VIENNAAs a Financial CentreFINANCIAL TIMES SPECIAL REPORT | Wednesday May 16 2012

Extremist threatHeinz-Christian Strache’sfar-rightFreedom partyis doing well inthe polls,echoing the1999 victoryof Jörg HaiderPage 3

Vladimir Putin, on stepping into theVienna mayor’s office, turned to hishost and said: “Mr Mayor, in my coun-try, the people staged a revolution foroffices half this size.”

As undisputed mayor of Vienna forthe past 18 years, Michael Häupl facesno such threat to his authority, butnevertheless tells the story with rel-ish. Vienna’s massive neo-Gothictown hall, he explains, was built by arising bourgeoisie to challenge Aus-tria’s established seat of power – thebaroque Hofburg palace across theRingstrasse, from which the Habsburgdynasty ruled its empire.

But Mr Häupl’s towering office alsosymbolises the power of one of Aus-tria’s most formidable politicians.Vienna’s mayor carries far greaterweight than the average urban admin-istrator, not least because Austria’spostwar historical truncation meansthe capital houses almost a quarter ofthe population.

More importantly, Mr Häupl has foryears been the chief puppet master ofthe Social Democratic party. WernerFaymann, the federal chancellor, for

example, served under him in the cityadministration. For years, little in theparty has happened without MrHäupl’s blessing. Curiously, he him-self has never shown interest in fed-eral government, preferring thebehind-the-scenes power and openprestige of the mayor’s job to anyministerial post.

Now, at 62, the talk is that themayor may be bowing out. If so, hedoes nothing to indicate it. “I knowthere’s life after politics. But there’sstill a little time left until then,” hesays.

Boosted by his charisma, the SocialDemocrats have long controlled Aus-tria’s capital city. In the 2010 election,the party secured almost 45 per centof the vote. Since then, the far-rightFreedom party has edged up to 27 per

cent from 25 per cent at the polls andthe People’s party has slipped tobarely 10 per cent from 14 per cent,but the Social Democrats remainunassailable.

Mr Häupl acknowledges the annualstudies that rank Vienna as one of theworld’s best places to live. “Quality oflife involves more than just the sumof various measurable variables. Qual-ity of life also has to do with the styleof life; just think what we have tooffer in terms of culture, sport or gas-tronomy,” says the thrice marriedmayor, who has a reputation as a bonviveur.

A stroll through Vienna’s showcasefirst district demonstrates those mer-its. The sumptuous cream-colouredpalaces of the former aristocracy rubshoulders with world-famous musicalvenues and art galleries. Despite itssize, the centre retains an intimatecharm, as Vienna’s distinctive horse-drawn carriages trot beside pedestri-ans, passing enticing cafés and well-kept parks.

Such “soft” factors have helpedVienna become a mecca for touristsand have even swayed business lead-ers considering new investments.

“Vienna has always been a favouredlocation for international companies.More than 50 per cent of all inwardinvestment into Austria comes toVienna”, says Mr Häupl. “But while

Formidable politician keen tofoster excellent quality of lifeMichael HäuplThe city’s mayor has goneunchallenged for 18 years,reports Haig Simonian

Michael Häupl: a noted bon viveur

For a while, it lookedas though Austriamight join Frank-furt and London asa leading financial centre,as its banks, bourse andinsurance and propertycompanies exploded invalue on the back of boom-ing confidence about cen-tral and eastern Europe.

A new powerhouse regionappeared in the making,boasting far higher growthrates than lacklustre west-ern Europe. With Austriancompanies at its heart, aboost to Vienna as a finan-cial centre seemed inevita-ble.

The reality has been verydifferent. Perched betweencrisis-ridden Italy and eco-nomic juggernaut Germany,Austria has weathered theeconomic crisis in the euro-zone relatively well, withgrowth, fiscal performance,unemployment and bondyields among the best inEurope.

But the turbulence of thepast few years, especiallyamong Austria’s centraland eastern Europeanneighbours, has left itsmark. Most obviously hithas been Austria’s financialsector, which once hoped toturn its rapid regionalexpansion into permanentdominance.

Instead, economic revers-als in central and easternEurope, which had longrelied on capital flows fromabroad to generate growth,have left Raiffeisen BankInternational, Erste Groupand Unicredit’s Bank Aus-tria – Austria’s three big-gest banks – in unexpecteddifficulties and clippedVienna’s wings.

Although the banks havenot retreated from anycountry, they have cur-tailed lending and writtendown investments. Strug-gling to raise capital tomeet tougher internationalrequirements, they nowlack the means to fundexpansion.

Similarly, the Viennastock exchange has beenmarginalised, as its centraland eastern Europeangrowth plans have hit thebrakes after gaining controlof three other regional mar-kets during the initialexpansion phase. Stockprices have recovered onlypartially from their steepfalls of 2008 and 2009.

