Austria and Bavaria are stepping up
a legal battle over who will foot the bill for billions of euros
of losses at Hypo Alpe-Adria-Bank International AG, three years
after the two made a deal to avert its collapse.

Austria’s statute of limitations means the government has
until today to sue Bavaria for duping it into an agreement to
buy Hypo Alpe for one euro, signed in Vienna in the early hours
of Dec. 14, 2009. Hypo Alpe is also due to decide whether to
stop honoring 2.35 billion euros ($3 billion) that Bayerische
Landesbank, owned by the Bavarian state, lent it prior to the
sale. Bavarian Finance Minister Markus Soeder has said he’ll
demand immediate repayment in that case.

Hypo Alpe and BayernLB are among Europe’s most expensive
bank failures, piling up as much as 14 billion euros in bailout
costs for taxpayers in Austria and Bavaria. Executives and
politicians behind the banks’ demise are either retired,
dismissed or dead, leaving Hypo Alpe with soured loans in the
former Yugoslavia and BayernLB with Icelandic debt and non-
performing asset-backed securities.

“I’m having a little bit of a deja vu experience,” Rolf
Holub, who led a parliament investigation of the bank in its
home province, southern Austrian Carinthia, said in an interview
yesterday. “Each time Hypo Alpe gets a new owner, the new owner
says after a while that he couldn’t possibly have known the bank
was in such bad shape.”

New Avenues

Austria is considering suing Bavaria after setting aside
1.5 billion euros of taxpayer cash and guarantees this year to
prop up Hypo Alpe, and another 700 million euros for 2013.
Daniela Kinz, spokeswoman for Austria’s Finance Ministry
declined to comment on whether the government would proceed with
the lawsuit. BayernLB, meanwhile, has started to pay down the
Bavarian state aid it received.

In a separate legal move for repayment, Austrian
authorities are arguing that BayernLB awarded Hypo Alpe the
loans to keep it afloat even when it thought it would default.
Under Austria’s insolvency laws, similar to U.S. and German
rules, the lending may qualify as “substituting equity” and
become subordinated to other liabilities. This would allow Hypo
Alpe to stop paying interest or principal on the borrowing.

“Starting with the summer of 2012, the Republic of Austria
has obtained evidence that suggests the loans are to be
qualified as equity-substitute,” according to a lawsuit the
Austrian government brought in the European Union General Court
in Luxembourg in September. The Austrian bank has hired lawyers
to advise it on the loans from BayernLB and will decide today
whether it needs to repay them, said Nikola Donig, a spokesman
for Hypo Alpe.

Repayment Demand

Bavaria’s Finance Minister Markus Soeder, after a hastily
arranged meeting in October with Maria Fekter, his opposite
number in Vienna, said BayernLB would call in the loans
immediately should Hypo Alpe halt payment.

Most of the borrowing matures at the end of 2013 or in
2014, according to Hypo Alpe.

Hypo Alpe expanded rapidly in the 2000s, when it was owned
by Austria’s Carinthia province, which was led by the late
populist politician Joerg Haider. It became one of the biggest
banks in the former Yugoslavia, with its assets almost
quadrupling to 43.3 billion euros in the five years to 2008. The
growth was fueled by as much as 25 billion euros in wholesale
funding guaranteed by Carinthia, which has a 2 billion-euro
budget.

BayernLB bought its initial 50 percent stake in Hypo Alpe
for 1.63 billion euros in 2007 from Carinthia, insurer Grazer
Wechselseitige and a group of investors led by Tilo Berlin, Hypo
Alpe’s former chief executive officer. After nationalization,
its losses were 3.7 billion euros.

Taxpayer Support

Austrian taxpayers have subsidized Hypo Alpe with 1.26
billion euros in capital and a 200 million-euro asset guarantee.
Carinthia’s guarantees and those of the federal government still
total 16.7 billion euros. The bank sold another 1 billion euros
of subordinated debt backed by Austria this month.

Several courts in Germany and Austria are already dealing
with cases related to the bank’s failure. BayernLB is itself
suing one of Hypo Alpe’s former owners in Austria for tricking
it into its 2007 purchase of the lender. The company also
accused former chief executive Werner Schmidt and seven other
executives as well as Kurt Faltlhauser, a former Bavarian
finance minister, of ignoring warnings about the viability of
the purchase.

Hypo Alpe’s former CEOs Wolfgang Kulterer and Tilo Berlin
as well as other executives have been charged in several
separate cases by Austrian authorities. They all denied
wrongdoing. Haider died in a 2008 car crash.

To contact the reporter on this story:
Boris Groendahl in Vienna at
bgroendahl@bloomberg.net

To contact the editor responsible for this story:
Frank Connelly at
fconnelly@bloomberg.net