Reform at a stately pace
Spurred by the prospect of economic and monetary union (Emu), Austria is opening its markets to European investors, reforming its stock exchange and leading the charge into eastern Europe.
Elegant Viennese may still stroll beside the Opera House on summer evenings to the sound of Strauss waltzes. But that is one of the few certainties that remains in a society facing three challenges: preparing for the euro, coping with further deregulation particularly in the banking sector, and exploiting the opportunities in eastern Europe.
“[All these developments] are important for Austria. But the most important is eastern Europe, which is making an important contribution to [banks’] consolidated profits,” says Gottfried Halbwidl, senior vice president of treasury-capital markets at Österreichische Postsparkasse (PSK), the state-owned post office bank which is to be partly privatized (49%) before the end of the year.
Emu has big implications for managers of debt in small European states, and Austria has been one of the countries quickest to position itself for the impending pan-European government bond market. According to Helmut Eder, manager director of the Austrian Federal Financing Agency, the key to keeping investors loyal is to issue bonds that can become fungible with larger, euro-denominated issues.
In July, Austria launched a “conversion” Eurobond in Dutch guilders, which local bankers say is the first of its kind. The issuer, rather than the investor, has the option to convert the Fls1 billion ($476.6 million) issue into euros after the Netherlands joins Emu.
In addition, after Austria and the Netherlands join Emu, the guilder bond automatically becomes fungible with a Sch15 billion ($1.14 billion) domestic government bond, which was issued the previous day. Both issues have a coupon of 6.25% and a 30-year maturity.
The guilder conversion bond is Austria’s second fungible issue. In January it launched the first ever euro-fungible bond, a Ffr5 billion ($796.3 million) “parallel” Eurobond which gives investors the option to convert their holdings into euros at the start of Emu.
The franc issue had to be structured in this way because of French tax law, but Eder says he prefers automatic conversion. “We want to provide liquidity. If you leave it as an option, some will exchange and others will not,” he says.
The franc issue helped Austria to reach long-term French investors and Eder says the guilder issue has mostly been taken up by non-Austrian institutions. “The policy of binding ourselves to the European investor has been correct. We have become more and more international,” he says.
That approach is symptomatic of the recent reforms to Austria’s heavily regulated economy. In the past, there were harsh limitations on industry and business ranging from agriculture to banking and finance. Until liberalization began in 1986, there were restrictions on capital movements and banks were protected from foreign competition.
Franz Nauschnigg, an under-secretary at the ministry of finance, says: “The reform in Austria has, unlike Sweden, been gradual. For example, we started by allowing banks to hold foreign accounts without needing authorization and then extended this to companies and private individuals in 1991. Now capital movements are liberalized and open.”
The latest reform is at the Vienna Stock Exchange. In July it was transformed into a company and this autumn it is scheduled to merge with Austria’s futures exchange. Privatization of the tobacco monopoly and post and telecommunications industries as well as new issues for the largest banks should provide another much needed boost for the exchange.
“We want to reduce fees and costs to a level that is internationally competitive. Then we have to attract more foreign stocks. There are two international brokerage houses we hope to attract. We want to have more market makers. The goal of these reforms is to have a cost-efficient structure with low internal costs and competitive fees,” says Michael Kremsner, deputy general secretary of the stock exchange.
The stock market has performed better this year after two years of stagnation. But, according to Andreas Treichl, chairman of First Austrian Bank, more reforms are needed. “We need to give the international investor more security that we are operating an open market and we need to get more local investors,” he says. “It has to be made more attractive for pension funds and insurance companies to invest. There must also be more publicly owned companies. You can count on one hand the number of companies in which you could buy a significant stake on the Vienna exchange.”
PSK’s Halbwidl thinks that Austria’s integration into the EU will benefit its capital markets. “The capital markets have not been highly developed because corporates didn’t need to pay [a competitive rate] for loans. But now Austrian banks will be subject to the same regulatory measures and capital requirements as other European banks and will raise their margins. This will push some corporates to raise equity rather than borrow money.”
However, some bankers have a low opinion of the exchange. One critic says: “It has not been quick enough to catch up with the opportunities in eastern Europe. The plan to expand the number of listed companies to 260 this September, several of which will be eastern European, has given it another chance. If we don’t now take advantage of this opportunity to exploit our knowledge of former communist countries, we can say goodbye to any chance of being eastern Europe’s financial centre.”
Austrian banks and companies have been dealing with eastern Europe for centuries. They led the charge into eastern Europe and the end of communism could affect Austria even more than its accession to the EU in 1995. Creditanstalt is one of the top banks in eastern Europe: it is one of the leading advisers on privatization and focuses on mergers and acquisitions.