In particular, the heavyweighting of Vienna’s blue-chip ATX stock indextowards the financial sector

has made the Austrian mar-ket one of the worst per-formers in the EU.

Recent domestic politicshas not helped Vienna’sstature either.

The federal coalition ofSocial Democrats and cen-tre-right People’s partyunder chancellor WernerFaymann, a Social Demo-crat, has dithered and bick-ered, postponing essentialreforms ahead of electionsnext year.

Only late last year, whenthe US rating agency Stand-ard & Poor’s cut Austria’striple-A credit rating, wasthe government compelledto act.

Within weeks, the coali-tion agreed on a package ofspending cuts and taxincreases to bring thebudget deficit into line withEU fiscal rules, calmingworries in the financialmarkets about Austria’shigh public debt.

But the government hasbeen much slower to tackleimportant economic andsocial reforms – notablysteps to pare back a gener-ous state pension systemand wasteful subsidies.

The two parties haveobstructed each other onideological grounds. Evenwhen they agree, proposalscan be held up by powerful

federal states, where muchof the real political powerlies.

Vienna’s ambitions havebeen further overshadowedby the continuing rise ofthe far-right Freedom party,which consistently scores27 per cent and more inopinion polls, thanks to itsstrident anti-European andanti-immigrant rhetoric.

Such populism has pro-pelled the party, led byHeinz-Christian Strache, tosecond place, ahead of theonce much stronger Peo-ple’s party and nudging theSocial Democrats.

Were the Freedom partyto score as well in nextyear’s elections, Austria’sinternational standingwould undoubtedly suffer –just as it did 12 years agowhen the Freedom partyentered into national gov-ernment for the first time.

The sense of inaction –indeed malaise – in nationalpolitics has spurred a rangeof responses from business.

It is no coincidence that anumber of associations orad hoc corporate groupingshave been launched, withinitiatives to polish Aus-tria’s international image.

“It shows the mood, thelevel of discontent in thebusiness community,” saysFriedrich Rödler, seniorpartner at PwC in Austria.

“People are concernedthat, while the two coalitionparties keep blocking eachother, Mr Strache becomesstronger and stronger.”

Unternehmen Österreich2025 comprises 25 top busi-ness leaders assembled byMichael Splindelegger, thePeople’s party head, to findways to make Austria more

competitive and attractiveas a business location.

Separately, 21st Austriahas been created by someleading companies with theaim of raising the country’sprofile, notably among thebig institutional Anglo-Saxon investors which areso important for Austria.Both initiatives, and thehandful of other smallerones, are also designed indi-rectly to boost Vienna as afinancial centre.

The sour mood of theelectorate and largeswathes of business standsin sharp contrast to theobjective state of affairs.

International surveys reg-ularly show the city’s qual-ity of life is one of the high-est in the world; its shopsand restaurants are full;tourism is booming; thestreets are safe and thereare few signs of outrightpoverty. Although houseprices have risen sharply,they have come up from rel-atively low levels comparedwith other European capi-tals.

Thanks to Austrian finan-cial and industrial groups’investments in central andeastern Europe, Vienna hasbecome a centre for high-value services, includinglaw firms, accounting, engi-neering and design.

The city has gained a rep-utation for its gastronomy,and few would deny itsattractions as a culturalcentre.

Its standing is furtherboosted by the presence ofnumerous UN bodies,including the InternationalAtomic Energy Agency,although they are clusteredin an enclave on the

“wrong” side of the Danube.Admittedly, while the

buildings of the showcaseFirst District are a treat forthe eyes, Vienna has beenslow in upgrading impor-tant parts of its infrastruc-ture.

Austrian Airlines, the flagcarrier now wholly ownedby Germany’s Lufthansa, isstruggling amid concernsthat reducing its dense cen-tral and eastern Europeanroute network could hurtAustrian business – andVienna in particular.

At least the long overdue

and vastly over budgetextension to the capital’sairport will be ready soon.

Opening ceremonies forsimilar showcase projectson the railways are muchfurther off.

Wien Mitte, the centrallylocated, but subsidiary, sta-tion that for many visitorsprovided a convenient, ifshabby, first impression ofthe capital, remains a build-ing site during a belatedmodernisation.

Construction will takeeven longer at the city’snew central station a little

to the south, where notonly Austria’s main raillink, but an entire new citydistrict, is due to take shapeby 2015.

By then, perhaps, econo-mies in central and easternEurope may have recoveredand regained their formerappeal for internationalinvestors, a new Austriangovernment may have gotto grips with the country’spressing structural prob-lems – and Vienna may bepoised once more to adoptthe mantle of a top regionalfinancial centre.

