## _cr09295

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### Executive summary and outlook
- Focus: Impact of the financial crisis on the Austrian economy and financial sector, authorities’ policy responses, and macro-financial linkages and spillovers.
- Growth and output:
  - GDP decline expected by staff: 4 percent in 2009; recovery in the course of 2010.
  - Current downturn described as the deepest in Austria’s postwar history.
  - Exports of goods declined by roughly a quarter compared with 2008.
  - Consumption declined slightly; investment and exports declined strongly.
- Inflation and labor market:
  - Inflation projected to decline in 2009 to about ½ percent for the year and to pick up in 2010.
  - Core inflation expected to remain above 1 percent.
  - Possible temporary negative inflation in second half of 2009 depending on energy and commodity prices.
  - Unemployment widely expected to increase to above 5 percent in 2009 and to continue rising into 2011.
- External position:
  - External position expected to weaken somewhat but remain sound.
  - Imports expected to shrink by less than exports in 2009, reducing the current account surplus which nevertheless remains positive.
  - CGER methodology suggests no major competitiveness issues.

### Key policy issues and recommendations
- Financial stability:
  - Recent stress tests showed systemic banks would not breach minimum capital requirements under shocks; authorities saw no need for further capital injections at that stage but monitored conditions closely.
  - Staff: ratios well above regulatory minima are needed to support market confidence.
  - Recommendation: use stress tests as input for discussions with banks about strengthening capital buffers when needed.
  - Maintain close home–host authority collaboration and contingency planning for banks’ presence in CESE.
- Fiscal policy:
  - Approved stimulus supports the economy short run but is neither targeted nor temporary and may threaten fiscal sustainability.
  - Recommendation: develop a credible exit plan aimed at structural fiscal consolidation over the medium term; prepare this year and implement once the economy stabilizes, focusing on identifying expenditure saving measures.
  - Authorities agreed on the need for consolidation but warned against premature exit from the stimulus.

### The Austrian banking system — size, exposures, and vulnerabilities
- Banking sector assets: about 330 percent of GDP at end-2007.
- CESE exposures of Austrian banks:
  - roughly 70 percent of GDP,
  - 350 percent of bank capital.
- Profits from CESE operations: accounted for 30-40 percent of total profits in 2005-07.
- About half of lending to CESE denominated in foreign exchange.
- Measurement note: figures refer to exposure through cross-border lending and via subsidiaries, exclude interbank loans or lending to sovereigns, and include exposure of foreign owned banks licensed in Austria.
- Household and corporate balance sheets:
  - Household debt: 90 percent of disposable income at end-2008 (euro area: 100 percent).
  - Financial intermediation represented about 6 percent of GDP in 2008.
  - Corporate debt to GDP increased by 8 percentage points between 2007Q1 and 2008Q4.
- Credit conditions (selected exact figures):
  - Credit growth to households fell to 1 percent in April 2009.
  - Year-on-year growth rate of loans to nonfinancial enterprises slowed to 6 percent in April 2009.
  - Insolvencies increased in 2008.

### Financial sector support, stress tests, and market reaction
- Financial support package headline figures:
  - Total package: €100 billion (about 35 percent of GDP).
  - Deposit insurance: 100 (billion €).
  - Capital injections, asset guarantees: 15 (billion €).
  - Guarantees: 75 (billion €).
  - Guarantees for non-bank corporates: 10 (billion €).
  - Total: 100 (billion €).
- Implementation and outcomes:
  - Government purchased participation capital in four of the six biggest banks worth €4.9 billion as of mid-June.
  - As of mid-June, government guaranteeing assets of two banks worth €1.6 billion.
  - As of mid-June, €17 billion outstanding in government guaranteed bank bond issues and €2.4 billion guarantees through the clearing bank.
  - Issuance of bonds to pre-fund financial sector support of almost 3 percent of GDP raised debt to 62.6 percent of GDP at end-2008.
- Capitalization and market indicators:
  - Tier 1 capital ratios averaging 9 percent for the system at end-December.
  - Banks remained profitable despite turmoil but profit outlook downgraded in early Spring 2009 after CESE currency depreciations; CDS spreads rose.
- ANB stress tests (top-down “Deep CESE Recession” features and results):
  - Coverage: end-2008 to end-2010; baseline uses April 2009 WEO growth projections scaled down by 2 percentage points in 2009 and by 3.5 points in 2010 for CESE countries.
  - Assumed 20-30 percent depreciation for floating-rate countries; no change for fixed regimes.
  - NPL ratios projected to reach close to 10 percent in the domestic market and almost 20 percent in the CESE region over two years.
  - Under the scenario, top six banks’ Tier 1 ratios would weaken substantially but remain above the 4 percent regulatory minimum.
  - Starting Tier 1 ratios include €8.4 billion of preferred shares from the Austrian bank rescue package and €0.7 billion from third parties.
  - Further capital injections from the remainder of the €15 billion package could help keep the average Tier 1 ratio of the top six banks from falling below 6 percent in stress.

### CESE strategy, bank behavior, and coordination
- Banks’ reactions and risk management:
  - Most banks stopped new lending in currencies other than the euro; some restructured outstanding non-euro loans by extending maturities or converting into local currencies.
  - Euro-denominated (or euro-linked) lending remains pervasive in CESE due to deposit composition.
  - Banks tightened internal lending policies, curtailed foreign currency loans within Austria and in non-euro currencies outside Austria, shortened lending portfolio terms, and broadened deposit bases.
  - Banks plan greater focus on countries/products with sizeable market share and enhanced risk management.
- European Bank Coordination Initiative (“Vienna Initiative”):
  - Facilitates information exchange and coordination among home and host authorities, banks, IMF, and EC.
  - Four country coordination rounds held (Serbia, Romania, Hungary, Bosnia and Herzegovina) with foreign banks signing commitment letters to support subsidiaries and, in some cases, forward-looking recapitalization.
  - Joint IFI action: EBRD, EIB, and World Bank Group lending directly to commercial banks to maintain exposure in CESE.

### Insurance, pensions, and regulatory response
- Insurance sector:
  - Affected by falling asset markets; equity investments low (4.3 percent at end-2008).
  - No major liquidity pressures; lapses remain low though new life business has fallen.
  - State support available but neither capital nor guarantees had been needed.
- Private pensions and Zukunftsvorsorge:
  - Concerns over 40 percent minimum equity investment requirement with generous guarantee.
  - Over one million Zukunftsvorsorge policies sold since 2003; total premiums around €700 million per year.
  - Authorities discussing reforms with stakeholders.
- Regulatory reforms and FMA powers:
  - EU-driven reforms to be implemented (Capital Requirements Directive; Solvency II from 2011).
  - FMA actions: recommendation in October 2008 contributed to ending new foreign currency loans to Austrian households; June approach to reduce outstanding lending in line with agreed targets.
  - Identified gaps: off-balance sheet vehicles exclusion from prudential ratios, gaps in investigative powers, low ceiling on administrative penalties (€75,000 for market manipulation), restrictions on publishing supervisory measures under official secrets legislation.
  - Parliament removed limits on FMA’s powers to set capital requirements for individual firms above minimums.

### Fiscal policy, stimulus composition, and sustainability risks
- Stimulus and budgetary impacts:
  - September 2008 stimulus: fiscal impulse of 0.3 percent of GDP in 2008 and additional stimulus in 2009-10.
  - 2009/10 budget stimulus: 1.5 percent of GDP in 2009 and an additional 0.4 percent of GDP in 2010.
  - Composition (2009/2010, percent of GDP as shown in source):
    - Total: 1.5 / 1.9
    - Public investment: 0.1 / 0.1
    - Social benefits: 0.2 / 0.2
    - Tax cuts: 1.0 / 1.3
    - Investment incentives: 0.0 / 0.1
    - Other: 0.1 / 0.1
  - More than half of 2009 stimulus accounted for by tax reform (brought forward) reducing PIT in two middle tax brackets by 0.3 and 1.8 percentage points, raising tax-exempt minimum by 10 percent, and raising the income threshold for the highest bracket by 15 percent, plus other measures.
  - Additional infrastructure stimulus from state-owned companies: about 0.3 percent of GDP.
  - Employment support measure: 0.2 percent of GDP for short-term labor and old-age part-time work benefits.
- Near-term fiscal outlook:
  - Stimulus, automatic stabilizers, and support to a distressed bank projected to widen the deficit to 4.2 percent of GDP in 2009 and 5.6 percent of GDP by 2010.
  - Issuance to pre-fund support raised stock of debt to 62.6 percent of GDP at end-2008.
- Medium- and long-term risks:
  - Under current policies, deficits projected to remain above the Maastricht 3 percent of GDP reference throughout the forecast horizon.
  - Aging-related costs for pensions, health, and long-term care will add about 4-5 percent of GDP annually in the medium and long term.
  - Without consolidation to deficits below 1 percent of GDP by mid-next decade, debt could rise above 300 percent of GDP by 2050.
  - Debt projected to rise above 80 percent of GDP by 2012.
- Consolidation strategy:
  - Mission recommended specific consolidation measures be agreed later in the year and implemented when recovery begins; authorities agreed consolidation needed but warned against premature exit and favored expenditure-based measures.
  - Working Group on Fiscal Consolidation identified 10 areas for study (education, health, pensions, subsidies, revenue sharing, administrative efficiency, etc.); recommendations in education completed and submitted.

