12:00 Noon EDT: In a move which could trigger a collapse of European banks, Austria  “Bailed-in” a failed bank; seizing depositor money to pay bank debts, leaving citizens broke.  This could be the actual start of a complete systemic banking collapse in Europe as panicked citizens, seeing their fellow depositors wiped out in one fell swoop, start pulling their money out of the banking system.  This has “DISASTER” written all over it.

Just over a year ago, a black swan landed in the middle of Europe, in what was then dubbed a “Spectacular Development.” In Austria, the “bad bank” of failed Hypo Alpe Adria – the Heta Asset Resolution AG – itself went from good to bad, with its creditors forced into an involuntary “bail-in” following the “discovery” of a $8.5 billion capital hole in its balance sheet primarily related to ongoing deterioration in central and eastern European economies.

Austria had previously nationalized Heta’s predecessor Hypo Alpe-Adria-Bank International six years ago after it nearly collapsed under the bad loans it ran up when it grew rapidly in the former Yugoslavia. Having burnt through €5.5 euros of taxpayers’ money to prop up Hypo Alpe, Finance Minister Hans Joerg Schelling ended support in March 2015, triggering the FMA’s takeover.

This was the first official proposed “Bail-In” of creditors, one that took place before similar ad hoc balance sheet restructuring would take place in Greece and Portugal in the coming months. Or rather, it wasn’t a fully executed “Bail-In” for the reason that creditors fought it tooth and nail.

And then today, following a decision by the Austrian Banking Regulator, the Finanzmarktaufsicht or Financial Market Authority, Austria officially became the first European country to use a new law under the framework imposed by Bank the European Recovery and Resolution Directive to share losses of a failed bank with senior creditors as it slashed the value of debt owed by Heta Asset Resolution AG.

The highlights from the announcement:

 Today, the Austrian Financial Market Authority (FMA) in its function as the resolution authority pursuant to the Bank Recovery and Resolution Act (BaSAG – Bundesgesetz über die Sanierung und Abwicklung von Banken) has issued the key features for the further steps for the resolution of HETA ASSET RESOLUTION AG. The most significant measures are:

• a 100% bail-in for all subordinated liabilities,
• a 53.98% bail-in, resulting in a 46.02% quota, for all eligible preferential liabilities,
• the cancellation of all interest payments from 01.03.2015, when HETA was placed into resolution pursuant to BaSAG,
• as well as a harmonisation of the maturities of all eligible liabilities to 31.12.2023.

According to the current resolution plan for HETA, the wind-down process should be concluded by 2020, although the repayment of all claims as well as the legally binding conclusion of all currently outstanding legal disputes will realistically only be concluded by the end of 2023. Only at that point will it be possible to finally distribute the assets and to liquidate the company.

As part of the announcement, Austria has cut Heta’s senior liabilities by 54 percent and extended the maturities of all eligible debt to Dec. 31, 2023 to help cover an 8 billion-euro ($9.1 billion) hole in Heta’s balance sheet. It also wiped out any residual equity and the junior liabilities as well as any supplementary capital. The Finanzmarktaufsicht took control of Heta last year in the first application of European Union rules designed to end taxpayer-funded bank rescues.

“While the application of the new European recovery and resolution framework for banks is uncharted territory in both legal and practical terms, we are on target with the resolution of Heta,” the FMA’s co-chiefs, Helmut Ettl and Klaus Kumpfmueller, said in the statement. “Orderly resolution is more advantageous than insolvency proceedings.”

As Bloomberg writes, dealing with failing banks remains a thorny issue in the EU more than seven years after the collapse of Lehman Brothers Holdings Inc. Rescues in Portugal, Greece and Italy carried out before new rules came into force in those countries prompted protests over unequal or arbitrary creditor treatment. The EU’s untested Bank Recovery and Resolution Directive, now in force across the 28-nation bloc, provides rules and tools, including the so-called bail in, to make sure creditors share the burden.

Creditors were not happy, and Heta became a battleground of what the first BRRD implementation would look like. “At the heart of the issue is 11 billion euros of Heta’s debt that’s guaranteed by the province of Carinthia, which owned Heta’s predecessor until 2007. Those guarantees blunt the intent of the new rules because they mean the losses imposed on bondholders become a claim on Carinthia, which says it can’t pay them. Sunday’s haircut means the province faces claims of about 6.4 billion euros, the FMA said.”

 Carinthia’s attempt to neutralize the guarantees by buying up the bonds at a discount was rejected by bondholders led by Commerzbank AG and Pacific Investment Management Co. last month. The creditors, who say that Austria should pay up if Carinthia can’t, also sued in a German court, arguing the BRRD’s rules don’t apply to Heta.

The announcement ushers in the next, and even more contentuous phase of creditor negotiations: after initially ruling out a second offer, Austrian officials this week smoothed the way for new negotiations to avoid years of litigation. Gaby Schaunig, Carinthia’s finance secretary, said she will review a recent creditor proposal and that “any out-of-court solution is better than the legal route.”

According to Bloomberg, some of the creditors are planning to make an offer to Austria that would result in a payout of 92 cents on the euro, a person familiar with the bid said Saturday. It’s unclear how many creditors support the offer. On Tuesday, representatives for both sides will also meet in London for talks, according to a report in Der Standard. Many creditors have rejected any haircut as an option over concerns how such an example could impact their investments in comparably impaired financial companies. Others are more willing to negotiate.