Regional ambitions thwartedEastern turbulencehas weakened thecity’s standing, sayHaig Simonianand Eric Frey

InsideEconomyGrowthmay haveslowedsharplythis yearbutperformance is muchbetter than elsewherePage 2

Banking Austria’s threebig banks hope theyhave turned the corner,leaving a tough yearbehind Page 2

Capital inflowsBackers of a tax dealwith Switzerland thinkas much as €20bn maybe repatriated Page 2

Interview AndreasTreichl,CEO ofErsteGroup, isa fiercecriticof thepolitical

system Page 2

Property fundsEuphoria overprospects in centraland eastern Europe hascollapsed in the wakeof the financial crisisand corporategovernance scandalsPage 4

Birgit Kuras Newco-chief of the stockexchange is chargedwith revitalising astagnant performancePage 4

PropertyBuyersfromRussiaandUkrainehavesnapped up expensiveapartments as solidinvestments Page 4

Danube blues: the sour mood within the electorate and a large section of business contrasts with surveys showing the city’s quality of life is among the highest in the world Dreamstime

Reversals in centraland easternEurope, have leftthe three big banksin unexpecteddifficulties

Continued on Page 3

www.ft.com/vienna-finance-2012 | twitter.com/ftreports

2 ★ FINANCIAL TIMES WEDNESDAY MAY 16 2012

Vienna as a Financial Centre

Tax accord with Switzerland may bring in billions

What better shot in the armfor Vienna as a financialcentre than a €12bn, €15bnor even €20bn capital injec-tion?

Those are the sums thatbackers of last month’stax deal between Austriaand Switzerland thinkmight be repatriatedbetween now and when theagreement takes effect inJanuary 2013.

The arrangement, thethird of what Switzerlandhopes will be a series of

bilateral tax accords withits neighbours, requiresSwiss banks to collect taxeson undeclared foreignaccounts and transfer theproceeds to the accountholder’s home country.

Tax dodgers will pay aone-off penalty to “regular-ise” their holdings and com-pensate for some of the pre-vious tax unpaid. There willalso be an annual levy ontheir income, with the pro-ceeds being forwarded tothe Austrian exchequer.

Such schemes, alreadynegotiated with Britain andGermany, allow Switzer-land to maintain its hal-lowed bank secrecy, despitea worldwide crackdown ontax evasion.

Meanwhile, the govern-ments concerned receivewelcome capital, while par-ticipating account holdersavoid the risk of prosecu-

tion and retain their ano-nymity.

Quite how much Austrianmoney lurks in Swiss banksis unclear. Maria Fekter,Austria’s finance minister,expects to make €1bn ayear in extra tax. The pre-cise amount, of course,depends on how much Aus-trian money is in Switzer-land, and how account hold-ers react by the January 1deadline.

Some funds may be trans-ferred to other offshorefinancial centres, such asSingapore or Panama,where there is a lower riskof detection. Others willparticipate, explaining MrsFekter’s €1bn estimate.

Others may find neitheroption attractive. For them,the new tax deal may be anincentive to come forwardand declare their Swiss hold-ings to the Austrian author-

ities and repatriate them –calculating that the finan-cial penalty from self-decla-ration may be lower thanthat suffered by leavingtheir funds in Switzerland.

Estimates of the amountsthat could be repatriated toAustria in this way varyfrom €12bn to €20bn.

“It should encouragemoney to flow back to Aus-tria,” says Claus Raidl, aformer industrialist whochairs the supervisoryboard of the AustrianNational Bank. “We hopethe money that returns willboost capital markets.”

Whether cash goes to thestock exchange, or otherforms of investment, suchas property, or even to lesstraditional asset classes,such as art, will depend onindividuals.

But the optimists believethat some of the money at

least will reach the capitalmarkets.

Andreas Treichl, chiefexecutive of Erste Group,notes: “These days, any-thing can be helpful. Thisisn’t exactly a time whenasset management and new

investments are booming.“Even if only 50 per cent

of the money held in Swit-zerland were repatriated,that would be very helpful.”

Others are more sceptical.“I’m not sure there will

be that much money return-

ing,” cautions FriedrichRödler, head of PwC in Aus-tria. “The most positiveaspect is that the deal willgenerate some additionaltax revenue.”

Mr Rödler, an Austrianand European business vet-eran, says the deal, if any-thing, helps the Swiss.Bern’s bilateral tax agree-ment with Germany hasbeen blocked by oppositionSocial Democrats andGreens.

As Chancellor AngelaMerkel’s centre-right fed-eral coalition has lost itsmajority in the Bundesrat,the upper chamber ofparliament where the pro-posal must be passed, theopposition’s blessing isessential.

Mr Rödler says: “Securinga deal with Austria wasimportant politically for theSwiss. It meant they could

show Germany’s oppositionthat, even a country with aSocial Democratic-led coali-tion, like Austria, could livewith this settlement – andat slightly lower tax ratesthan those applying in thedeal with Germany.”

Mr Rödler concedes thatthe deal – and Switzerland’ssuccess at negotiating sucharrangements – is indirectlyhelpful to Austria, as thecountry, like Switzerland,has a tradition of bank sec-recy it wants to preserve.

