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Austrian banks could be dramatically affected by the financial crisis unraveling in Hungary. In turn, this could have serious implications for the rest of Europe.

The European Central Bank (ECB) announced Oct. 16 that it was bailing out Hungary with a 5 billion euro (US$6.7 billion) loan facility, just days after the Hungarian Finance Ministry said it was seeking consultations with the International Monetary Fund (IMF) about a possible support package. The ECB’s unprecedented move in bailing out a non-euro state underlines the crisis unraveling in Hungary and its possible impact on the rest of Central Europe. Several players will be affected, but at particular risk are the Austrian banks which invested so heavily in the region. A potential serious hiccup of the Austrian banks could mark a significant blow to Europe’s already troubled banking system.

When Central Europe turned to market-based economics after the collapse of the Soviet Union and the opening of the Iron Curtain in the early 1990s, Austria was one of the first countries to rush into the region. This was a natural development given that Austria has cultural and historical links there. The expansive Austro-Hungarian Empire dominated the countries of the Danube basin, including portions of modern day Poland and Czech Republic. Vienna-based banks therefore were much more comfortable with the region’s market risks than were many of their larger competitors in France, Switzerland and Germany.

Particularly aggressive in moving into the region were Austrian banking giants Raiffeisen, Erste Bank, Volksbank, BAWAG P.S.K. and Bank Austria Creditanstalt (which is part of Italy’s UniCredit Group Central European banking empire). From their initial move into Central Europe in 1991, these banks expanded operations and practically dominated — along with Italian banks UniCredit and Banca Intesa — the banking sectors of all Central European and Balkan states. In fact, Austrian banks as a whole made 35 percent of their profits in Central European and Balkan markets in 2005 and currently dominate claims in inter-bank lending and short-term money market instruments. Overall Austrian bank exposure to the region amounts to nearly $300 billion, with only Italy (at $212 billion) approaching the same level of exposure. No country’s banking system, however, comes close to the total bank asset exposure to Central Europe and the Balkans, with somewhere between 15 percent and 20 percent of total Austrian bank assets being located in the region.