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Did anyone really expect the government of Austria to make good on the promise of the state of Carinthia to guarantee the debt of Hypo Alpe Adria? The sub debt holders were always going to get bailed in. If I was an Austrian tax payer Id have been pretty angry about any other outcome.
Bear in mind that HAA is a small bank, its failure idiosyncratic - its not even vaguely systemic to Austria, let alone the Eurozone - and that there is precedent for governments doing this sort of thing when they can get away with it. Although its not exactly analogous, the actions of the Dutch government with respect to the failure of SNS showed a similarly cavalier attitude towards the rule of law and a similarly self-serving approach to apportioning losses.
If HAA was systemic, maybe the Austrian government would have acted differently. But if it was systemic then pretty soon it wont even be up to them. The ECB will be calling the shots under the Single Supervisory Mechanism although there is going to be a very clear national/European conflict of interests going on there. Not convinced that this been fully thought through.
But the important point for the covered bond market is that the law that the Austrian government rushed through is nothing more or less than bringing forward implementation of the Bank Resolution and Recovery Directive. Ive always argued - yes, I am saying I told you so - that the resolution directive comes into force as soon as you start to think its a good idea, never mind official implementation dates, they can be changed. Would you really expect Austria to go down the state aid route to solve the problem?
Weve certainly come a long way since the ECB told Ireland to bail-out its banking sector rather than impose loses on bond holders thereby both bringing misery on the Irish taxpayer and oddly confirming the much ridiculed Moodys Joint-Default Analysis. JDA predicted the convergence of government and banking system credit long before the crisis, they just didnt think through the implications (remember the Icelandic banking sectors Aaa?).
Perhaps the actions of the Austrian government can now consign JDA to history, which is basically what the resolution directive was supposed to do.
The best argument Ive heard over many years of trying to persuade investors that they need to buy covered bonds is that they would rather buy the higher yielding senior bonds instead as governments just dont let banks fail.
They do now.
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