“It reduces the externalpressure for automaticexchanges of tax informa-tion between countries,” hesays.

With tax deals in the air,Austrian bankers are notjust looking at Switzerland.

Austria’s larger westernneighbour may be the lesserof the potential prizes,given the widespread view

that much more Austrianmoney is secreted in tinyLiechtenstein, wedged be-tween the two countries,than in Switzerland.

The principality has fordecades thrived as an off-shore financial centre. It istrying to change its rathershady image and hasalready negotiated a taxdeal with the UK that willforce British account hold-ers to come forward.

Neither Vienna norVaduz, Liechtenstein’s capi-tal, is prepared to commentofficially. But people closeto the situation say talksare under way.

Whether a deal will bestruck remains open. Thematter is complicated byless than transparent Liech-tenstein laws on founda-tions – legal structures usedby wealthy foreigners tohide beneficial ownership.

A scepticalview of city’sprospects

Austria’s best-known andmost international bankeris not just a distinguishedfigurehead for finance.

As the country’s best-paid banker, AndreasTreichl, chief executive ofErste Group, has become alightning rod at a time ofalmost universal “bankerbashing” in Europe.

But he is also atrenchant critic,unleashing periodic boltsagainst the paralysis of theAustrian political systemand the dangers that holds.

When asked aboutVienna’s standing as afinancial centre, the 59-year-old Mr Treichl, chiefexecutive since 1997, ischaracteristicallyoutspoken.

“I would not regardVienna as a financialcentre, other than thatwe’ve had a traditionalcompetence for central andeastern Europe. It’sobvious the key financialcentre for Europe isLondon”, he says.

“I’ve never had hopes oraspirations Vienna woulddevelop as a financialcentre. To build that wouldrequire a very determinedpolicy to make thingsflourish. Clearly, that’s nota target of our governmentat the moment.”

Mr Treichl acknowledgesVienna is blessed withbeautiful architecture, richculture and an excellentquality of life. But when itcomes to finance, heworries that, if anything,the city is losing ground.

“Many of the advantagesVienna offered areeroding”, he says. “It isnot so much because ofneglect or decay in Viennaitself – although politics isa problem – but the factthat Vienna’s neighboursare catching up.”

Progress among centraland eastern Europeanrivals is both physical andless tangible, he argues.

“Whether ininfrastructure or quality oflife, our neighbours havegained ground. Thenthere’s what one might callrisk perception – thingslike legal certainty orcorruption. The fact is, thedifferentiation isdiminishing and there’snow a sort ofconvergence,” he says.

Matters have not beenhelped by what Mr Treichlsees as glaring weaknessesin the city’s infrastructure– problems that sometimesapply to the country as awhole.

He compares Vienna’srelatively small and visiblystretched airport with itsslick and massive rival inMunich, although Viennais marginally the biggercity in terms of population.

“And don’t even talkabout the railways. Atleast there we are fullypart of eastern Europe,” hesays ironically.

Addressing thechallenges to Vienna’s andAustria’s competitivenesswill require political vision,courage and determination,

he believes – qualities mostobservers fear Austria’spoliticians lack. “What’srequired is very shrewdthinking, with a policythat goes up to, say, 2025.”

Mr Treichl’s worry isthat Austria’s leaders willnot rise to the challengeand, if anything, haveworsened Vienna’scompetitive edge as afinancial centre. “It’s amixture of things. And,unfortunately, the lateststeps have not been gearedto improving ourattractiveness for foreigndirect investment. Ifanything, the opposite.”

Mr Treichl points inparticular to recent taxmeasures. Discussion oncapital gains tax, forexample, has created “anegative image” for “verylimited” fiscal advantage.

He says cuttingly thatAustria has been “aleader” in imposing specialtaxes on banks. “The onething we had to offer wasstability. Recently, manychanges have shaken thatimage.”

He denies that the banksthemselves havecontributed to damagingVienna’s standing becausetheir exposure to centraland eastern Europe hasshaken investors andrattled rating agencies.

Mr Treichl says therating agencies’ focus onbanks’ central and easternEuropean problems hasbeen “greatly overdone”.

He says the governmenthas exacerbated matters byimposing special levies,meaning, “the good and

strong banks are payingfor what the weaker onesare costing thegovernment”.

Erste Group at least isemerging relatively wellfrom the crisis, he believes.First-quarter results,published last month,showed a healthy increasein profits and importantprogress on boostingcapital ratios.

Mr Treichl acknowledgesthat Hungary remains amillstone. But Romania,whose economy has alsosuffered badly, isimproving, if gradually.

While caustic aboutAustria and some itsleaders, Mr Treichl has anunderlying faith in hiscapital city.

Erste is a leadinginvestor in the massiveredevelopment of a newbusiness and residentialdistrict around what istaking shape as Vienna’snew main railway station.