### Medium-Term Budgeting Framework (MTBF) and fiscal institutions
- MTBF features:
  - Budget for 2009/10 includes binding rolling four-year expenditure ceilings—currently to 2013—for five broad expenditure categories.
  - Within categories, indicative ceilings are set but expenditures are fungible.
  - Nondiscretionary element of ceilings (including pensions and unemployment benefits) automatically modified according to objective criteria; discretionary element can only be modified by parliament.
  - Authorities allow budget entities to save unused funds at the end of year to reduce disincentives for cost savings.
- Mission cautions:
  - Expenditure ceilings need to be sufficiently ambitious; current envisaged expenditure path does not accomplish long-term sustainability and will be revised once recovery is underway.
  - Suggest explicitly account for long-term aging cost estimates in expenditure ceilings.
- Supporting elements and reforms postponed until 2013 (performance-based budgeting; comprehensive accounting framework; administrative reform completion).

### Key macroeconomic and fiscal data (selected exact figures preserved)
- Real GDP Growth (selected): Austria 2.42.8 (as presented in source); Euro area average2.12.1 (as presented in source).
- Table 1 highlights (2005–2010):
  - Total area: 83,850 square kilometers
  - Total population (2008): 8.3 million
  - GDP per capita (2008): US$ 44,600 (€ 33,800)
  - GDP (percentage changes at constant prices): 2009: -4.0; 2010 (Proj.): -0.3
  - Registered unemployment rate (national definition): 2009: 7.2; 2010 (Proj.): 8.3
  - CPI inflation (period averages): 2009: 0.5; 2010 (Proj.): 1.0
  - General government overall balance (percent of GDP): 2009: -4.2; 2010 (Proj.): -5.6
  - Gross debt (end of period, percent of GDP): 2009: 70.2; 2010 (Proj.): 75.5
- Medium-term projections (Table 2, selected):
  - GDP: 2009: -4.0; 2010: -0.3; 2011: 1.6; 2012: 2.0
  - CPI inflation: 2009: 0.5; 2010: 1.0; 2014: 1.8
  - Unemployment (percent): 2009: 5.3; 2010: 6.4; 2014: 5.3
  - General government balance (percent of GDP): 2009: -4.2; 2010: -5.6; 2014: -3.4
  - Gross debt (percent of GDP): 2009: 70.2; 2010: 75.5; 2014: 82.9
- Financial soundness indicators (Table 5, selected):
  - Regulatory Tier I capital to risk-weighted assets: 2008: 9.3
  - Capital to assets (total banking system): 2008: 6.3; 2009Q1: 6.3
  - Nonperforming loans to total gross loans: 2008: 2.0; 2009Q1: 2.2
  - Return on assets: 2008: 0.1
  - Total assets (EUR billions): 2008: 1,069.1; 2009Q1: 1,069.5
  - Regulatory Tier 1 capital (EUR billions): 2008: 66.9; 2009Q1: 67.6

### Staff appraisal and recommended priorities
- Macroeconomic outlook:
  - Downturn expected to shrink the economy by 4 percent in 2009 with recovery starting in 2010.
  - Risks balanced but uncertainties large.
- Fiscal stance:
  - Stimulus measures timely but neither temporary nor optimally targeted; most measures are largely permanent except short-term labor support.
  - Further stimulus not recommended given rapid fiscal deterioration and rise in debt.
  - Authorities should prepare a credible fiscal consolidation plan to be implemented once the economy stabilizes to strengthen market confidence and lower borrowing costs.
  - Expenditure measures preferred to tax hikes; priority consolidation areas: administration at lower levels of government, pensions, education, and health; accompanying revenue options could include increases in fuel and real estate taxes.
- Financial sector:
  - Authorities’ crisis response was timely and comprehensive (ANB and FMA cooperation; Parliament’s banking support package; blanket deposit guarantee; stepped-up supervision and cross-border cooperation).
  - Need for faster disbursement under public support program and effective contingency planning.
  - Repeat stress tests as the outlook changes and use results to discuss stronger capital buffers or further public participation.
  - FMA should continue monitoring insurers and develop further stress tests.
  - Government initiatives to consider private pension reforms (including “Zukunftsvorsorge”) are worthwhile.

_Executive Summary and chapter extracts from IMF staff report (_cr09295)._

### Executive Summary

### _cr09295 - Executive Summary

### Focus and Background
- Focus: Impact of the financial crisis on the Austrian economy and financial sector, the authorities’ policy responses, and macro-financial linkages and spillovers.
- Background findings:
  - After a string of strong years, Austria’s open economy started to slow down in 2008.
  - A generous stimulus package, consisting mostly of lasting tax cuts, implies deficits and debt are expected to rise and remain high in the medium term.
  - The Austrian banking system is strongly exposed to Central, Eastern, and Southeastern Europe (CESE).
  - The authorities have implemented a large banking stabilization package, including public capital injections and guarantees.

### Outlook
- Growth and output:
  - Staff expects GDP to decline by 4 percent in 2009 and to recover in the course of 2010.
  - The current downturn is expected to be the deepest in its postwar history.
  - Exports of goods declined by roughly a quarter compared with 2008.
  - Consumption declined slightly but held up relatively well so far; investment and exports declined strongly.
- Inflation and labor market:
  - Inflation is projected to decline further in 2009, to about ½ percent for the year, and to pick up again in 2010.
  - Core inflation expected to remain above 1 percent in the period ahead.
  - Austria could temporarily experience some negative inflation during the second half of 2009, depending on energy and commodity prices.
  - Unemployment is widely expected to increase to above 5 percent in 2009 and to continue rising into 2011.
- External position:
  - The external position is expected to weaken somewhat but to remain sound.
  - Imports—driven by private consumption—are expected to shrink by less than exports in 2009, reducing the current account surplus which nevertheless remains positive.
  - Applying the CGER methodology suggests no major competitiveness issues.

### Key Policy Issues and Recommendations
- Ensure financial stability during a period of shocks to the financial sector:
  - Recent stress tests showed systemic banks would not breach minimum capital requirements under shocks; authorities see no need for further capital injections at this stage but are closely monitoring conditions.
  - Staff emphasizes that ratios well above regulatory minima are needed to support market confidence in the banks.
  - Recommendation: Use stress tests as input for discussions with banks about strengthening capital buffers, when needed.
  - The banks’ strategy of maintaining their presence in CESE can have positive spillovers for regional economic activity and stability, provided risks are well-managed through close home–host authority collaboration and adequate contingency planning.
- Support the economy through responsible fiscal policy:
  - The approved stimulus supports the economy in the short run but is neither targeted nor temporary and may threaten fiscal sustainability.
  - Recommendation: Develop a credible exit plan aimed at structural fiscal consolidation over the medium term, to be prepared this year and implemented once the economy stabilizes, with a focus on identifying expenditure saving measures.
  - Authorities agreed with the need for consolidation but warned against a premature exit from the stimulus.

### Context and Recent Performance (selected exact figures preserved)
- Comparative growth and unemployment (as presented):
  - Real GDP Growth
    - Austria                                 2.42.8
    - Euro area average2.12.1
  - Unemployment rate
    - Austria                                 4.34.6
    - Euro area average8.48.3
- Financial sector and growth contribution:
  - Between 2004-2007, the banking and insurance sector contributed on average about 0.4 percentage points to real GDP growth (annually).
  - Financial intermediation represented about 6 percent of GDP in 2008.
- Other salient short-term developments:
  - Exports and investment declined strongly in 2008 and 2009; consumption has been affected more recently.
  - Headline CPI dropped below zero at times due to a fall in energy prices.
  - Nominal wage increases did not anticipate the drop in inflation, raising real wages.
  - Employment is now coming down and unemployment, while still low, is pointing upwards.

