs. Such support also allowed issuer credit ratings to be maintained. In addition, their relatively strong position ahead of the crisis enabled the three biggest banks to remain profitable despite the market turmoil. However, in early Spring 2009, following the depreciation of some currencies in CESE, uncertainties about the economic outlook and the resilience of the Austrian banks increased, the profit outlook was downgraded by the rating agencies (Table 6), and CDS spreads rose to unprecedented levels.

Table 5.

Austria: Financial Soundness Indicators for the Banking Sector, 2005-09 1/

(In percent)

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Source: Austrian National Bank.

Figures refer to the whole banking system, including foreign owned banks, unless noted otherwise.

Figures refer to Austrian owned banks only.

Comparability across years is limited due to changes in reporting requirements or introduction of new reporting schemes.

Table 6.

Austria: Major Banks' Ratings Changes, 2008-09

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Source: Bloomberg.

30. Banks are now strengthening their financial position in response to the deteriorating economic outlook. While CDS spreads have recently subsided and liquidity has returned to interbank markets, banks are strengthening their capital and reducing credit risk. Internal lending policies have been tightened, foreign currency loans within Austria and non-euro foreign currency loans outside Austria curtailed and, where possible, the term of lending portfolios has been shortened. Banks are also seeking to broaden their deposit bases to reduce dependence on interbank funding. In addition, they are reviewing their asset portfolios to identify the collateral that would qualify in refinancing operations with the ECB.

31. The authorities were clear that further resources will be committed if necessary. Banks and authorities were reluctant to contemplate a further round of capital support from the government at this stage. However, if such support is required, and not (fully) available from private sources, it will be made available by the government, including if necessary from that part of the support package earmarked for guaranteed bank bond issuance.

B. CESE Exposures—Risks and Strategy

32. Stress tests carried out by the ANB suggest that major banks could withstand a relatively severe CESE recession without breaching minimum capital requirements. Staff welcomed