“We have set up a commercial banking network across the region covering retail and corporate finance. We started in 1989 and our network includes Hungary, the Czech Republic, Slovenia and Slovakia. We are continuing to expand in Poland and Hungary. The bank has a business base of $3 billion from this network and is growing,” says Alois Steinbichler, head of Creditanstalt’s international division.
Other bankers believe that Austria has not made the most of its six-year head start in the region and that its advantage will be increasingly eroded. They point to the EU’s decision to offer membership initially to Poland, the Czech Republic, Hungary, Estonia and Slovenia and then to up to 10 other eastern European states.
The prospect of accession will accelerate the modernization of these countries’ own financial markets, possibly drawing influence away from regional centres such as Vienna. But the larger German and US banks in particular will begin to play an even more active role.
The question is whether smaller institutions like the Austrian banks and minor exchanges like Vienna will be able to compete – or whether business will switch to the leading European financial centres. Wolfgang Habermayer at Deutsche Bank in Vienna says Austrian banks will have difficulty defending their position in eastern Europe, arguing that they do not have enough capital to undertake underwriting.
Austria needs to continue deregulation if it is to win this battle. But it has already succeeded in overcoming problems. The economy has suffered less than most of continental Europe from the downturn in the 1990s. But recent years have not been easy. Despite the promises of those calling for a yes vote in the 1994 referendum campaign there was an immediate economic decline after joining the EU.
As trade barriers came down, business investment fell and consumer demand dropped, dragging growth down to 1.8% in 1995 and 0.7% in 1996. The worst appears to be over. Bank Austria economists forecast 1.6% this year and 2.4% in 1998.
The structural changes have also driven up unemployment, although the rates – 4.4% for 1997, and a projected small drop in 1998 – are well below the European average.
The markets have shown confidence in Austrian economic policy. The spread between Austrian and German 10-year government bonds, which two years ago was as high as 50 basis points, has narrowed steadily in recent months. With significant questions about German economic management and the future of chancellor Helmut Kohl, that spread has disappeared.
“[That] is proof that the investment community believes we are fulfilling our commitments for the economy. We met our preliminary budget targets for 1996 and will do so in 1997 and coming years,” says Eder.
Austria looks certain to meet the criteria for the single currency with the deficit for this year expected to total 2.9% of GDP and inflation to remain at just above 1.5% for the next two years. “I am certain that Austria will meet the targets, that the single currency will be introduced on time at the start of 1999 and that membership will include southern European states including Italy and Spain,” says one economist.
Klaus Liebscher, governor of the National (central) Bank, says he has “no doubts that the single currency will go ahead. I see that 11 of 15 EU states are meeting the inflation criteria, a similar number are meeting the exchange rate criteria and, at the end of 1996, five were meeting the deficit target. Most countries are prepared to fulfil the 3% deficit target for 1997 so I am convinced that we are in the best situation to say that convergence is fulfilled.
“As the central banker of a country with a high stability in its monetary, currency and economic policy, I say that sustainability is the key word. There has been a big change in Europe over the past decade towards stability.
“We have no reason to have doubts about meeting the deadline of January 1999 and have no reason to look at alternative solutions. What will be the benefit if we postpone or cancel the project?”
Deals in the balance
Austrian banks are trying to restructure in the face of new competition, but political interference is holding them back
In a complicated deal at the beginning of the year the two coalition parties – the Social Democrats and the conservative People’s Party – agreed a plan to privatize Bank Austria but to keep it under state control. Bank Austria, which is traditionally close to the Social Democrats, bought the 70% state-owned Creditanstalt, which has links with the People’s Party.
But the Bank Austria privatization foundered in June when it emerged that Germany’s Westdeutsche Landesbank, which owns 10% of Bank Austria, has the first refusal to buy the shares held by the city of Vienna.
The city of Vienna’s overall stake in the bank will fall as it has no plans to take new shares as rights issues are made. But Austrian bankers believe the city, which holds its stake through a foundation, Anteilsverwaltung Zentralsparkasse (AVZ), will have to hold on to the 45% of Bank Austria shares it had agreed to sell until WestLB’s option expires in 2001. The uncertainty will affect the price of any further rights issue and the sale of the national state’s 19% holding in Bank Austria.
Bank Austria faces another obstacle: the deficiency guarantee provided by Vienna has raised eyebrows among EU officials in Brussels, who regard it as anti-competitive. However, any attempt to force Austria to remove this guarantee would be firmly resisted by the Austrian central bank.