### Macro-Financial Linkages and Risks
- Transmission channels of the crisis:
  - Trade channel: Negative impact on exports due to worsened European outlook.
  - Financial channel: Slowdown in CESE affects returns on foreign investments of Austrian banks and corporates.
- Financial sector vulnerabilities:
  - Rapid expansion of the financial sector, mostly outside Austria, created benefits and increased risks and vulnerabilities.
  - Large exposures to CESE are a source of concern; a further economic decline in the region could translate into deteriorating credit quality, declining profitability, and the possibility of a credit crunch.
- Policy stance:
  - Maintaining financial stability is essential for macroeconomic stability, fiscal sustainability, and a return to growth, with important spillovers to regional financial stability.

_Executive Summary from _cr09295 - Executive Summary (IMF staff report)._

### 10.      The Austrian banking system

### 10.      The Austrian banking system

### Banking system size and international exposure
- Banking sector assets accounted for about 330 percent of GDP at end-2007.
- This is close to the euro area average and considerably less than the size of the banking sectors in some other countries with internationally active banking systems.
- The financial system’s rapid expansion into European emerging markets brought benefits but increased vulnerabilities.

### Exposure to CESE (Central, Eastern and Southeastern Europe) and related vulnerabilities
- CESE exposures of Austrian banks are:
  - roughly 70 percent of GDP,
  - 350 percent of bank capital.
- Profits from CESE operations accounted for 30-40 percent of total profits in 2005-07.
- About half of lending to CESE is denominated in foreign exchange.
- Authorities emphasize that:
  - portfolios are relatively well-diversified for the Austrian banking system as a whole,
  - three-quarters of all assets in CESE represent claims on EU member countries.
- Note on measurement: figures refer to exposure through cross-border lending and via subsidiaries, but exclude interbank loans or lending to sovereigns. Figures include the exposure of foreign owned banks that are licensed in Austria.

### Austrian banks’ FX lending and exposures (figures cited in source)
- Austrian Banks' FX Lending (in billion euros): figure provided in source (chart not reproduced here).
- Austrian Banks' Exposures to Eastern Europe and CIS (in billion euros): country-level exposures listed in source (chart not reproduced here).

### Household balance sheets and savings behavior
- Household debt stood at 90 percent of disposable income at end-2008, compared with 100 percent in the euro area.
- Lack of a housing boom-bust cycle contributed to lower cumulative credit growth in recent years than in some other European countries.
- Drop in stock markets expected to induce an increase in the savings rate due to erosion of wealth and precautionary motives.
- Cushioning factors:
  - guarantees that insurance companies offer, including on retirement savings,
  - but a sizeable share of savings is held in mutual funds where investment losses are passed on to investors.
- Private pension funds have been hit hard and further reductions in benefits or increased contributions are likely, though this sector is relatively small.

### Corporate sector balance sheets and credit conditions
- Corporate debt to GDP increased by 8 percentage points between 2007Q1 and 2008Q4, but the level is much lower than the euro area average.
- Since the onset of the crisis, Austrian enterprises have found it more difficult to finance themselves through profits or new equity and have resorted to loans.
- Insolvencies increased in 2008, reflecting a drop in demand rather than a lack of financing (surveys).
- Credit conditions:
  - Credit growth to households fell substantially (to 1 percent in April 2009).
  - Year-on-year growth rate of loans to nonfinancial enterprises slowed to 6 percent in April 2009.
  - Bank lending surveys indicate household credit developments are mostly demand-driven, with demand for consumer loans dropping sharply.
  - Credit standards for the corporate sector have been tightened since the third quarter of 2007.
- Authorities are closely monitoring credit conditions.

### Financial sector impact on public finances
- Financial sector support has substantially worsened public finances.
- Under current projections, capital injections under the financial sector support program may account for some 4½ percent of GDP in general government debt by 2010.
- Concerns about the Austrian financial sector have spilled into sovereign bond and CDS markets.

### Fiscal policy response and stimulus composition
- September 2008 stimulus package envisaged a fiscal impulse of 0.3 percent of GDP in 2008 and additional stimulus in 2009-10.
- For 2008, the general government balance improved by some 0.2 percentage points of GDP to -0.5 percent of GDP.
- Issuance of bonds to pre-fund financial sector support of almost 3 percent of GDP raised the stock of debt to 62.6 percent of GDP at end-2008.
- The 2009/10 budget includes:
  - a stimulus package of 1.5 percent of GDP in 2009,
  - an additional 0.4 percent of GDP in 2010.
- Composition of the stimulus (2009-10):
  - Total: 1.5 / 1.9 (percent of GDP) as reported in source's table headings (figures shown in source).
  - Public investment: 0.1 / 0.1 (percent of GDP).
  - Social benefits: 0.2 / 0.2 (percent of GDP).
  - Tax cuts: 1.0 / 1.3 (percent of GDP).
  - Investment incentives: 0.0 / 0.1 (percent of GDP).
  - Other: 0.1 / 0.1 (percent of GDP).
- More than half of the total stimulus for 2009 is accounted for by a tax reform (originally planned for 2010 and brought forward) reducing the personal income tax (PIT) in the two middle tax brackets by 0.3 and 1.8 percentage points, raising the tax-exempt minimum by 10 percent, and raising the income threshold for the highest income bracket by 15 percent; other measures include a tax exemption per child, increased exemption for profits, increased tax deductibility of church and charitable contributions, and a deduction for child care expenditures.
- Additional stimulus from state-owned railway and highway companies bringing forward infrastructure investment amount to about 0.3 percent of GDP.
- A specific stimulus of 0.2 percent of GDP aimed at supporting employment (extension of short-term labor benefits and old-age part-time work benefits) was approved by Parliament.

### Near-term fiscal outlook and automatic stabilizers
- The stimulus, unrestricted automatic stabilizers, and support to a distressed bank are projected to widen the deficit to:
  - 4.2 percent of GDP in 2009,
  - 5.6 percent of GDP by 2010.
- Automatic stabilizers are similar to the euro area average; strong progression in PIT rates generates large stabilizers.
- Net replacement rates for unemployment benefits remain virtually constant for the five years following employment loss in Austria, contrasting with steeper falls after 12-24 months in many OECD countries.

### Fiscal sustainability and medium-long term risks
- Under current policies, deficits are projected to be above the Maastricht reference value of 3 percent of GDP throughout the forecast horizon.
- Aging-related costs for social security pensions, health, and long-term care will add about 4-5 percent of GDP annually in the medium and long term.
- Without consolidation to deficits below 1 percent of GDP by the middle of the next decade, the stock of debt could rise above 300 percent of GDP by 2050.
- With debt projected to rise above 80 percent of GDP by 2012, the mission and authorities agreed that fiscal consolidation is the key challenge once the economy recovers.

### Consolidation strategy and institutional actions
- The mission recommended that specific consolidation measures be agreed later in the year, to be implemented when the economic recovery begins, to put debt on a downward path.
- Authorities agreed with the need for consolidation but warned against a premature exit from the stimulus and noted consolidation measures should be expenditure based.
- A Working Group on Fiscal Consolidation was created to identify specific expenditure consolidation measures.
- The working group identified 10 areas for further study, including education, health, pensions, subsidies, the revenue sharing arrangement, and improvements in administrative efficiency.
- In education, recommendations have been completed and submitted to the government; recommendations on administrative efficiency were expected to be finalized soon.

### Revenue-side options and limits
- There is room to raise certain nondistortionary taxes, but these are unlikely to generate significant revenue increases.
- Most taxes are above or at OECD and EU averages.
- Increasing labor taxation would run counter to long-term objectives to reduce the tax burden on labor.
- Fuel taxes are low compared with neighboring countries and encourage cross-border arbitrage; even assuming no behavioral response, raising fuel taxes to comparable levels is likely to generate less than ¼ percent of GDP in additional revenues.
- Increased property taxes could provide additional income for municipalities and encourage accountability; additional revenues may amount to some ½ percent of GDP.
- Tax Revenues, 2007 (percent of GDP) shown in source table for selected countries (figure not reproduced here).
- Average Excise Duty Rates on Petrol, 2009 (per 1000 l) shown in source table for selected countries (figures not reproduced here).

*Source: IMF staff report chapter "10. The Austrian banking system" (text and figures as provided).*

### 23.      The mission welcomed the long-awaited introduction of a medium-term

### 23.      The mission welcomed the long-awaited introduction of a medium-term

### Medium-Term Budgeting Framework (MTBF)
- The budget for 2009/10 includes binding rolling four-year expenditure ceilings—currently to 2013—for five broad categories of expenditure.6
- Within each broad category, indicative ceilings are set but expenditures are fungible.
- To allow full operation of automatic stabilizers:
  - The nondiscretionary element of the expenditure ceilings, including pension and unemployment benefits, is automatically modified according to objective criteria.
  - The discretionary element of the expenditure ceilings can only be modified by parliament.
- Authorities highlighted removal of disincentives for cost savings by allowing budget entities to save unused funds at the end of the year.
- Mission cautions:
  - The medium-term expenditure ceilings need to be sufficiently ambitious to be an effective tool for ensuring fiscal sustainability.
  - The currently envisaged expenditure path does not accomplish this goal and will be revised once the economic recovery is underway.
- Mission suggestion:
  - To ensure that expenditure ceilings are consistent with long-term sustainability, explicitly take into account long-term aging cost estimates.
- Footnote 6: Law and order; labor and social affairs; education and research; economy, infrastructure and environment; and treasury.

