Bawag faces EU probe into Austrian loan guarantees

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European Union regulators said they'll investigate whether Austrian aid to Bawag PSK Bank broke EU rules, possibly delaying plans to sell the lender tied to bankrupt futures trader Refco Inc.

The European Commission, which vets whether government subsidies distort competition, will probe Austria's pledge of €900 million ($1.16 billion) in May to rescue Bawag after hedge-fund losses. A ruling against the bank may force it to repay the cost of the guarantees. „Companies in difficulty may benefit from state support under strict conditions,” European Competition Commissioner Neelie Kroes said in a statement today in Brussels. „It's the commission's duty to verify that these conditions are met, in order to ensure that competition is not distorted and that the restructuring of BAWAG-PSK is likely to be a success.”
Bawag, Austria's fourth-biggest bank, is up for sale after the government guarantee helped it weather the collapse of Refco, in which it held a stake. The commission will investigate whether Bawag benefited from guarantees under the same terms that would be available to other lenders. Bawag's creditors sued it for $1.3 billion for its role in the collapse of Refco Inc., triggering a run on the bank that jeopardized its owners' plans to sell the Vienna-based lender. Bawag's owner, the Austrian Trade Union Federation, was required to sell the bank as a condition for the government aid. The unions hope to sell Bawag by the end of the year.

German bank BayernLB and US private equity firms Cerberus Capital Management LP and Lone Star Funds are among four bidders selected to make final offers for Austria's Bawag PSK Bank, a person involved in the sale said November 20. Austria's guarantee plus €450 million in loans from rival banks helped Bawag recover. Bawag had to write off losses from hedge-fund investments and settle lawsuits accusing the bank of aiding fraud that led to Refco's collapse.
Bawag agreed in June to pay $683 million to avoid US prosecution for its role in the collapse of Refco and settle claims by creditors and investors. While the bank didn't admit wrongdoing, it accepted the government's version of the alleged fraud and promised to continue cooperating in the investigation. Kroes has been urging „less and better targeted state aid,” advocating subsidies to areas that will create jobs, such as in research and startup companies. (Bloomberg)

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