Among its offices, flatsand shopping centres, theproject includes a newheadquarters for ErsteGroup.

While leaving its historicbase in one of Vienna’smost attractive centralsquares will be a wrench,the new Erste Campusshould offer the sort ofworking environment MrTreichl believes isappropriate to a bank of itssize – and for a financialcentre of Vienna’s potentialstanding.

Managers hope the worst is past

Austria’s big commercialbanks have left a toughyear behind them and facean uncertain future.

Their large investmentsin central and easternEurope (CEE) have turnedfrom a boon to a burden, asRaiffeisen Bank Interna-tional (RBI), Erste Groupand Unicredit’s Bank Aus-tria have been forced towrite down assets, mostlyin Hungary, Romania andUkraine.

They are struggling tomeet the tougher minimumcapital requirementsimposed under the Basel IIIregime by the end of June.

And at home, they sufferfrom extremely thin mar-gins and tough competitionfrom what is widely seen asan overbanked economy.

While RBI and Bank Aus-tria reported net profits for2011, Erste Group stunnedits shareholders by taking a€2.3bn charge to clean upits balance sheet, giving anannual loss of more than€700m.

RBI and Erste Group areboth trying to avoid turningto the stock market forfresh capital because ofdepressed share prices andthe desire to keep control inthe hands of core share-holders.

Even so, banks believethey may have turned thecorner and can return to apath of rising profits andcorporate expansion.

Herbert Stepic, chief exec-utive of RBI, says the out-look in the CEE region isbetter than it has been foryears.

“Current account deficitsare lower than before,labour-cost growth hasslowed down, competitive-ness has increased, taxeshave come down and debtlevels are half what theyare in the rest of the EU,with the exception of Hun-gary,” he says.

But even Hungary islikely to find a way out ofits debt crisis, despite wide-spread misgivings about thepolicies of Viktor Orbán,the nationalist prime minis-ter. “Hungary is not a newGreece. These people arechampions in problem-solving,” says Mr Stepic.

The government hasalready changed its toneand has mostly abandonedits confrontational tactics oflast year, when it forced for-eign banks to convert Swissfranc loans at an unfavour-able rate, he says. “Theyare talking to us again.”

Others are less sanguine.Willi Hemetsberger, anexperienced banker whonow heads Ithuba Capital,an investment banking bou-tique, says the dependenceof most CEE countries onforeign capital will keepgrowth down, and Austrianbanks will be forced to sellassets to beef up their bal-ance sheets.

“We shouldn’t even talkabout growth, there will beconsolidation and selectiveretreat,” he says.

So far, Austrian banks

have stayed in every mar-ket they entered during theboom years. Loan volumesin some CEE countries havedeclined, however, as thebanks have shifted thefinancing of their opera-tions from wholesale loansto domestic deposits.

Austrian regulators, in acontroversial paper,demanded such a strategy

shift last year to reducerisks, but Mr Stepic saysthat the banks did not needany prodding.

“We were doing thisbefore, and we are paying alot for it because collectingdeposits is expensive. But itis the right thing to do.” Hedenies that Austrian bankscontributed to any creditcrunch in the region.

The main burden for Aus-trian taxpayers has beensome of the second-rankbanks that needed morestate aid, partly to offsetthe costs of the Greek debthaircut.

This year, the governmenthad to put another €1.2bninto KA Finanz, the badbank of Kommunal-kredit, aonce-flourishing lender tothe public sector that wentbroke in 2008. It alsostepped in with €1bn to res-cue the bank’s former par-ent, Österreichische Volks-banken. Meanwhile, thecredit risks at Hypo GroupAlpe Adria, a strugglingregional bank that wasnationalised in 2009, areseen to be rising quicklybecause of huge losses insouth-eastern Europe.

The Volksbanken bailoutcame just after the banksold most of its CEE subsid-iaries to Russia’s Sberbankin a move that couldchange the Vienna financialindustry. Sberbank, whichpaid €550m for VolksbankInternational, plans to putin another €300m in freshcapital and use Vienna as a

base for a CEE expansion.Mr Hemetsberger, who

helped to arrange the VBIsale, is convinced that Sber-bank will eventually buysome of the CEE assets ofRBI, Erste or Bank Austria

The Russians “are enter-ing a market where theycan grow and others needto shrink”, he says. Still,Sberbank will rely on man-agement in Vienna and cre-ate new jobs in the Aus-trian finance sector, headded.

The government wants tosell its Volksbanken withina few years, possibly toBawag PSK, the formertrade union bank that isowned by Cerberus, the USequity fund.

But there is also talk inVienna that the Volks-banken sector, which con-sists of dozens of co-opera-tive banks, may dissolve orjoin the RBI or savings banksectors, which are organ-ised in a similar fashion.

Such a developmentwould reduce the number ofbanks and branches in thedomestic market and helpimprove profit margins.