### Important Supporting Elements and Reforms (Postponed)
- Important supporting elements of the MTBF have been postponed until 2013.
- Administrative reform initiated in 2006 encompasses a wide range of structural reforms, many affecting subnational governments; authorities confirmed commitment to implementation.
- Efficiency concerns:
  - Austria ranks below average in efficiency in both education and health systems.
  - Loopholes remain in the disability insurance system at the federal level that de facto assume some functions of pension and unemployment insurance systems.
- Recommendations:
  - Conduct expenditure reviews in education, health, and disability insurance with benchmarking against comparator countries, using indicators like the European Commission’s Catalogue of Quality of Public Finance Indicators (2008).
  - Use benchmarking to prepare for move to performance-based budgeting (postponed to 2013) and for introduction of a more comprehensive accounting framework (postponed to 2013).

### Federal Equalization Law and Fiscal Federalism
- A simplified federal equalization law for 2008-13 reduces some inefficiencies in the fiscal federalism system by converting some earmarked federal transfers into general transfers.
- Potential effects:
  - If earlier earmarking had been enforced, converting to general transfers could enhance expenditure efficiency at local and state government levels.
- Remaining issues:
  - Room for additional efficiency gains remains since take-up of incentives for municipalities to cooperate has been low.
  - The federal equalization law is complemented by an internal stability pact that limits deficits for each level of government.
  - Enforcement of these deficit limits has not yet been tested because the trigger clause for sanctions was based on general government balances, which had outperformed expectations recently.
  - Authorities view the pact as providing a useful framework for discussion and raising awareness of fiscal discipline.

### V. Financial Sector — Key Challenges and Vulnerabilities
- Key challenges stem from risks related to the economic downturn—both in Austria and CESE—and the financial crisis.
- Vulnerabilities arise from:
  - Significant involvement in CESE (Figure 10), exposing banks to economic downturns in the region through subsidiaries and major Austrian corporate customers exposed to the region.
  - A particular risk from foreign currency loans made by subsidiaries in CESE countries, exposing banks to indirect credit risk via foreign exchange exposure taken on by unhedged borrowers.
  - Credit risk on loan portfolios in Austria during the economic downturn, including rising unemployment.
    - A particular risk: Austrian borrowers’ extensive use of financial vehicles (“Tilgungsträger”) for repayment of bullet loans; these relied on growth in underlying investments and created funding gaps when markets fell, leading to potential loan impairments.
    - Foreign currency loans (in SFR) have been made to Austrian customers, although their share of total loans is lower than in CESE countries (Figure 11).
  - The need to secure medium-term funding in challenging markets. Government guarantees are currently facilitating rollover of funding, but new guarantees are scheduled to be withdrawn by the end of the year.

### A. The Authorities’ Response to the Crisis
- Fall 2008 impact:
  - Banks suffered sudden losses from significant exposures to Lehman and the Icelandic banks.
  - Participation in European syndicated loan markets led to credit losses and funding challenges.
  - Interbank markets dried up; liquidity positions came under pressure; share prices dropped; CDS spreads increased; spreads on Austrian government paper were negatively affected (Figure 12).
- Authorities’ actions:
  - The Financial Market Authority (FMA) and the Austrian National Bank (ANB) coordinated rapid responses to liquidity shortages.
  - Interventions:
    - One small bank was intervened and sold to its creditors.
    - Another bank of systemic importance in its market niche was nationalized.
  - Parliament enacted an extensive support package (Box 2) that included funding for state capital injections and a state guarantee scheme for new debt issues.
  - A clearing bank supported by a public guarantee was set up to reduce liquidity pressures in interbank markets.
  - A blanket deposit guarantee was introduced; depositors’ concerns addressed similarly to other EU members.
  - Implementation of capital injections has been drawn out.
- Box 2: Financial Sector Support Measures (summary of measures and amounts)
  - The package amounted to €100 billion in total or about 35 percent of GDP and contained the following support measures:
    - Capital injections, asset guarantees:
      - Financial Market Stability Act allows Ministry of Finance to recapitalize banks and insurance companies, including government guarantees for assets and acquisition of shares.
      - As of mid-June, government is guaranteeing assets of two banks worth €1.6 billion.
      - Authorities purchased participation capital in four of the six biggest banks, worth €4.9 billion as of mid-June.
      - Negotiations for capital injections into the other two big banks were ongoing as of mid-June.
      - If capital injections and asset guarantees in excess of the limit of €15 billion were needed, funds to support the interbank market could be used.
    - Interbank market:
      - Under the Interbank Market Support Act, Ministry of Finance can guarantee bonds issued by banks and liabilities/losses incurred by Oesterreichische Clearingbank AG (OeCAG).
      - Originally, €75 billion were pledged for this purpose, of which €4 billion are reserved for the OeCAG.
      - As of mid-June, €17 billion were outstanding in government guaranteed bank bond issues (used by four different banks) and €2.4 billion guarantees through the clearing bank.
      - Out of the €75 billion, €10 billion have been redesignated to secure funding of nonbank corporations.
    - Deposit insurance:
      - Deposits of natural persons are guaranteed without limit until end-2009 and thereafter up to €100,000.
      - Government pledged an amount of €10 billion to back this guarantee.
    - Funding of non-financial corporates:
      - Law allows government to guarantee debt of nonfinancial corporations up to a combined volume of €10 billion.
      - Eligible companies had to be profitable before the summer of 2008, have more than 250 employees, and a turnover of more than €50 million.
  - Austria: Banking Support Package (tabulated summary in source)
    - Deposit insurance: 100 (billion €)
    - Capital injections, asset guarantees: 15 (billion €)
    - Guarantees: 75 (billion €)
    - Guarantees for non-bank corporates: 10 (billion €)
    - Total: 100 (billion €)
- Market sentiment and bank positions:
  - Government support package enabled banks to maintain relatively strong capitalization—with Tier 1 capital ratios averaging 9 percent for the system at end-December (Table 5)—while meeting refinancing needs.
  - Support helped maintain issuer credit ratings; three biggest banks remained profitable despite market turmoil.
  - In early Spring 2009, after depreciation of some CESE currencies and increased uncertainties, profit outlook was downgraded by rating agencies (Table 6), and CDS spreads rose to unprecedented levels.
- Bank responses to deteriorating outlook:
  - Strengthening capital and reducing credit risk.
  - Tightening internal lending policies, curtailing foreign currency loans within Austria and non-euro foreign currency loans outside Austria, and shortening lending portfolio terms where possible.
  - Broadening deposit bases to reduce dependence on interbank funding.
  - Reviewing asset portfolios to identify collateral qualifying for ECB refinancing operations.
- Authorities’ commitment:
  - Further resources will be committed if necessary.
  - Banks and authorities reluctant to contemplate further government capital support at this stage, but if required and not fully available from private sources, government will provide support, including if necessary from support package earmarked for guaranteed bank bond issuance.

### B. CESE Exposures — Risks and Strategy
- ANB stress tests indicate major banks could withstand a relatively severe CESE recession without breaching minimum capital requirements.
- Staff welcomed ANB’s use of stress tests to identify CESE vulnerabilities; methodology in line with international best practice.
- Stress test findings and caveats:
  - Tests suggest capital ratios of all systemic banks would remain above minimum regulatory requirements under a range of adverse shocks (Box 3).
  - Authorities concluded no further capital injections were needed at the time, though monitoring continues.
  - Staff noted assumptions underlying the “Deep CESE Recession” scenario appear broadly within range used by analysts, but more adverse outcomes cannot be ruled out.
  - Because of uncertainty over recession impact on non-performing loans, Tier 1 ratios well above regulatory minimum may be needed to support private investors’ confidence.
  - Tail risks underline need for effective contingency planning; authorities committed to contingency planning.

