Austria is set to pay 1.23 billion euros ($1.36 billion) to the German state of Bavaria as both sides agreed to settle all pending legal disputes over the collapse of Hypo Alpe-Adria-Bank International AG, whose assets are being wound down in bad bank Heta Asset Resolution AG.

Under the terms of the deal, Austria will pay the sum to its neighbor as soon as the settlement is approved by parliament, regulators and former Heta parent Bayerische Landesbank, Austrian Finance Minister Hans Joerg Schelling told journalists in Vienna. The payout will be funded at least partially from proceeds from Heta’s own wind-down, Schelling said.

“If we proceed with all the trials, we have two problems,” Schelling said. “High fees for courts and lawyers as well as very big legal risks. Many of the cases are at the very beginning with an uncertain outcome.”

The landmark agreement ends a chain of legal cases stemming from BayernLB’s two-and-a-half year ownership of Heta’s predecessor, Hypo Alpe, that descended into acrimony with the parties accusing each other of deception over hidden losses and asset valuations. The lender had to be rescued in 2009 and has cost Austrian taxpayers 5.5 billion euros since then.

Bavarian Finance Minister Markus Soeder has called a press conference for 11:30 a.m. in Munich to discuss the developments.

Heta “welcomes the political initiative” to end the dispute and will initiate a process to review the agreement immediately, the Austrian company said in an e-mailed statement.

Capital Hole

Heta, which revealed a 7 billion-euro capital hole on June 18, said at the time that an insolvency may ultimately be the only way to shut down the company.

Hypo Alpe, Austria’s worst bank failure in the 2008 financial crisis, almost collapsed over bad loans in the former Yugoslavia. Austria’s government halted further support in March as regulators imposed a debt moratorium under new European Union rules.

That may force senior bank bond holders to share losses for the first time in the euro area, causing ripples among Heta’s Austrian and German creditors.

The sum to be paid to Bavaria is equivalent to 45 percent of the amount state-owned lender BayernLB was awarded by a Munich court in May, according to Schelling. If Heta’s creditors end up receiving a lower payout ratio in the course of the wind-down, Austria has agreed to pay the balance, he said.

Broke Ground

Austria broke new ground in Europe when it began forcing creditors to share Heta’s losses after new writedowns emerged this year.

Heta was ordered to pay 2.3 billion euros plus interest to its former parent by a Munich court in May, according to Schelling. Other pending litigation included a 3.5 billion-euro lawsuit in which Austria alleged BayernLB hid the “catastrophic” situation of Hypo Alpe before the 2009 rescue.

Officials in Vienna and in Munich will sign a memorandum of understanding on Tuesday, Schelling said. The proposed settlement will also have to pass through the Austrian parliament and win approval by the FMA regulator, which is overseeing Heta’s wind-down, Schelling said.

BayernLB is 75 percent-owned by the state of Bavaria. The Association of Bavarian Savings Banks owns the remaining 25 percent, according to its website.