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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. 

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Austria’s banks have been under close watch ever since, with some recalling that a similar chain of events brought down Vienna’s Creditanstalt in 1931, an event widely credited with sparking the Great Depression. In the spring of last year, analysts were warning that Austria was itself at risk for national bankruptcy, including Nobel laureate Paul Krugman.

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Last July, the Organization for Economic Cooperation and Development warned that the financial system was still at risk from its exposure in Eastern Europe and that contingency plans “should be kept at the ready to deal with any downside risks.”

But even in the aftermath of the latest bank nationalization, some experts are now cautiously optimistic that the worst will not come to pass. “The fear was that this region would be like Asia in 1997, a crisis that would bring everything down,” says Krzysztof Rybinski of the Warsaw School of Economics. “Those fears have been completely overblown.”

Indeed, Austria’s banks say the situation has always been less dire than supposed. The region, they point out, did not have a financial crisis of its own, but rather has been suffering from the economic downturn. “We don’t have a problem with toxic assets,” says Michael Mauritz, a spokesperson at Erste Bank Group, which controls subsidiary banks throughout the region. “The banks finance the real economy: real people and real companies that produced real goods. There are no fancy products.”

“The problem we face now is that consumption and production are going down,” Mauritz adds. “But dealing with a downturn in an economic cycle is what we are here to do.”

“The situation regarding the Austrian banks’ exposure in Central and Eastern Europe was exaggerated,” says Raiffeisen International spokesperson Michael Palzer. “We will be faced with still increasing numbers of non-performing loans, but we believe we will manage the situation and are on our way out of the woods.”

But Mr. Hahn at the Austrian Institute for Economic Research isn’t as certain. The worst affected countries have been shored up by emergency aid from the IMF and other international institutions, but it is unclear if they are really stabilized. “Our assessment is that the risks are still there,” he says. “The Austrian banking sector may be a little over optimistic in this respect.”

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