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Cooperation with healthy banks over Hypo ruled out

Government plans to deal with the toxic assets of nationalised lender Hypo Alpe Adria has been dealt a blow after healthy Austrian banks could not be brought around to the idea of absorbing some of the debt.

Finance Minister Michael Spindelegger explained on Monday that resistance from banks such as Bank Austria or Erste Bank means they have to ditch those plans. "It became clear that this bank involvement and privatisation model de facto is not possible," he said.

An alternative option for the Finance Ministry is to set up a vehicle to wind down the bank and absorb some of the 19 billion Euros of Hypo's assets into state debt. If all else fails, the bank could be allowed to go insolvent, which Spindelegger has not ruled out.

Some groups such as the FMA markets watchdog and the central bank have warned against letting Hypo go bust, which they think could risk financial security in Austria. However, other experts such as Professor Karl Aiginger, head of think tank WIFO, have said that the option shouldn't be ruled out and the insolvency could be managed to prevent it from snowballing out of control.

If the assets are absorbed into a state vehicle it would mean the government would no longer need to continue providing the bank with state aid relief, although officials have estimated that it could hike state debt up to nearly 80% of economic output, threatening Austria's credit rating.

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