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* Austria's banking package aimed at emerging Europe
* Austria most at risk with $290 billion exposure to region
* Risk for Austria has raised bond, CDS spreads
By Boris Groendahl
VIENNA, Nov 4 (Reuters) - Austria's move to help its banks
with state funds is less aimed at shoring up troubled lenders
and more at boosting credit and growth in emerging Europe, where
its banks dominate and it could lose heavily from a downturn.
The Austrian financial sector's lucrative grip on the former
Communist part of Europe, which contributed 42 percent of its
profits last year, has turned into a risk. It has even made it
relatively more expensive for the government to borrow and has
driven up costs to insure against its default in recent months.
Austrian banks are owed $290 billion by borrowers from
Albania to Russia. Its exposure is much higher than that of
Italy, Germany and France, and almost on par with what Spain has
lent to Latin America, according to the Bank for International
Settlements.
Relative to the size of the Alpine country, the exposure --
roughly equal to its gross domestic product -- is daunting.
In other words: should the recent central European hiccup
turn into a crisis of Asian or Latin American proportions, with
currencies devaluing and debtors defaulting en masse, Austria
would be in trouble, and more so than any other western country.
This fact has shaped how the Austrian government is using
its 100 billion euro ($129 billion) banking package.
The finance ministry last week agreed to boost the capital
of Erste Group Bank <ERST.VI> by 2.7 billion euros, even though
the bank, emerging Europe's third-biggest lender, is
well-capitalised and funded.
The state money came cheaper and with fewer strings attached
than similar deals in Germany or Belgium. There are few rules on
how to use the capital -- just enough to allow the government to
present the measure as boosting domestic credit.
In reality, most of the capital is going to underpin lending
in countries including Romania, where Erste owns the biggest
bank, or Hungary, where it is number 6.
"That this is about providing credit to Austrian companies
is just a pretense," said Matthias Siller, who manages emerging
market funds at Baring Asset Management. "This move is a clear
commitment to eastern Europe.
"But this has nothing to do with charity. Those (Austrian)
banks are system-relevant banks in central and Eastern Europe,
and if they had to withdraw capital from there, this would set
off a landslide," he said.
HUNGARY, ROMANIA, BALTICS
Several emerging countries in Europe share the problem of a
gaping hole in their current accounts which they currently fill
to a large extent through the funding that Austrian, Italian,
French, Belgian and Swedish parent banks provide.
Fears that they were about to choke off lending because the
parents themselves had trouble refinancing played a big role
when investors dumped Hungarian assets in droves last month.
Under pressure from the Hungarian central bank, the foreign
parents had to pledge publicly to continue to grant credit to
Hungarian clients to help calm the markets.
By tapping their home governments, the banks effectively
lean on taxpayers in their home countries for refinancing
countries with large current account imbalances -- which also
include Romania, Bulgaria and the Baltics.
"Given the expansion of the Austrian banking system into
central and Eastern Europe, (the Austrian government is)
implicitly providing a 'vendor-financing' deal," said Ian
Harnett of Absolute Strategy Research.
"The banks are simply passing their financing problems onto
the public sector," he said.
By accepting the state money Erste ended a game of chicken
in which every Austrian bank appeared to fear the embarrassment
of being the first to ask for some of the 15 billion euros
Austria has set aside for capital measures.
As it turned out, the market loved the deal, and Erste's
shares have gained 17 percent since.
That reaction makes it a likely blueprint for other Austrian
banks, such as Raiffeisen Zentralbank (RZB), whose Raiffeisen
International <RIBH.VI> arm is the second-biggest lender in the
region, and even UniCredit's <CRDI.MI> Bank Austria, the No.1.
However, some analysts doubt it will be enough to rely on
small, disproportionally affected countries to shoulder the risk
if things begin to head downwards on a bigger scale in emerging
Europe.
"If there is no EU-wide plan then it will be left to Sweden
(in the Baltics) and Austria (on the Balkans) to take care of
this," said Lars Christensen, an analyst at Danske Bank.
"Obviously you can't have the Austrian government bailing
out central and Eastern Europe," he added. "The problem in this
situation is a lack of coordination between European Union
governments about a stabilisation plan for Eastern Europe."
(Reporting by Boris Groendahl; Editing by Chris Wickham)