- Box 3: The ANB’s Stress Tests — key features and results
  - Tests included macro stress tests for credit risk, liquidity stress tests, and sensitivity analysis for market risk (interest rate, equity, foreign exchange, and volatility risk).
  - Top-down “Deep CESE Recession” stress test features:
    - Austrian banks’ exposures include direct cross-border lending and indirect exposures via foreign subsidiaries (on and off-balance sheet positions), but not interbank loans or lending to sovereigns.
    - Coverage period: end-2008 to end-2010.
    - For CESE countries, April, 2009 WEO growth projections used as baseline and further scaled down by 2 percentage points in 2009 and by 3.5 points in 2010.
    - Assumed 20-30 percent depreciation for all countries with floating exchange rates and no change for countries with fixed exchange rate regimes.
    - Impact on Austria assessed using the ANB’s Austrian Quarterly Model (AQM).
    - Further reduction of banks’ operating income before risk and an increase in risk-weighted assets due to loan portfolio deterioration are taken into account.
  - Based on these assumptions:
    - NPL ratios reach close to 10 percent in the domestic market and almost 20 percent in the CESE region over the two year horizon.
    - Stress test results suggest Austrian banks have sufficient buffers to withstand a fairly deep recession in the CESE region.
    - Under the “Deep CESE Recession” scenario, the top six banks’ Tier 1 ratios would weaken substantially but remain above the 4 percent regulatory minimum.
    - Banks’ starting Tier 1 ratios include €8.4 billion of preferred shares from the Austrian bank rescue package and €0.7 billion from third parties (part of these capital infusions still under negotiation).
    - Further capital injections using the remainder of the €15 billion bank support package would help keep the average Tier 1 ratio of the top six banks from falling below 6 percent in a stress scenario.

*Source: IMF staff extract from the referenced IMF country report content.*

### 33.      Banks recogniz

### 33.      Banks recogniz

### Foreign-currency lending and banks' response
- Most banks have stopped new lending in currencies other than the euro, and have began to restructure outstanding non-euro currency loans by extending maturities and, in some cases, converting into local currencies.
- Euro-denominated (or euro-linked) lending remains pervasive because a large proportion of the banks’ deposits in CESE are denominated in or indexed to euros.
- Banks believe that any reduction in the outstanding stock of euro loans can be made only gradually.
- Many banks are curtailing foreign currency lending and, where possible, shortening the term of lending portfolios.

### Bank strategy, risk management, and CESE engagement
- Banks are concentrating more on risk management and some plan to focus on countries and products in which they have a sizeable market share.
- Major banks pointed to the good prospects for a resumption of growth in financial services in many CESE markets.
- Banks reiterated commitment to support their subsidiaries in Eastern Europe, but emphasized stronger control of risks.
- Authorities are committed to further enhancement of the regulatory and supervisory approach, with a stronger macroprudential focus; this will result in lower credit growth rates than seen in the past.

### European Bank Coordination Initiative (“Vienna Initiative”)
- Western European banks play a key role in CESE countries and have a long-term interest in the region.
- Continued private bank involvement is critical for balance of payments sustainability, which requires coordination to: (i) keep banks well capitalized and (ii) ensure rollover of loans.
- The European Bank Coordination Initiative (EBCI) facilitates information exchange and coordination and includes home and host country authorities and banks.
- For program countries, the EBCI involves country-related bank coordination under the leadership of the IMF and the EC—with support from other IFIs.
- Four country coordination rounds have taken place so far (Serbia, Romania, Hungary, and Bosnia and Herzegovina) with foreign banks signing commitment letters to support their subsidiaries and, in some cases, committing to forward looking recapitalization based on agreed stress tests.
- Under a “Joint IFI action plan”, the EBRD, EIB, and World Bank Group are directly lending to commercial banks to maintain exposure in the CESE region.
- Coordination efforts are scheduled to be extended to more countries, with a focus on specific commitments.

### Insurance sector and pensions
- The insurance sector has been affected by falling asset markets but has not experienced liquidity pressures or major adverse changes in policyholder behavior.
- Some insurers were exposed to Icelandic banks and asset-backed securities; the failure of Lehman had an unexpected impact on guarantees attached to certain products.
- Main crisis impact has been falling asset values—especially corporate bonds—as equity investment is low, averaging 4.3 percent at the end of 2008.
- Many life policies have guarantees, but the guaranteed return is relatively low; annuities business is low due to limited development of private pensions.
- Insurers have not suffered liquidity pressures, and lapses remain low, although new business has been falling in life insurance.
- Authorities made state support available to insurers as they had to banks, but neither capital nor guarantees had been needed.
- Insurance Supervision Act requirements related to accounting recognition of investment losses were relaxed somewhat, mostly on a temporary basis; authorities are monitoring unrecognized losses for permanent impairment and stepping up monitoring of complex new products.

### Private pensions and Zukunftsvorsorge
- Falls in asset values have spurred interest in reform of pension funds (Pensionskassen) and the Zukunftsvorsorge product.
- Previous IMF reports, including the 2008 FSAP Update, had raised concerns over the high (40 percent) minimum equity investment requirement coupled with a generous guarantee.
- Total amounts invested are still relatively low, but these are longer-term (up to 40 year) policies and over one million have been sold since 2003, with total premiums now around €700 million per year; aggregate values are set to rise significantly over the medium term.
- Authorities are discussing reforms with Pensionskassen, insurance companies and others.

### Regulatory initiatives and supervisory response
- Regulatory reform will be taken forward mainly through the EU process; many changes respond to the 2008 FSAP Update.
- Most crisis lessons for regulation, including for bank capital and liquidity requirements, will be addressed through Austria’s participation in EU reforms.
- Authorities have responded to Austria-specific crisis experience, including prevalence of foreign currency lending.
- FSAP Update recommendations on regulatory reform and related issues have been addressed in many cases.
- Cooperation between the ANB and the FMA in banking supervision has been intensified; on-site inspection and off-site monitoring increased, staff resources augmented, and cooperation with foreign regulators stepped up, including through supervisory colleges.
- Gaps in the FMA’s powers, for example its ability to levy significant fines, should be filled; close cross-border supervisory cooperation will be essential.

### Staff appraisal — macroeconomic and fiscal outlook
- The economic downturn in Austria is expected to shrink the economy by 4 percent in 2009—the highest rate of decline in the post-war period—with a recovery starting in 2010.
- Exports and investment were affected first in late 2008; more recently private consumption has been impacted as well.
- Inflation is projected to remain low in 2009, with a slight increase in 2010.
- The risks to the outlook are balanced but uncertainties are large.
- Fiscal stimulus measures were timely but neither temporary nor optimally targeted; tax cuts for middle-income earners are likely to have lower multipliers than public investment or more targeted payments.
- The measures in the package—except those supporting short-term labor arrangements—are largely permanent.
- The stimulus, large automatic stabilizers, and financial sector support will weaken public finances significantly:
  - Deficit is projected to remain at 5-6 percent of GDP in the next few years.
  - Debt is expected to rise by about 20 percentage points to above 80 percent of GDP.
- Further stimulus is not recommended at this stage given rapid fiscal deterioration and sharp rise in debt.
- Authorities should prepare a credible fiscal consolidation plan to be implemented once the economy stabilizes to strengthen market confidence and lower borrowing costs; debt should be brought back to a downward path to accommodate aging costs and avoid crowding out.
- Expenditure measures are preferable to tax hikes; priority consolidation areas include administration at lower levels of government, pensions, and education and health.
- Accompanying revenue measures could include increases in the fuel tax and the real estate tax.
- Recent structural fiscal reforms (federal equalization law for 2008-13; medium-term budget establishing binding ceilings to 2013) are welcome but need stronger enforcement and greater cooperation across subnational governments; the ceilings are described as unambitious.
- Authorities’ crisis response was timely and comprehensive: ANB and FMA cooperated to address liquidity shortages; Parliament enacted a large banking support package including fresh capital and guarantees; a blanket deposit guarantee was introduced; supervision and cooperation with foreign regulators were stepped up.
- Slow pace of disbursements under the public support program has been a concern; contingency planning should support quick and effective interventions.
- The ANB’s use of stress tests is welcomed; recent tests indicate capital ratios of all systemic banks would remain above minimum regulatory requirements under a range of shocks.
- Because of uncertainty over recession impacts on non-performing loans, ratios well above regulatory minimums will be needed to support private investors’ confidence; tests should be repeated as outlook changes and used to discuss possible stronger capital buffers or further public sector participation.
- The FMA should continue to monitor major insurers and develop further stress tests.
- Government initiatives to consider reforms to the private pension system (including the “Zukunftvorsorge”) are worthwhile.

*Source: _cr09295 - 33.      Banks recogniz*

### 51.      It is proposed that the next Article IV consultation be conducted on the standard

### _cr09295 - 51.      It is proposed that the next Article IV consultation be conducted on the standard

### Consultation scheduling
- It is proposed that the next Article IV consultation be conducted on the standard 12-month cycle.

