The Greek crisis is nearing its climax on Sunday, when EU leaders will gather for a summit to evaluate the latest reform goals from Athens. While many European figureheads are inclined to give Greece another chance, Angela Merkel still seems undecided.

Their allies from Bavaria, the Christian Social Union or CSU, are firmly against further bailout packages, especially if they involve any kind of haircut. What could weaken their argument, though, is the fact that Bavaria’s finance Minister Markus Söder just allowed for a significant haircut himself – with Austria.

The HAA story …
The financial struggles between the two neighboring countries dates back about eight years, when Bavaria’s state-owned bank BayernLB bought Hypo Alpe Adria from the Austrian state of Carinthia – not to be confused with the Greek region of Corinthia, of course.

Hypo Alpe Adria (HAA) was in no good shape, to say the least. When the financial crisis hit in 2009, HAA went bankrupt. It had to be bailed out by the Austrian government and came into public possession. As it turned out, the bank’s troubles did not only stem from the general crisis in capital markets but also from mismanagement dating back as far as the end of the 90s. Many former employees and partners of HAA had to face legal charges, some of them still ongoing.

In 2013, the EU commission agreed to liquidate HAA and a bad bank named Heta Asset Resolution was set up to take on all the non-performing loans. Austria helped with a state guarantee. But in March 2015, Heta stopped repayments to its creditors and Austria declared void its former guarantee. BayernLB as the biggest creditor was among the first to file a lawsuit against this move.

… and how it ended
Although a verdict from a Munich court strengthened BayernLB’s position, the state of Bavaria as its majority shareholder struck a deal with Austria’s government this week – accepting a 55% haircut and forfeiting around €1.5bln in a general settlement deal.

Bavaria’s opposition parties were outraged. Combined with all the former losses, the whole HAA story has now cost BayernLB about €5bln and the Bavarian state twice as much.

Many other German banks, who still claim repayment from Heta, are not amused with the outcome of the deal either. Fact is that they already had to write down a large chunk of their outstanding positions and the settlement deal does not set legal precedence. However, judges in upcoming lawsuits will likely use the haircut agreed upon by the Bavarian government as a guideline. And this means, the write-downs are gone forever.

On a happier note, German banks got nearly all their money back from Greece. If another haircut comes into play on Sunday, it will be mostly at the expense of the taxpayer.