OREANDA-NEWS. Heta creditors' rejection of an offer from the Austrian authorities prolongs uncertainty over the bad bank's resolution and the solvency of the State of Carinthia, but Austria's general government debt figures already fully capture the associated liabilities, Fitch Ratings says.

The offer made by Carinthia's Karntner Ausgleichszahlungs-Fonds (KAF) to creditors of HETA, the wind-down unit of Hypo Alpe-Adria-Bank (HAA), expired on Friday 11 March. The largest creditors, including Commerzbank, Pacific Investment Management and Dexia's German unit rejected the proposal made by KAF on January 20 to buy back 75% of the face value of the bad bank's senior debt and 30% of the face value of its subordinated debt. This would have implied a EUR3.2bn haircut on the EUR11.1bn of HETA bonds guaranteed by the State of Carinthia.

HETA's liabilities, both principal and interest, are under moratorium until 31 May 2016, after which the Financial Market Authority (FMA) will propose a resolution plan, which could involve the use of a bail-in tool. A lengthy legal dispute may follow as higher haircuts may be imposed on HETA's outstanding liabilities and creditors would likely claim compensation for their loss from Carinthia under the guarantee. The state's EUR2.4bn budget cannot cover this sum.

We assume that the federal government will not bail-out the State of Carinthia. Austrian Finance Minister, Hans Joerg Schelling, reiterated this last Monday, although Carinthia could get Treasury funds to support its day-to-day operations if necessary, Bloomberg reported. The absence of a legal insolvency framework for sub-sovereigns in Austria creates further uncertainty over the potential federal support mechanism.

While federal government intervention on HETA's guaranteed liabilities cannot be ruled out, we do not believe support would impact gross general government debt (GGGD) as the bad bank's liabilities are already recorded on the public balance sheet. As a sub-national entity, Carinthia's public finances are already consolidated into the general government figures.

On the upside, a partial write-down of HETA's debt would lead to a decrease in recorded GGGD. In addition, the sale of the state-owned bad banks' assets, including those of KA Finanz and immigon, could also reduce GGGD gradually. Our debt forecasts however do not include these potential disposals as the timing and value of such operations is uncertain.

An independent evaluation of HETA's assets conducted by the FMA should give an updated picture of the ultimate recovery once HETA is wound down. It may cause revisions to historical general government primary deficit figures, either upward or downward depending on the difference between the assessed fair value of the bad bank's assets and liabilities.

Austria's delayed restructuring of its banking sector has weighed on its public finances and policy credibility. GGGD rose from 80.9% of GDP in 2013 to 84.3% in 2014 and to 86.4% in 2015 following the inclusion of the liabilities of the bad banks on the public balance sheet. Support to HAA is estimated to have cost EUR8.8bn over 2013-2015.

Fitch affirmed Austria's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AA+' with Stable Outlooks on 5 February.