### Key macroeconomic indicators (Table 1: Austria: Basic Data, 2005-10)
- Total area: 83,850 square kilometers
- Total population (2008): 8.3 million
- GDP per capita (2008): US$ 44,600 (€ 33,800)
- GDP (percentage changes at constant prices): 2005: 2.5; 2006: 3.5; 2007: 3.5; 2008: 2.0; 2009: -4.0; 2010 (Proj.): -0.3
- Total domestic demand (percentage changes): 2005: 1.9; 2006: 2.3; 2007: 1.7; 2008: 1.1; 2009: -2.6; 2010 (Proj.): -0.1
- Exports of goods and nonfactor services (percentage changes): 2005: 7.4; 2006: 7.5; 2007: 9.4; 2008: 0.8; 2009: -10.3; 2010 (Proj.): 0.5
- Imports of goods and nonfactor services (percentage changes): 2005: 6.4; 2006: 5.3; 2007: 7.3; 2008: -0.7; 2009: -8.8; 2010 (Proj.): 1.0
- Output gap (percent of potential GDP): 2005: -0.4; 2006: 1.2; 2007: 3.0; 2008: 3.4; 2009: -1.6; 2010 (Proj.): -2.7
- Employment (percentage changes; period averages): 2005: 0.9; 2006: 1.6; 2007: 1.9; 2008: 2.3; 2009: -1.4; 2010 (Proj.): -1.4
- Registered unemployment rate (national definition): 2005: 7.3; 2006: 6.8; 2007: 6.2; 2008: 5.8; 2009: 7.2; 2010 (Proj.): 8.3
- Standardized unemployment rate (Eurostat): 2005: 5.2; 2006: 4.8; 2007: 4.4; 2008: 3.9; 2009: 5.3; 2010 (Proj.): 6.4
- CPI inflation (period averages): 2005: 2.1; 2006: 1.7; 2007: 2.2; 2008: 3.2; 2009: 0.5; 2010 (Proj.): 1.0
- Unit labor costs (manufacturing): 2005: -0.9; 2006: -4.4; 2007: -0.6; 2008: 1.3; 2009: 3.7; 2010 (Proj.): -1.3
- General government revenue (percent of GDP, ESA95 basis): 2005: 48.4; 2006: 47.9; 2007: 48.0; 2008: 48.3; 2009: 46.1; 2010 (Proj.): 45.3
- General government expenditure (percent of GDP): 2005: 50.1; 2006: 49.7; 2007: 48.7; 2008: 48.7; 2009: 50.4; 2010 (Proj.): 50.8
- General government overall balance (percent of GDP): 2005: -1.7; 2006: -1.7; 2007: -0.7; 2008: -0.5; 2009: -4.2; 2010 (Proj.): -5.6
- Structural balance (percent of GDP): 2005: -1.6; 2006: -2.3; 2007: -1.8; 2008: -1.7; 2009: -3.5; 2010 (Proj.): -4.5
- Gross debt (end of period, percent of GDP): 2005: 63.9; 2006: 62.3; 2007: 59.5; 2008: 62.6; 2009: 70.2; 2010 (Proj.): 75.5
- Trade balance (goods, billion euros): 2005: -1.4; 2006: 0.3; 2007: 1.3; 2008: -0.2; 2009: -3.0; 2010 (Proj.): -4.0
- Current account (billions of euros): 2005: 4.9; 2006: 7.3; 2007: 8.4; 2008: 9.8; 2009: 5.8; 2010 (Proj.): 4.2
- Current account (percent of GDP): 2005: 2.0; 2006: 2.8; 2007: 3.1; 2008: 3.5; 2009: 2.1; 2010 (Proj.): 1.5
- Three-month interbank rate (period average): 2005: 2.2; 2006: 3.1; 2007: 4.3; 2008: 4.6
- 10-year government bond (period average): 2005: 3.4; 2006: 3.8; 2007: 4.3; 2008: 4.3
- Euro per US $: 2005: 0.80; 2006: 0.80; 2007: 0.73; 2008: 0.68
- Nominal effective exchange rate (2000=100): 2005: 105.3; 2006: 105.5; 2007: 107.0; 2008: 107.9

### Medium-term projections and framework (Table 2: Austria: Medium-Term Macroeconomic Framework, 2005-14)
- GDP (projections): 2009: -4.0; 2010: -0.3; 2011: 1.6; 2012: 2.0; 2013: 2.1; 2014: 2.4
- Domestic demand (percentage contribution at 2000 prices): 2009: -2.4; 2010: -0.1; 2011: 1.2; 2012: 1.6; 2013: 1.6; 2014: 1.6
- Final consumption (percent contribution): 2009: 0.0; 2010: 0.2; 2011: 0.7; 2012: 0.8; 2013: 0.9; 2014: 0.9
- Exports of goods and nonfactor services (contribution): 2009: -6.3; 2010: 0.3; 2011: 1.5; 2012: 3.3; 2013: 3.5; 2014: 3.8
- CPI inflation (percentage change): 2009: 0.5; 2010: 1.0; 2011: 0.8; 2012: 1.2; 2013: 1.5; 2014: 1.8
- Unemployment (percent): 2009: 5.3; 2010: 6.4; 2011: 6.5; 2012: 6.1; 2013: 5.7; 2014: 5.3
- Current account balance (percent of GDP): 2009: 2.1; 2010: 1.5; 2011: 1.5; 2012: 1.4; 2013: 1.2; 2014: 1.2
- General government revenue (percent of GDP): 2009: 46.1; 2010: 45.3; 2011: 45.2; 2012: 45.1; 2013: 45.2; 2014: 45.2
- General government expenditure (percent of GDP): 2009: 50.4; 2010: 50.8; 2011: 50.6; 2012: 50.6; 2013: 50.1; 2014: 49.4
- General government balance (percent of GDP): 2009: -4.2; 2010: -5.6; 2011: -5.3; 2012: -5.0; 2013: -4.2; 2014: -3.4
- Gross debt (percent of GDP): 2009: 70.2; 2010: 75.5; 2011: 79.0; 2012: 81.6; 2013: 82.9; 2014: 82.9
- Structural balance (percent of GDP): 2009: -3.5; 2010: -4.5; 2011: -4.4; 2012: -4.4; 2013: -3.8; 2014: -3.4
- Potential output (growth in percent): 2009: 0.9; 2010: 0.9; 2011: 1.0; 2012: 1.2; 2013: 1.5; 2014: 1.7
- Output gap (percent of potential output): 2009: -1.6; 2010: -2.7; 2011: -2.2; 2012: -1.4; 2013: -0.8; 2014: -0.2
- Memorandum: Gross national saving (percent of GDP): 2009: 23.2; 2010: 22.4; 2011: 22.5; 2012: 22.8; 2013: 22.8; 2014: 23.1
- Memorandum: Gross domestic investment (percent of GDP): 2009: 21.1; 2010: 20.9; 2011: 21.1; 2012: 21.4; 2013: 21.6; 2014: 21.9

### Balance of payments highlights (Table 3: Austria: Balance of Payments, 2005-14)
- Current account (percent of GDP): 2005: 2.0; 2006: 2.8; 2007: 3.1; 2008: 3.5; 2009: 2.1; 2010 (Proj.): 1.5
- Trade (percent of GDP): 2005: 3.3; 2006: 3.9; 2007: 4.9; 2008: 4.7; 2009: 3.3; 2010 (Proj.): 2.8
- Exports (percent of GDP): 2005: 53.4; 2006: 55.8; 2007: 58.8; 2008: 58.1; 2009: 54.2; 2010 (Proj.): 54.4
- Imports (percent of GDP): 2005: 50.1; 2006: 51.9; 2007: 53.9; 2008: 53.5; 2009: 50.9; 2010 (Proj.): 51.6
- Balance on factor income (percent of GDP): roughly -0.7 to -0.9 across 2005–2014 horizon
- Capital and financial accounts (percent of GDP): 2005: -0.2; 2006: -3.4; 2007: -3.5; 2008: -4.2; 2009: -2.1; 2010 (Proj.): -1.5
- FDI, net (percent of GDP): 2005: -0.1; 2006: -1.4; 2007: -1.0; 2008: -3.6; 2009: -1.5; 2010 (Proj.): -1.5
- Portfolio investment, net (percent of GDP): 2005: -4.5; 2006: 4.5; 2007: 8.5; 2008: 9.1; 2009: 6.5; 2010 (Proj.): 4.5
- Reserve assets (percent of GDP): small values around 0.2 to -0.7 in 2005–08; 2009–14: 0.0