BankingExposure to easternand central Europehas been a burden,writes Eric Frey

Servicesector hasgrown insignificance

C ompared with most othereurozone countries, theAustrian economy is ingood shape.Economic growth may have

slowed sharply this year from itsunusually high expansion rate of3.1 per cent in 2011. But the twomain forecasting institutes, Wifoand HIS, still expect gross domes-tic product to grow between 0.4and 0.7 per cent for the full yearand are even more optimistic for2013.

The unemployment rate was 4per cent in March, by far the low-est in the EU, and income percapita remains one of the highestin Europe.

Inflation is subdued, the currentaccount in balance and the fiscaldeficit fell to 2.6 per cent of GDPlast year, well below the 3 percent threshold set by EU rules.

While the deficit is larger thanin neighbouring Germany, thetotal public debt load, at 72 percent, is significantly smaller.

Even so, government officialsand economists are far from com-placent.

The crisis in Italy and Hungary,two of Austria’s main tradingpartners, is taking a toll on someindustrial sectors, as is the widerturbulence in the eurozone.

When Standard & Poor’s, therating agency, downgraded Aus-tria from triple-A status to thesecond-best level last winter,responding to the country’s rela-tively high debt burden and therisk posed to public finances by

the exposure to central and east-ern Europe of its big banks, thegovernment was propelled intoaction.

It passed an austerity budgetthat included spending cuts aswell as moderate tax increases oncapital gains and high income.

It also addressed at least someof the structural problems thattend to dog the Austrian econ-omy, in particular high earlyretirement rates.

The measures will cut growthby 0.5 percentage points nextyear, says Marcus Scheiblecker,an economist at Wifo, but it willgive the country more room formanoeuvre if and when the nextdownturn hits.

“The austerity budget was wellbalanced in terms of growth andincome distribution,” Mr Schei-blecker says. “The governmentdid not choose the easy way outby raising consumer taxes.”

Because of Austria’s strongexport dependence, austerity athome does less damage to growththan in larger countries that relymore on domestic demand.

Mr Scheiblecker says that hewould like to have seen a largershift from taxes on income tothose on wealth and property,which remain extremely low, andmore public money for educationand research, where Austria is alaggard.

Economic policy “is wastingsome opportunities, but nothingwe see is alarming”, he adds.

More noteworthy in an interna-tional comparison are the under-lying strengths of the economy,which became even more appar-ent in the wake of the financialcrisis.

The low unemployment ratecan be partly explained by theearly retirement age, but a moreimportant factor, particularlyamong the young, is the publicly

subsidised apprentice system thatallows young people to work andgo to school at the same time.

Shortened shifts helped indus-trial workers remain in their jobsduring the downtown of 2009, andthere are plenty of programmes

offering retraining to those wholose their jobs.

These measures may be expen-sive, adding to the high rate ofnon-wage labour costs in Austria,but they do work.

Moreover, Austria is benefitingfrom its close ties to German

industry. With the exception ofthe oil and gas group, OMV, thereare hardly any multinational cor-porations to speak of.

But thousands of highly special-ised groups act as suppliers to thebig German automotive andmachinery makers and benefitfrom their export performance.

“Austria is tied into the interna-tional business cycle, so we arebenefiting from demand fromemerging markets and the US,”says Mr Scheiblecker.

Even a downturn in central andeastern Europe has had less of animpact on Austrian growth thanit did a few years ago because“our relations with CEE are partof larger international supplychains”.

By contrast, exports to theGerman domestic consumer mar-ket, which is poised to growstrongly this year and next,remain fairly small.

The biggest risk to Austriangrowth would therefore be a sud-den downturn in the US or China,which would hit German export-ers and its local suppliers, or asharp rise in the euro exchangerate. Both prospects seemunlikely.

Furthermore, expansion intonew regions such as Turkey andother Black Sea countries mayhelp to buffer such a shock.

“We are really well diversified,”Mr Scheiblecker says.

And almost unnoticed, thecountry’s service sector hasundergone a shift over the pastfew years, away from its strongreliance on tourism to high-valueactivities such as engineering,legal and accounting services.

Starting in 2008, these “otherservices” surpassed receipts fromtourism, which had previouslybeen the main factor offsettingthe country’s trade deficit.