Some creditors had already challenged the FMA’s decision to apply European bank resolution rules to Heta. Answering the objections, the FMA said the wind-down remains “fully binding,” adding that creditors are now free to appeal to Austria’s federal administrative court:

 Challenges may be submitted to the FMA against the emergency administrative decision of 10.4.2016, which sets out the significant resolution actions under BaSAG, within three months.If applicable, the FMA will initiate ordinary administrative proceedings, will recognise and examine the submitted challenges and will then issue an administrative decision in relation to the challenge procedure.

Changes, if any, to today’s decision will likely take years to pass through the Austrian court system. In the meantime, the precedent has been set and we expect many more banks to follow suit in “bailing in” their senior debt creditors, and ultimately – if there is not enough value to satisfy claims – depositors.

Putting this is layman’s terms, a bank in Austria named Hypo Alpe Adria, failed.   It was taken over by an authority to deal with such failures, that authority being named Heta Asset Resolution AG.  But the bank’s failure was so massive, it wrecked Heta Asset Resolution AG too!

There are stockholders in Heta Asset Resolution AG including Depositors.  The stockholders are “preferred” creditors, and Depositors are “subordinated” creditors.  The stockholders today found out that they will only see 46 cents on the dollar — AND WILL RECEIVE THAT THROUGH STOCK IN THE FAILED COMPANY!  Depositors found out today, they likely will get: NOTHING.

This is how Europe deals with bank failures under laws passed after the Lehman Brothers collapse in 2007-08.  THE SAME RULES ALSO NOW APPLY INSIDE THE UNITED STATES!

Think about that for a moment.  All the money you have saved in your retirement accounts IRA/401-K and the like . . . . wiped out in one fell swoop.   FDIC Insurance . . . no more.  This is the new game.  And your life’s work and hard-earned savings are the prize.

The fact that such a thing was announced on a SUNDAY AFTERNOON is astonishing; governments NEVER do things like this.

Why a Sunday? Because they know this is going to cause massive turmoil as people all over Europe rush to take their money out of banks starting tomorrow, and Bank Stocks utterly PLUMMET as stockholders see they are no longer protected as “creditors” to Banks.

This could be the actual start of a complete systemic banking collapse in Europe as panicked citizens, seeing their fellow depositors wiped out in one fell swoop, start pulling their money out of the banking system.  This has “DISASTER” written all over it.

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HISTORY REPEATING ITSELF

The following passages are excerpts from Charles Kindleberger’s book “The World in Depression.”

The Creditanstalt

Just as in May 1873 and July 1914, with tension growing among Germany, France, and Britain, the crack, when it came, appeared in Austria.  In the early spring of 1931, a Dutch bank wrote a polite letter to the Creditanstalt in Vienna saying that it was obliged to raise the charge on its acceptance credits from 0.25 percent a month to 0.375 percent. It was a timorous letter, says Beyen, not a prescient one, and the bank was somewhat surprised when the Creditanstalt chose to pay off the loan rather than renew at the higher rate.  Three months later the Creditanstalt could have used the money.

The Austrian economy had been in disarray since the Treaty of St. Germain of 1920.  Its finances had required League of Nations loan assistance, which entailed international supervision between 1922 and 1926…Industrial capital was consumed in the postwar inflation, and financial capital in the unsuccessful bear speculation against the French franc in 1924 that produced failures of the Allgemeine Industriebank, the Austro-Polnische Bank, and the Austro-Orientbank, as well as the private Union Bank owned by one Bosel, with grave difficulties for Kolmar& Co., Kettner, and the Brothers Nowak.  Maerz calls this episode “the opening shot of a series of bank failures culminating in the breakdown of the Creditanstalt seven years later.”…

In May 1931 losses were still at 140 million schillings, and capital at 125 million plus disclosed reserves of 40 million for a total of 165 million. Under Austrian law, if a bank lost half its capital it had to “turn in its balance sheet,” or close down.  In an effort to rescue the Creditanstalt, the government, the National Bank, and the House of Rothschild, the last with help of the Amsterdam branch, furnished 100 million, 30 million, and 22.5 million schillings, respectively.  But the announcement of the support operation on May 11, 1931, started a run, partly foreign, partly Austrian…

By June 5 the credit [for the entire country] was exhausted and the Austrian National Bank requested another.  Still under pressure, the bank raised its discount rate to 6 percent on June 8 and 7.5 percent on June 16. The new credit was arranged by the BIS, by June 14 this time, but subject to the condition that the Austrian government should obtain a two-to-three year loan abroad for 150 million schillings. At this point the French interposed the condition that the Austrian government should abandon the customs union with Germany. The Austrian government refused, and it fell…

The demise of the Creditanstalt and the Austrian government was followed by a run on Germany and an attack on Sterling, which was depreciated a massive 25 percent as a result. Afterwards, central banks began a run on the U.S. dollar, liquidating it for gold. The banks included the Bank of France, the National Bank of Belgium, the Netherlands Bank and the Swiss National Bank. The result was an immediate need to increase the interest rate in the U.S. from 1.5 to 3.5 percent.

These events triggered further panics and bank runs in the U.S.. Later, the U.S. dollar was depreciated and multiple bank holidays were called to contain the panic.  The U.S. economy bottomed only in April 1933.

UPDATE

Five hours after this story broke, the Finance Minister of Italy called an EMERGENCY MEETING of Bankers for Monday in Rome.  He made clear that Italian banks have 360 Billion in BAD LOANS against Bank Capital of only 50 Billion.  He also bluntly stated that Monday’s meeting was a “last resort” to save Italy’s Banks!