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Austria: „El Dorado for Borrowers“

Published: January 4, 2014; 15:23 · (Vindobona)

According to Bank Austria´s management board member Dieter Hengl, Austria is an oasis for borrowers. Interest rates have reached an all-time low.

Despite the favorably low interest rates, corporate loans have declined substantially in 2013. According to the Austrian National Bank, this is mainly due to the weak economic growth.

However, also lending conditions are difficult. Above all, enterprises have to provide more securities to their lenders, Creditreform says. “Austrian creditors are still very cautious and not very generous in terms of lending”. About 57 percent of a total of 1,700 Austrian enterprises interviewed by Creditform are suffering from the lending conditions, the institution argues. Moreover, banks have shifted their lending focus more and more to the public sector n the last years. For banks, providing loans to the public sector and buying sovereign bonds is often more attractive than to providing funds to the real economy. That has to do with the fact that equity costs are much lower for loans to the public sector.

Nevertheless, corporate lending will rebound, Dieter Hengl predicts. Due to the expected economic recovery, demand for corporate loans will increase in the next six to ten months, Hengl argues. “The corporate sector becomes more and more active. In addition, the pipeline is being filled with more and more projects.”

Hengl thinks that companies should secure their finances as soon as possible. “The frame conditions were never so favorable. In general, Austria is a real “El Dorado” for borrowers. On average, interest rates in Austria are 0.8 to 1.0 percentage points lower than in Germany.” Hengl argues. However, the frame conditions will not remain as favorable as now, he adds.

Although the base rate remains flat, borrowing costs will increase again, Hengl forecasts. Depending on the solvency, interest may grow by 0.3 to 0.5 percentage points, Hengl stresses. However, there will be no credit crunch in Austria. According to Hengl, the competition in Austria would be too high.

The main reason behind the growing interest rates on corporate loans is the growing regulatory pressure on the banking sector. Above all, Basel III requirements will be highly challenging for the Austrian banking sector. Despite the low interest margins, banks have to build up equity. As a result, banks are forced to raise interest rates. Moreover, the bank tax and the new regulatory requirements by the banking union will make the situation even more difficult.

Corporate financing must be put on a broader basis in Austria, Hengl says. At the moment, 60% of the corporate financing in Europe are corporate loans. In future, the share of corporate loans will shrink below 50%, Hengl predicts. According to him, corporate bonds or promissory notes may become alternatives.