HypoAdria Nightmare

When the 39-year-old farmer’s son Wolfgang Kulturer took over as managing director of the Carinthian Hypo Bank, he formulated the bank’s destiny as follows: "Expand or die." In order for the institution with 220 employees and total assets of €1.9 billion to balance the books, the Carinthian regional government had to take over. Three employees were put in charge of foreign business transactions. This was on Nov. 1, 1992.

One Sunday in early December 2009, 17 years later, finance minister Josef Pröll (ÖVP) faced a similar decision: To rescue the bank, or let it die. Hypo now employs 8,000 employees in 13 southeastern European countries and has assets representing €43.3 billion. Pröll decided in favor of nationalization – afraid of a domino effect from Munich via Vienna and Klagenfurt to Zagreb.

Still, dangers remain. Indeed, after revelations about the billions in bad loans in Croatia were disclosed, nervousness broke out along the axes of government, bank offices and federal prosecutors. In Munich, heads began to turn. The Bavarian minister for economic affairs called the 2007 takeover of Hypo a "catastrophically wrong decision," which will cost the state €3.7 billion. The Austrian Republic will also have to dig deep into its pockets. Journalist Robert Misik speaks of the "Hypo Nightmare Adria." The nightmare took root in Croatia, where accusations of systematic corruption, money laundering and nepotism are growing to massive proportions. But you have to look back to the distant 1990s to understand the stir these billions created.

As Hypo opened leasing branches in 1993 in Slovenia and Croatia, the Yugoslavian civil war was raging only a few hundred kilometers to the East. Austrian companies, and above all banks, are among the first movers, the market-pioneers.

Hypo granted a loan of around 140 million Schillings to the Croatian post-war regime. This would open the door to a country in which warlords currently were making millions with arms deals and privatizations, and under the mantel of democracy were dividing up the country amongst themselves.

1996 saw the establishment of Hypo Banka Croatia. Hypo specialized in real estate, but also leases out everything under the sun, from yachts to construction machinery to buildings and solar installations. In 1999, the bank’s assets amounted to barely €4.5 million. The owner, the state of Carinthia and the Grazer Wechselseitige, received dividends of 10 to 15%, dream payouts for a state bank whose business model was to invest regionally.

Soon it will not be just the financial world that is in on the open secret: that the Croatians who were cashing in on the post-war bonanza were stashing their profits in Carinthian Hypo accounts. "Hypo was the financer of the theft-privatizations of the Tudjman dictatorship," says a high-ranking Austrian business agent who requested anonymity.

In fact, hardly anyone wants to be named personally these days; too much is at stake, including the reputation of Austrian domestic banking. This is the dark side of the oft-praised Austrian success in the East, no come to light in the Hypo case.

In 2000, Hypo was threatened with a credit default of one billion Schillings. This was money for which the former Tudjman regimehad given guarantees "without closer examination" – as had been understood at the time. Kulterer was allowed to "conduct business in Croatia that other foreign banks wouldn’t have dared," wrote Der Standard at the time. "Carinthia stood behind him, eager to be proud of its bank."

It was Jörg Haider himself who took advantage of Hypo as a money-making institution for his beloved Carinthia, which thus gained access to the southeastern Europen markets. The newly elected governor traveled regularly to Slovenia and Croatia to use his contacts to right-wing politicians.

In the years that followed, Istria would become the "California of Southern Europe," predicted Hypo manager, Günter Striedinger, in 2000. At the time, there was no significant tourism project that was not run through Hypo, and not one that was seen as clean in the industry.

One example uncovered by the German weekly Die Zeit, shows how corrupt the morals were in these transactions as well as how the FPÖ was filling their pockets: In the year 2000, a company of then FPÖ deputy Detlev Neudeck acquired 374,000 square meters of coast line from the Istrian community of Vodnjan. When the property was reclassified as development land shortly after, the price increased 200 times over night. The deal was financed by Hypo, and the local Hypo manger was president of the supervisory board of the real estate company. The re-classification had been promised to the bank before the purchase, Hypo boss Kulterer revealed later to a local paper. Haider himself seems to have prepared the deal with a local governor, Stefo Zufic, who became managing director of a company involved in the deal.

In 2001, the Austrian National bank audited the Croatian operations of Hypo. "In situations of solvency inquiries and reviews of the credit-worthiness of borrowers, Hypo Croatia doesn’t proceed carefully enough and does not take sufficient care of the loan repayment terms," the audit said. Risk prevention initiatives, said the ÖNB, were "insufficient."  Certain subsidiaries were seen throughout the firm "as service locations to whom problem cases could in part be assigned."

High risk loans, says the critique, were thus taken out of the bank’s balance sheets and parked in leasing companies in order to not reduce the equity capital. The background: in non-EU states, leasing businesses are not added to the operations of the home bank, and local regulators did not have the right to review the books.

In 2001 alone, the assets of Hypo increased to €7.6 billion. Hypo was written up internationally as the "most profitable bank in Austria" and described as the "second fastest growing banking group in western Europe." The warning voices got lost in the East-euphoria.

In 2002, some 2500 employees were working for the company, and the Austrian trade representative in Zagreb, Peter Hasslacher, spoke about a new "Gründerzeit," a boom in business start-ups. Having set the necessary economic reforms in place, the country post-war joined the WTO and applied for EU accession with economic growth of six to seven per cent. A third of all foreign investments came from Austria. In 2003, Hypo built a headquarters in Zagreb for €92 million. The 86,000 square meters of office space was biggest high-rise building project in Croatia.

