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Austria bankers fear wave of bad loans tied to Eastern Europe

In another sign of Europe's financial woes, the Austrian government has spent $137 billion to shore up its banks, worried that they're overexposed to Eastern Europe's struggling economies. 

By Colin WoodardCorrespondent / February 12, 2010

Vienna, Austria

The Viennese pride themselves on having turned back the Ottoman invasion of Europe at the city’s gates after a famous 1529 siege. But these days there’s a new threat coming from the East: billions of dollars in potentially bad loans Austrian banks gave out to their former Communist neighbors.

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Austrian banks have outstanding loans in Central and Eastern Europe totaling some €200 billion Euros ($273 billion), an amount equal to 70 percent of their country’s gross domestic product (GDP). With the world financial crisis hitting that region particularly hard, there have been fears that a tidal wave of bad loans could overwhelm Austria’s banks, possibly pulling the country itself into bankruptcy.

The government here has already spent €100 billion ($137 billion) to shore up its banks, guaranteeing loans and refilling their depleted coffers. In December, it nationalized Hypo Group Alpe Adria, a Klagenfurt-based regional bank overwhelmed by bad loans to clients in the Balkans, for fear a collapse would endanger the rest of the sector. In the event of a regional meltdown, it is unclear if Austria has the resources to save its highly exposed banks.

“We don’t yet know exactly how the East European countries will overcome the crisis, because they got hit very strongly,” says Franz Hahn, a financial macroeconomist at the Austrian Institute of Economic Research. “Everything is happening in the dark, so we can only hope that there isn’t a monster hiding there.”

Through the 1980s, Austria’s banks were sleepy places in a city on the periphery of European events. But the collapse of the Soviet Empire changed all that, opening new opportunities in lands that were once part of Imperial Austria’s empire. Austria’s banks moved in a big way, taking advantage of their cultural, historical, and geographic proximity to seize an outsized share of the banking opportunities in Hungary, Czechoslovakia, Poland, Slovenia, and other countries.

The bankers boldly invested in the region’s many unmet needs, providing loans to manufacturers and real estate developers and buying up local banks, where they introduced East European customers to credit cards, mortgages, ATM cards, and small business loans.

But many of those investments became vulnerable when crisis swept the world financial system in the wake of the collapse of New York-based Lehman Brothers in September 2008. Hungary and Latvia had to be rescued from national bankruptcy by the International Monetary Fund, export orders plummeted, national currencies weakened against the Euro, and the newly jobless fell behind on their mortgage and credit card payments.