Austria to face down World Bank over burning bondholders

Austria and the World Bank may end up in court over the planned wipe-out of junior creditors of nationalised Hypo Alpe-Adria-Bank International , the Austrian finance minister said.

The Austrian government was "surprised" to see that the World Bank, through its International Bank for Reconstruction and Development unit, owns €150 million of subordinated Hypo Alpe bonds, Michael Spindelegger told Austrian state radio ORF today.

The Washington-based lender’s claim that it can’t be expropriated is being reviewed, he said. “What we have to do now is to investigate whether it’s accurate what the World Bank says,” Mr Spindelegger said. “We’ll have to clarify that in court if necessary.”

Austria is preparing to impose losses on subordinated Hypo Alpe creditors, effectively bypassing a guarantee by the country's province of Carinthia. The €890 million of junior debt, including bonds held by the World Bank's IBRD, will be wiped out once a law on Hypo Alpe's wind-down, passed by Parliament's lower house, gets final approval.

The plan is complicated by World Bank statutes that protect the lender's assets from expropriation. "We are currently in discussions with the Austrian authorities, which have committed to undertake a legal review of the situation," Frederick Jones, a spokesman at the World Bank, said by e-mail yesterday. "This review will confirm that the international legal obligations of Austria, as embodied in IBRD's Articles of Agreement, will prevail over domestic legislation."

Bloomberg