### General government accounts (Table 4: Austria: General Government Accounts, 2005-14)
- Revenue (percent of GDP): 2005: 48.4; 2006: 47.9; 2007: 48.0; 2008: 48.3; 2009: 46.1; 2010 (Proj.): 45.3
- Expenditure (percent of GDP): 2005: 50.1; 2006: 49.7; 2007: 48.7; 2008: 48.7; 2009: 50.4; 2010 (Proj.): 50.8
- Overall balance (ESA 95 basis, percent of GDP): 2005: -1.7; 2006: -1.7; 2007: -0.7; 2008: -0.5; 2009: -4.2; 2010 (Proj.): -5.6
  - Federal government balance (percent of GDP): 2009: -2.0; 2010 (Proj.): -2.8
  - Other levels (percent of GDP): 2009: -2.3; 2010 (Proj.): -2.8
- Structural balance (ESA 95 basis, percent of GDP): 2005: -1.6; 2006: -2.3; 2007: -1.8; 2008: -1.7; 2009: -3.5; 2010 (Proj.): -4.5
- Fiscal impulse (1/ Negative of the change in the structural balance): 2005: 0.0; 2006: 0.7; 2007: -0.5; 2008: -0.1; 2009: 1.8; 2010 (Proj.): 1.1
- Public debt (percent of GDP): 2005: 63.9; 2006: 62.3; 2007: 59.5; 2008: 62.6; 2009: 70.2; 2010 (Proj.): 75.5
- Memorandum: Overall fiscal balance, EDP definition (percent of GDP): 2005: -1.6; 2006: -1.6; 2007: -0.5; 2008: -0.4; 2009: -4.2; 2010 (Proj.): -5.5

### Financial soundness indicators — banking sector (Table 5: Austria: Financial Soundness Indicators for the Banking Sector, 2005-09)
- Capital adequacy:
  - Regulatory capital to risk-weighted assets (Austrian owned banks): 2005: 11.8; 2006: 11.8; 2007: 12.7; 2008: 12.9
  - Regulatory Tier I capital to risk-weighted assets: 2005: 8.2; 2006: 8.0; 2007: 8.8; 2008: 9.3
  - Capital to assets (total banking system): 2005: 4.8; 2006: 5.2; 2007: 6.5; 2008: 6.3; 2009Q1: 6.3
- Asset composition (sectoral distribution of bank credit to total gross bank credits):
  - Nonbank financial institutions: 2005: 3.6; 2006: 3.7; 2007: 3.3; 2008: 3.2; 2009Q1: 3.2
  - Nonfinancial corporations: 2005: 20.4; 2006: 19.7; 2007: 18.4; 2008: 16.6; 2009Q1: 16.6
  - Households: 2005: 20.1; 2006: 18.9; 2007: 17.7; 2008: 15.4; 2009Q1: 15.3
    - Housing loans (as percent of total claims on households): 2005: 10.1; 2006: 10.4; 2007: 9.6; 2008: 8.6; 2009Q1: 8.6
    - Personal loans: 2005: 10.0; 2006: 8.5; 2007: 8.1; 2008: 6.8; 2009Q1: 6.8
  - Domestic and non-domestic banks share of credits: 2005: 37.6; 2006: 39.1; 2007: 40.9; 2008: 46.1; 2009Q1: 46.1
- Geographical distribution of loans to total loans:
  - Domestic: 2005: 70.6; 2006: 68.6; 2007: 65.7; 2008: 67.5; 2009Q1: 67.1
  - Cross-border: 2005: 29.4; 2006: 31.4; 2007: 34.3; 2008: 32.5; 2009Q1: 32.9
- Asset quality:
  - Nonperforming loans to total gross loans: 2005: 2.6; 2006: 2.1; 2007: 2.2; 2008: 2.0; 2009Q1: 2.2
  - Loan loss provisions (as % of loans to non-banks): 2005: 3.1; 2006: 2.9; 2007: 2.4; 2008: 2.2; 2009Q1: 2.4
  - Loan-loss provisions to nonperforming loans: 2005: 71.5; 2006: 75.3; 2007: 76.4; 2008: 64.0; 2009Q1: 63.0
  - Nonperforming loans net of provisions to Tier 1 capital: 2005: 15.1; 2006: 9.6; 2007: 6.0; 2008: 8.8; 2009Q1: 9.7
- Foreign currency exposure:
  - Total foreign currency-denominated loans to total loans: 2005: 25.9; 2006: 24.8; 2007: 23.6; 2008: 25.9; 2009Q1: 24.6
  - Foreign currency-denominated loans to residents to total claims on residents: 2005: 20.1; 2006: 18.7; 2007: 16.2; 2008: 18.0; 2009Q1: 17.7
- Large exposures to capital: 2005: 89.7; 2006: 77.5; 2007: 56.4; 2008: 67.8; 2009Q1: 65.1
- Profitability and income:
  - Return on assets: 2005: 0.6; 2006: 0.7; 2007: 0.8; 2008: 0.1
  - Return on equity: 2005: 14.8; 2006: 16.9; 2007: 17.0; 2008: 2.6
  - Net interest margin: 2005: 1.1; 2006: 1.0; 2007: 1.0; 2008: 0.9; 2009Q1: 0.9
  - Gross income as a percentage of average assets: 2005: 2.3; 2006: 2.2; 2007: 2.1; 2008: 2.0; 2009Q1: 1.6
- Liquidity and leverage:
  - Liquid assets to total assets: 2005: 27.4; 2006: 27.6; 2007: 26.8; 2008: 26.8; 2009Q1: 26.3
  - Liquid assets to short-term liabilities: 2005: 68.0; 2006: 68.6; 2007: 67.2; 2008: 67.8; 2009Q1: 71.2
  - Deposits as a percentage of assets: 2005: 65.3; 2006: 63.8; 2007: 62.6; 2008: 63.4; 2009Q1: 63.3
  - Loans as a percentage of deposits: 2005: 112.9; 2006: 115.8; 2007: 116.3; 2008: 117.7; 2009Q1: 117.5
- Memorandum items (EUR billions):
  - Regulatory capital: 2005: 51.8; 2006: 59.5; 2007: 63.1; 2008: 87.8; 2009Q1: 88.1
  - Regulatory Tier 1 capital: 2005: 35.0; 2006: 41.8; 2007: 47.1; 2008: 66.9; 2009Q1: 67.6
  - Risk-weighted assets: 2005: 353.4; 2006: 393.3; 2007: 362.3; 2008: 454.8; 2009Q1: 448.6
  - Total assets: 2005: 725.8; 2006: 797.8; 2007: 899.5; 2008: 1,069.1; 2009Q1: 1,069.5
  - Total loans: 2005: 535.4; 2006: 589.4; 2007: 654.9; 2008: 797.5; 2009Q1: 794.9
  - Total deposits: 2005: 474.2; 2006: 509.2; 2007: 563.2; 2008: 677.5; 2009Q1: 676.6
  - Net interest income: 2005: 7.1; 2006: 7.2; 2007: 7.4; 2008: 8.2; 2009Q1: 2.2
  - Noninterest income: 2005: 8.6; 2006: 9.4; 2007: 10.1; 2008: 12.3; 2009Q1: 2.2
  - Pre-tax operating profit: 2005: 5.6; 2006: 5.8; 2007: 6.7; 2008: 9.1; 2009Q1: 1.7
  - After-tax profit: 2005: 3.7; 2006: 4.0; 2007: 4.8; 2008: 1.9; 2009Q1: 2.7

### Major banks’ ratings changes (Table 6: Austria: Major Banks' Ratings Changes, 2008-09)
- Erste:
  - 10/16/2008 Outlook S&P: Negative (from Stable)
  - 12/11/2008 Bank Financial Strength Moody's: C (review)
  - 12/11/2008 Senior Unsecured Debt Moody's: Aa3 (review)
  - 4/16/2009 Individual Rating Fitch: C B/C downgrade
  - 4/1/2009 Bank Financial Strength Moody's: C- C downgrade
- Raiffeisen:
  - 11/25/2008 Outlook S&P: Negative (from Stable)
  - 4/1/2009 Issuer Rating Moody's: A1 (from Aa2) downgrade
  - 4/1/2009 Bank Financial Strength Moody's: D+ (from C) downgrade
- Volksbanken:
  - 11/17/2008 Bank Financial Strength Moody's: C- C downgrade
- UniCredit Bank Austria:
  - 3/18/2009 Outlook S&P: Stable (from Stable)
  - 3/18/2009 LT Local and Foreign Issuer Credit S&P: A (from A+) downgrade
  - 4/16/2009 Individual Rating Fitch: C/D (from B/C) downgrade
  - 4/27/2009 Senior Unsecured Debt Moody's: A1 (from Aa2) downgrade
  - 4/27/2009 Bank Financial Strength Moody's: D+ (from C+) downgrade

### Annex 1 — Western banks’ exposures to Eastern Europe: BIS data interpretation
- BIS locational banking statistics indicate a decline in Western banks’ exposures to Eastern Europe:
  - Exposure decline of US$57 billion in 2008Q4 (exchange-rate adjusted)
  - Exposure decline of US$40 billion in 2009Q1 (exchange-rate adjusted)
  - Prior increase of US$25 billion in 2008Q3
- Decline concentrated in five emerging market countries: Russia, Turkey, Poland, Ukraine, and the Czech Republic.
- Consolidated international banking statistics (exchange-rate adjusted to euros at end-period exchange rates) show largest declines in Western banks' consolidated claims vis-à-vis: Poland, Russia, the Czech Republic, Ukraine, Latvia, and Turkey.
- Noted exceptions: Swedish, Spanish, and French banks appear to have maintained or increased their Eastern European exposures between end-September 2008 and end-March 2009.
- Possible interpretations listed in the source:
  - Western banks scaled back more risky exposures (example: Ukraine) while trying to maintain positions in markets with long-term strategic interests.
  - Portfolio rebalancing may have been motivated by the need to reduce concentration of exposures (examples: German banks vis-à-vis Russia; Austrian and Belgian banks vis-à-vis the Czech Republic; Italian banks vis-à-vis Poland).
  - Considerations included feasibility of scaling back exposures without imposing excessive pressure on local economies or causing reputational damage (e.g., reducing lending to unaffiliated entities rather than affiliates).

