Death by a thousand cuts

2 May 2006

It was the attempted coverup that brought on the liquidity crisis. Ironically, it was not the huge losses it made on derivatives trades that nearly sunk Austria s fourth largest bank.

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The Austrian government and the country's major banks granted an E1.4bn bailout to Bawag in order to avoid a liquidity crisis at Austria's fourth largest bank.

They responded to a request by Bawag that, last week, was hit by an unexpected $1.3bn US lawsuit in connection with the bankruptcy of Refco, the US securities broker.

As a result, Bawag customers had started withdrawing their funds – in the order of E100m per day, according to Bawag's chief executive Ewald Nowotny.

Bawag has now reached an out of court settlement with US creditors, according to Nowotny, who declined to disclose further details of the agreement.

Bawag and its owners, the labour union, are also selling their stakes in the country's central bank to the government. The holdings will be sold at their nominal values, or about E2.5m.

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