"Already back then it was an open secret that Hypo was conducting non-banking risk policies," remembers the then trade delegate, Hasslacher, today.

It’s a question of "disloyal competition," says one long-term market observer, who asked to remain anonymous. "Hypo was undermining all [market] conditions and therefore diluting the standards." That Hypo is now going through a melt down in Croatia, says the insider,  was expected much earlier in the industry.

At the parliamentary elections in 2003, the Croatian investigative journalist, Hrvije Appelt, described how Hypo was the biggest political contributor, donating €300,000 to the right wing party HDZ alone.  As was one of the most important media advertisers, Hypo got no bad press.

In 2004, total assets climbed to €17.8 billion. One year later employing some 5,200 people, the bank, reached €22 billion.

"Those who were interested, knew from the beginning on about shady dealings of Hypo in Croatia," says journalist Appelt, telling of adventurous goings on, some involving Zagreb mayor, Milan Bandic. The politician, who resides to this day in a Hypo penthouse, supposedly funneled his million-euro business through dream loan conditions and unusually high market commissions.

This was also reported by the Croatian magazine Nacional, which claimed to have a secret survey from the Bavarian Landesbank about Hypo’s deals in Croatian. According to this survey, the now retired head of government, Ivo Sanader, received a DM 800,000 commission for the facilitation of a DM 4 million loan.

Multiple other questionable business partners of the Hypo Bank have come to light. There was, for instance, Ivic Pasalic, also known as "the doctor," a right-wing extremist and previous consultant of former president Tudjman received a €30 million loan for building a shopping center, without any experience in this field. Or Branimir Glavas, the "Godfather of Osijek," in the meantime a convicted war criminal, who was personally welcomed by Haider in Klagenfurt. Pasalic sold an apartment to Hypo for €280,000, which he had bought just before from the state for €3000. In return, he is supposed to have brokered Hypo deals. The ex-general Vladimir Zagorec, also has, according to the magazine Nacional, received Hypo loans of about €260 million for real estate projects. The man responsible for weapons in the Croatian army during the war currently sits in a Croatian prison for abuse of power in office.

Only grudgingly did the Austrian authorities hand over the real estate agent who had been living in Vienna. "When he starts singing, many, many people in business and politics will have a lot to be afraid of," says one insider in Croatia. Addendum: "And on both sides of the border."

All these cases raise a fundamental question which can be accurately formulated as follows: Is it possible for investors in Croatia to stay clean at all?

"No comment," say several Austrian business representatives in Croatia. The comments speak a clear language. Empty bars, which bought at overvalued prices, unemployed friends on the gravy train, P.O. box companies that need loans on prime terms – the barriers to market entry still look the same today as ever, erected by both local sheriffs and high ranking politicians.

In his recent book about Hypo’s activities, Croatian investigative journalist Domagoj Margetic described what he saw as corruption rather daring.

"The large loans for dubious business partners cannot be considered high risk deals, but rather money laundering," he argues, asserting that he has several thousand pages of documents. "Hypo has not squandered hundreds of millions of euros in Croatia. Croatian politicians have simply taken back the money, as they were afraid that Hypo might collapse one day."

Hearing about a Viennese Banking Investigation Committee of the Austrian Parliament in 2006 that oversees all Banks including Hypo, Margetic offered his documents to the committee members – in vain. They were not interested, he says. Apart from a short disclaimer, Hypo also did not react to his accusations.

The consequences of the risky deals started hitting Hypo only after the acquisition by the Bavarian Landesbank in May 2007. Early in 2008, Hypo boss Tilo Berlin conceded the lack of risk prevention for activities involving several million euros. In the same year, the bank balanced its accounts with a loss of €520 million.

At the end of November, after Hypo has already received €700 million from Bavaria and €900 million from the Austrian banking package, the big blow releasing the rescue bailout arrives: the bank estimates this year’s necessary write off of its Balkan business at €1.4 to €1.7 billion.

Surprising, as the national bank had even predicted profits for the year 2009 in their previous year’s audit. "Internal and external checks have clearly failed in the Hypo case," says Franz Hahn, financial market expert of the Austian Economics Research Institute, WIFO. "The bank has taken on enormous risk at a high level. This was part of the growth strategy."

The financial crisis is not the reason for the quasi-bankruptcy, however, rather only the trigger. Since the middle of the year, the credit defaults in Croatia have increased massively. At the same time, leasing fraud cases have been brought forward in great numbers. It appears that at several banks, the existence itself of about half of the leasing properties was never checked. "

It has to be assumed that Hypo itself doesn’t know its properties nor their value," says a market insider.

In the Klagenfurt group headquarters today, no one wants to comment on a long list of accusations. A spokeswoman simply points to the consequences of the economic crisis and the current overhaul of "legally questionable cases."

It is the role of the state attorneys in Munich, Vienna, Klagenfurt and Zagreb to draw the line between commercial risk, fraud and serious crime. In any case, the Austrian Republic and the new owner of Hypo will have to answer a lot of questions. Why, for instance, have rumors about fraudulent deals never been pursued? Why did warning voices within the industry not lead to consequences? Why could the state of Carinthia, bank managers and friends of Haider, such as Tilo Berlin, ex-Bayern-LB boss Werner Schmidt and Veit Sorger enrich themselves by hundreds of millions of euros through the sale of Hypo, while the taxpayers now have to carry the liabilities?

Wolfgang Kulterer, the architect of the questionable rise of Hypo, will also find himself confronted by uncomfortable questions. The millionaire can be found breeding his horses in England, where he has retired ever since the accounting fraud conviction.