*Source: IMF staff report content (excerpt), tables and annex as provided in the supplied text.*

### Annex 2. Regulatory Reform Priorities in Austria

### Annex 2. Regulatory Reform Priorities in Austria

### Institutional framework and responsibilities
- Financial regulation is undertaken by the FMA, an integrated regulator created in 2002.
- Since January 1, 2008, responsibilities for onsite inspection and offsite analysis of banks that were formerly shared between the FMA and the ANB have been allocated to the ANB but the FMA remains the decision-taking authority for banks and is jointly responsible for international cooperation.
- The ANB will be a member of the new European Systemic Risk Board.

### Crisis lessons and planned EU-driven reforms
- Crisis lessons relating to weaknesses in prudential regulation will be addressed in Austria through its implementation of changes in EU legislation such as the Capital Requirements Directive.
- For insurance, the FMA’s approach will be transformed from 2011 by the Solvency II directive, which will introduce market consistent approaches to asset and liability valuation.

### FMA responses and supervisory actions taken
- The FMA has addressed certain features of Austrian crisis experience, including:
  - The high level of foreign currency lending in Austria:
    - Such loans have not been prohibited; instead, the FMA issued a recommendation in October 2008 on bank practices, which has contributed to the ending of new foreign currency loans to Austrian households.
    - In June, the FMA announced an approach that will result in banks reducing outstanding lending year by year in line with targets agreed with the regulators.
    - However, most of the intermediaries involved in arranging such loans will remain unregulated.
  - Weaknesses in the conduct of investment business, particularly sales practices in respect of property funds and investment-linked vehicles for the repayment of bank loans (“Tilgungsträger”):
    - Enforcement action has been taken, which has contributed to a sharp reduction in the number of licensed companies.

### Identified gaps in FMA powers and recent changes
- Material gaps in the FMA’s powers highlighted by the crisis include:
  - Banks have not been required to include certain off-balance sheet vehicles and conduits in the calculation of prudential ratios.
  - Gaps in the FMA’s investigative powers.
  - Limited powers of sanction due to the low ceiling on administrative penalties (fines): €75,000 in cases of market manipulation.
  - Under official secrets legislation, the FMA is unable to make public its administrative decisions and supervisory measures other than in the most exceptional cases.
- One further significant gap was recently filled when Parliament removed limits on FMA’s powers to set capital requirements for individual firms above the minimum generally applicable level set out in law.

### Policy implications and priorities (implied by actions and reforms)
- Implement EU directives (Capital Requirements Directive; Solvency II from 2011) to strengthen prudential regulation and insurance valuation practices.
- Strengthen FMA enforcement tools and investigatory powers, including reconsideration of administrative penalty ceilings (noted: €75,000 ceiling for market manipulation).
- Address regulatory treatment of off-balance sheet vehicles and conduits in prudential ratio calculations.
- Enhance transparency where official secrets legislation limits publication of supervisory measures.
- Monitor and manage foreign currency lending exposures and intermediaries involved in arranging such loans, noting that many intermediaries remain unregulated.
- Continue enforcement to improve conduct of investment business and reduce misconduct in sales practices (evidenced by reduction in licensed companies).

*Source: _cr09295 - Annex 2. Regulatory Reform Priorities in Austria*

### 1.      This statement provides information that has become available since the Staff Report

### _cr09295 - 1.      This statement provides information that has become available since the Staff Report

### Update since Staff Report
- This statement provides information that has become available since the Staff Report was circulated to the Executive Board on August 5, 2009. The information does not alter the thrust of the staff appraisal.
- Statement by Johann Prader, Alternate Executive Director for Austria, September 9, 2009.

### Macroeconomic performance and outlook
- Real GDP:
  - Declined in Q2 2009 by 0.4 percent quarter-on-quarter and by 4.4 percent year-on-year.
  - Private consumption increased by 0.4 percent quarter-on-quarter in Q2 2009.
- Near-term outlook:
  - Based on a more positive outlook for Austria’s main trading partners, expected economic growth in 2010 to be slightly positive (about ¼ percentage point).
  - Internal central bank update points towards GDP growth of around ¼ percent in both Q3 and Q4 2009.
  - Expected GDP growth rate for 2009 in the range of -3.5 percent to -3.8 percent (compared with central bank forecast of -4.2 percent in June and IMF forecast of -4.0 percent).
  - Most likely recovery shape: U-shaped; risks of double-dip recession described as limited and mainly related to:
    - Worsening external environment possibly triggered by phasing out temporary fiscal stimulus.
    - Lagged and stronger than expected impact of labor market slack reducing private consumption.
- Labor market and activity:
  - Unemployment has been rising in 2009, employment declining, especially in the export sector.
  - Rise in number of unemployed seems to have stabilized since February 2009.
  - Industrial production rose by 0.6 percent in June (seasonally adjusted, month-on-month).
  - Export indicator (road freight data until July) signals goods exports rebounding month-to-month from May 2009 onwards.
  - Subsidized short-term work schemes and active labor-market policies noted as very effective.

### Other developments and financial markets
- Inflation:
  - Headline inflation is negative in July (0.4 percent both month-on-month and year-on-year).
  - Core inflation in Austria remains positive.
- Sovereign and bank market indicators:
  - Spreads on government bonds fell from a peak of 130 basis points in February to 45 basis points at end-August.
  - CDS spreads dropped from 260 basis points in mid-February to 80 in mid-August.
  - Austrian stock prices: ATX up by about 20 percent since end-June; Austrian stock exchange gained almost 50 percent since January 2009.
- Banking sector support and performance:
  - Authorities negotiated a capital infusion into an additional bank worth around €1 billion (€0.6 billion in participation capital, €0.4 billion in asset guarantees), in addition to the €6.5 billion spent on participation capital and asset guarantees in various banks as reported in the staff report.
  - Large Austrian banks reported profits for the first half of 2009, despite higher provisioning for non-performing loans.

### Fiscal policy
- 2008 outcome and 2009 measures:
  - General government deficit for 2008 was 0.4 percent of GDP.
  - 2009 budget reflects the biggest stimulus package ever; automatic stabilizers are set to work fully.
  - Authorities note staff assessment of low efficiency of some measures for short-term stimulus; emphasize also trust in implementation and infrastructure spending (some of which is not recorded as public investment due to institutional setup).
- Medium-term stance and plans:
  - Returning to fiscal stability is key.
  - 2010 budget includes a further fiscal stimulus of around ½ percent of GDP; fiscal consolidation not immediate but to be addressed as recovery takes hold.
  - Planned that fiscal deficit will return to below 3 percent in 2012.

### Financial sector assessment and policies
- Exposure and resilience:
  - Austrian banks have high exposure to Eastern Europe (CESE) via close trade and financial links; this is a specific risk for Austria.
  - No housing boom-bust cycle; solid deposit base; EU-focus of CESE exposure; comparatively large Austrian stabilization package helped cope with volatility.
  - Austrian banks remained long-term investors in CESE and active in the European Bank Coordination Initiative, reaffirming willingness to maintain exposure and provide capital.
- Supervisory priorities and contingency planning:
  - Authorities remain mindful of region’s vulnerabilities; FX lending remains a top priority concern.
  - Emphasis on maintaining adequate capitalization levels and monitoring non-performing loans in Austria and CESE and their impact on capital ratios.
  - Regular stress tests will be conducted to benchmark reality against stress-test scenarios and provide early warning signals for contingency planning.
  - Markets reacted positively to stress tests discussed with Fund staff and published by the authorities in early July.

*Statement by Johann Prader, Alternate Executive Director for Austria, September 9, 2009.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09295.pdf_