EconomyManufacturing is tiedto global supply chains,especially via Germany,writes Eric Frey

Steel specialist: thousands of groups supply big German automotive and machinery makers Bloomberg

The low jobless ratecan be explained byan early retirementage and a subsidisedapprenticeship system

InterviewAndreas TreichlHaig Simonianspeaks to Austria’sbest known banker

Capital inflowsThe governmenthopes a series ofdeals will boostrevenue, writesHaig Simonian ‘Even if only 50 per

cent of the moneyheld in Switzerlandwere repatriated,that would bevery helpful’

Herbert Stepic,chief executive ofRaiffeisen Bank,says prospects arebetter than theyhave been for years

AndreasTreichl, ErsteGroup CEO,says Viennais fallingbehind

FINANCIAL TIMES WEDNESDAY MAY 16 2012 ★ 3

Vienna as a Financial Centre

ContributorsHaig SimonianSwitzerland and AustriaCorrespondent

Eric FreyFT Contributor

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising, contact:Gerd Roezleron:+43 1 897 36 00 364;email:office@financialtimes.at oryour usual representative

All FT Reports areavailable online:www.ft.com/reportsFollow us on twitter atwww.twitter.com/ftreportsAll editorial content in thissupplement is producedby the FT.Our advertisers have noinfluence over articles oronline material.

there’s obviously the visibleside, there are also thoseaspects of the city that areless evident,” he adds.

He means the knowledge-based industries his admin-istration has tried to attractto counter the progressivedecline in Vienna’s once-solid industrial base.“Vienna is not just a city ofculture but also of know-ledge. We’re still not wherewe want to be, but we’regetting there.“

Mr Häupl, who read bot-any and zoology at the Uni-versity of Vienna, points tothe city’s 12 universitiesand 120,000 students amongthe almost 1.7m population.

But while such future tal-ent may eventually enrichthe city’s scientific commu-nity, his emphasis is on thepresent.

He stresses life sciences,pointing to flourishingyoung biotech and other

companies, helped some-times by City Hall. Assist-ance is usually indirect –through improved infra-structure or by makingproperty available. Butoccasionally, the city hasalso co-financed projects.

That has dug into cityfinances, but Mr Häupl isunrepentant. “We are quiteKeynesian. In the goodtimes, we pay back our bor-rowings, and in the badtimes, we invest for ourfuture.”

In 2008, the best year,Vienna’s debt fell to €800per person. Now it is morethan double that, but MrHäupl’s aim is to balancethe budget by 2016.

He admits to two continu-ing areas of weakness.Investment in crucial trans-port infrastructure projectshas been severely delayed.

The long overdue exten-sion to the airport is onlynow close to opening, yearsbehind schedule and spec-tacularly over-budget.

And on the railways, mas-sive building projects attwo stations – Wien Mitte, ahub on the city’s localtransport system, and thenew central station – have aconsiderable way to go.

When finished in 2013 and2015 respectively, the newstations will give the city amuch more acceptable facefor new arrivals than thecramped and shabby currentgateways. The new mainstation is, moreover, part ofa much bigger scheme torevive and extend an entirecity district.

“It’s possible it all starteda bit too late,” Mr Häuplconcedes. “But things taketime in Austria, just obtain-ing the planning approvaland then the financing. Isay: better late than never.”

Another marathon isbeginning with plans for athird runway at the airport,which is 20 per cent city-owned. A formal mediationprocess has been completed,but significant legal barri-ers remain, meaning con-struction is years off.

Mr Häupl points out thatthe mayor’s job has no offi-cial retirement age – and hemay not be the person tointroduce one.

Mayor is keen tofoster quality of lifeContinued from Page 1

W hen Marine LePen, leader ofthe far-rightN a t i o n a lFront, scored 18 per cent inthe first round of theFrench presidential elec-tions, it triggered a wave ofconcern in the rest ofEurope.

The parliamentary elec-tions due in Austria in theautumn of 2013 could causea much bigger shock. Forthe far-right Freedom partyis consistently scoring 27 to28 per cent in opinion polls,up from 17.5 per cent at thelast elections.

The Freedom party hasmoved to second place inthe polls ahead of the con-servative People’s party andmight surpass the SocialDemocrats as the strongestforce when votes arecounted.

Thomas Hofer, a politicalconsultant, says: “It’s neck-and-neck between the twoand, if the economy turnsdown, the number one spotfor the Freedom party is nottotally unrealistic.”

Such an outcome wouldbe a frightening throwbackto 1999, when the Freedomparty scored 26.9 per centand tied for second placeunder Jörg Haider, its lateleader.

As the charismatic MrHaider – whose praise forNazi policies made him aninternational outcast –negotiated a coalition withWolfgang Schüssel, the Peo-ple’s party leader, other EUgovernments were out-raged, froze bilateral rela-tions for six months andput Austria into isolation.

Still, there are some strik-ing differences to the situa-

tion 12 years ago. Under itscurrent leader, Heinz-Chris-tian Strache, the Freedomparty has moved even fur-ther right, abandoning anyclaim to moderation.

While an electoral tri-umph of the extremist forcewould certainly make head-lines, official reaction in theEU is far less likely nowthan it was in 2000, espe-cially as the Freedom partyis not about to enter anational government, what-ever its results at the ballotbox.

