by John Galt
June 5, 2012 19:30 ET
The hits for the Eurozone keep coming but these pages have been warning you for over a year that Austria was one of the high risk European Union nations due to its exposure to the PIIGS and more so its flailing neighbor Hungary. Thanks to a persistently slowing economy in the PIIGS, Hungary, and as a result other Eastern European nations, Austria is in a particularly risky position due to the large number of home loans their banks provided to its poorer neighbors.
Moody’s statement seems to reflect the risks they are facing (click on the title below to read the entire release):
Global Credit Research – 06 Jun 2012
Actions conclude rating reviews initiated or extended on 15 February 2012
Frankfurt am Main, June 06, 2012 — Moody’s Investors Service has today taken various rating actions on Austrian banks, including downgrades of the debt and deposit ratings of the three largest Austrian banking groups.
The senior debt and deposit ratings of Raiffeisen Bank International (RBI) and UniCredit Bank Austria (UBA) were downgraded by one notch, whilst those of Erste Group Bank AG (Erste) were downgraded by two notches. The new ratings are as follows:
• RBI, deposit ratings A2, standalone bank financial strength rating (BFSR) D+ / baseline credit assessment (BCA) ba1,
• UBA, deposits A3, BFSR D+ / BCA ba1,
• Erste, deposits A3, BFSR D+ / BCA baa3.
The short-term ratings for Erste and UBA have been downgraded by one notch to Prime-2, reflecting the same considerations that triggered the long-term rating changes. RBI’s Prime-1 rating has not been affected by today’s rating action.
The debt and deposit ratings and standalone credit assessment for RBI carry stable outlooks. The debt and deposit ratings for UBA carry negative outlooks, due to the negative outlook on its parent’s ratings. The standalone credit assessment for UBA carries a stable outlook. The debt and deposit ratings and standalone credit assessment for Erste carry negative outlooks given the bank’s less diversified CEE franchise which makes Erste more vulnerable to negative developments in single countries such as the adverse and uncertain operating conditions in Romania and Hungary, where Erste has sizeable operations.
The rating downgrades for the three major Austrian banks reflect their vulnerability to the adverse operating conditions in some of their core markets in Central and Eastern Europe and the Commonwealth of Independent States (CEE/CIS) and the increased risk of further shocks from the ongoing euro area debt crisis. Specifically, the main drivers underlying today’s rating actions are:
» Risks to asset quality resulting from their exposures to the CEE/CIS region and increased uncertainty from the euro area crisis.
» Limited capital buffers to absorb losses in a stressed environment, which leave banks vulnerable to further asset quality deterioration and other potential shocks. While Austrian banks have improved capital and reserves, loss-absorption capacity in an adverse scenario remains below that of many European banking peers.
» Moderate reliance on wholesale funds which, while manageable, renders the banks susceptible to the increased risk of possible disruptions amidst the adverse and highly uncertain current environment.
There are numerous other banks on review still as the release above outlines in detail and should be taken into consideration as the recession sweeps across Europe and causes a financial and currency crisis which will not be resolved overnight. The chart below published in the February 6, 2012 edition of the UK Guardian reflecting debt levels as a percentage of GDP and the composition of the debt is a reminder to my readers of the coming storm and part of the reasons for the downgrade above. This problem is spreading in Europe and is far from contained so without a resolution, Lehman Euro style is on the way.