Klaus Liebscher, the National (central) Bank governor, is adamant that Bank Austria should not be singled out. “We will see how discussions with the EU on the city of Vienna guarantee will be resolved. But the German savings banks have similar guarantees. Our guarantees have to be put in a European context. Why should we move earlier than others? Why should we do some things that others are not doing when that brings us some disadvantages,” he says.
Liebscher’s problems extend beyond the EU row. He has to regulate a financial system that suffers from political interference. As the story of Bank Austria and Creditanstalt demonstrated, the deals owe more to political compromise than banking logic.
It took six years to agree a buyer for Creditanstalt, during which its managers had to worry as much about ownership as keeping up with the changes in international banking. And, as analysts at Moody’s note: “The sale conditions demanded by the coalition government, in particular the requirement that Creditanstalt must remain a separate legal operating entity for five years and that no targeted staff reductions may be undertaken by Bank Austria, suggest that any far-reaching integration opportunities are less likely for the medium term.”
Moody’s adds: “Austrian banks still, by European standards, operate in a highly politicized environment. A number of key Austrian banks are often viewed as either ‘socialist’ or ‘conservative’ in their political orientation. Senior management appointments invariably necessitate party political membership.” It concludes that while these factors will not affect the “secondary wave” of banking consolidation, “forthcoming privatizations and shareholder realignments among Austria’s banks will, in the context of Bank Austria’s acquisition of Creditanstalt, be part of a political balancing act”.
However, Liebscher and the bank heads maintain that political influence is diminishing, and will eventually fade. Liebscher says political factors affect only a small number of big banks and that Austria is not unique: there is similar interference in France and Italy. He says state shareholdings inevitably led to its involvement in management and the solution lies in privatization. “For open competition, it is better to have a system that is as privatized as possible, a process that must take place step by step. There has to be a real privatization, but in such a way as to avoid hurting banks.”
At First Austrian Bank, which is completing its merger with Girocredit, which Bank Austria had to divest when it bought Creditanstalt, chairman Andreas Treichl says: “Austrian banking will be depoliticized but it will take a while. I don’t think that in reality there are black [People’s Party] and red [Social Democrat] banks any more. However, we are regarded as a black bank, even though we are everything other than [that].”
Treichl believes that, even though the influence of politics will be reduced, “there is no need for all state ownership to go. I see some sense in having a state-owned entity which plays an equalizing role – it must, though, have an economically useful purpose”.
The key question is whether the banking system can restructure quickly enough to find a role in an industry that is rapidly splitting into massive conglomerates and tightly run niche banks. Moody’s argues that, despite the potential for Creditanstalt’s total integration into Bank Austria, some of the government’s preconditions “could lead to a far slower pace of system-wide consolidation and rationalization than would otherwise have been the case. In these circumstances other Austrian banks could underestimate the need to rationalize their own operations” as the new Bank Austria might not appear “as daunting or threatening” and will be “preoccupied with integration for much longer”.
Liebscher rejects this. “Bank Austria will handle the question of how to deal with Creditanstalt. They have already combined their treasury activities and investment and international banking – a clear approach that shows a clear strategy and I am convinced they can deal with the problems facing the Austrian banking industry.”
He also rejects arguments that Austrian banks are not flexible enough to keep up with the pace of international change. “It is ridiculous to say that Austrian banks by themselves could become global players. They have to build up links with existing global players,” he says. “They also have to have a strategy in areas where they can stand alone – as some are doing in eastern and central Europe.
“You don’t need to be a global player there but you can find attractive business conditions. Size is very important for a bank but it is not the only way to become successful. The most important thing is that we have entities of a reasonable size and of international standard – Austrian banks are not the largest but we are not one of the largest countries on the continent.”
A Creditanstalt manager says Austrian banks “can do well with a regional niche approach. We have to focus on what we can do. We would be less viable if we tried to be all things to all men”.
Treichl believes his new institution is well placed to take on the challenge of the enlarged Bank Austria. “We are becoming the only large banking and finance institution in this country that is entirely private since 1945. We are one of the three largest traded shares in the country, with the largest float of any Austrian share. We believe there is a need for a bank like ours which can bring something to the market in eastern Europe. That strength will be one reason that we will be a good partner to other European banks which have a broad and well established network.”
Despite the slow pace of change in Austria, the threat from foreign banks in a market that has only recently been opened to competition, and the uncertainties in eastern Europe, Liebscher says the banking system is “in sound condition. We have several institutions of reasonable size. The problem is not of being overbanked – there has been rationalization with the number of co-operative banks falling from 1,600 two years ago to 700 – but of being overbranched. The trend in the past five to 10 years was to close banks but leave the branches open. This is the question for the future”.