Mr Hofer explains why.Compared with then, theFreedom party has hardlyanyone on board who haseither government experi-ence or is seen as qualifiedfor top positions. Further,neither the Social Demo-crats nor the People’s partywould have anything togain from joining forceswith Mr Strache. With thePeople’s party stuck inthird place, it has no claimto the chancellorship,unlike Mr Schüssel in 2000.

So it would still be thejunior partner in a highlycontroversial arrangement.And the Social Democratsare committed not to co-operate with the far right.

“Strache is trying topresent himself as a futurechancellor, but I am notsure he even wants thatjob,” says Mr Hofer. “Heknows he does not have theteam for that challenge.And there is nobody therewho would make him chan-cellor.”

Whatever the electoratesays, the coalition betweenSocial Democrats and con-servatives that has ruledsince 2006 is bound to carryon.

Still, a far-right victory ingeneral elections would bea first in Europe and woulddo serious damage to Aus-tria’s reputation. Chancel-lor Werner Faymann, theSocial Democratic leader,and his coalition partner,People’s party leaderMichael Spindelegger, arestruggling to find a counter-strategy.

The Social Democratsseem to be holding on totheir share of the vote from2008, which was 29 per cent,while the People’s partyslipped from 26 to 23 percent.

The People’s party haschanged leaders twice sincethe last elections, is torn oneconomic and social issues

and finds itself under pres-sure from a parliamentaryinvestigation into corrup-tion charges under MrSchüssel’s government.

Mr Spindelegger, who isalso foreign minister, iswidely seen as bland andindecisive, and is strugglingto leave a mark in a loom-

ing confrontation betweenMr Faymann and Mr Stra-che. The People’s party isparticularly weak inVienna, where its share ofthe vote fell to 14 per centin the last communal elec-tions and now scores below10 per cent in opinion polls.

The conservatives mayalso face fresh competitionfrom Austrian-Canadianentrepreneur Frank Stro-nach, the founder of Magna,a car-parts group, whoplans to set up a business-oriented party. Even thePirate party, which empha-sises free access to theinternet and direct voters’participation, could lureaway young urban voters.

However, the Social Dem-ocrats are also losing someof their traditional blue-collar support to the Free-dom party. Mr Strache hasskilfully expanded his tradi-tional anti-foreigner themeto include frustration overthe eurozone crisis and thecost of bailouts, Mr Hofer

says. “Strache managed tocreate a link between thesetwo topics, telling the peo-ple that their money goes tothe evil Greeks and otherforeigners,” he says.

“That message is power-

ful and even more danger-ous for the other parties.”

The government standsbehind the decisions of theeurozone countries anddoes not waver in its sup-port for the eurozone

periphery. But Mr Fay-mann, Mr Spindelegger andMaria Fekter, the financeminister have botched theirmessage to the voters and“always remained on thedefensive”, Mr Hofer

argues. A more courageousapproach to structuralreforms, including unpopu-lar measures such as pen-sion reform, would alsohelp to lift their standing inthe polls.

Far right poses threatbut may not win powerPoliticsThe Freedom partyrides high in pollsbut is unlikelyto influencegovernment,says Eric Frey

Heinz-Christian Strache: under his leadership, the Freedom party has moved even further to the right Getty

Whatever theelectorate says, thecoalition that hasruled since 2006 isbound to carry on

4 ★ FINANCIAL TIMES WEDNESDAY MAY 16 2012

Vienna as a Financial Centre

It has been a sobering year forVienna’s stock exchange, acornerstone of the financialcommunity

After heady growth earlierthis decade on optimism aboutAustrian companies operatingin central and eastern Europe(CEE), came first the creditcrisis, then the deflation of theCEE balloon.

The market has notrecovered. The benchmark ATXindex of leading shares fell by34 per cent last year. Volumesremained depressed. “At leastthere was one initial publicoffering – better than someother markets,” says BirgitKuras, the Vienna bourse’s newco-chief executive.

The market’s capitalisationsank to €65.8bn, down from€94bn in 2010, though up onthe €55bn nadir of 2008.Although 2012 has brought asmall recovery, there is still along way to go.

One of Ms Kuras’s jobs is totry to change matters. Aveteran equity specialist – shebegan her career in 1984,creating equity research at thethen GenossenschaftlicheZentralbank, a forerunner totoday’s RZB – she has beeninvolved with shares andquoted companies virtuallyall her working life.

Her move on March 1 tothe bourse after yearsheading equity capitalmarkets at RZB’s RaiffeisenCentrobank subsidiary, waswell received, putting notjust a highly experiencedequity specialist, but also awoman, into the Viennamarket’s top management.

Gender issues may begaining ground inEuropean corporategovernance, but Ms Kuras,

55, prefers not to be asked ifbeing a woman helped her getthe job, citing her experience.

“I built up equity trading ata time when nobody else did it.In those days, share tradingtook place for just 90 minutes aday. Companies reported onlyrudimentary information andprovided no background. We

lived on insider information –it wasn’t forbidden in thosedays”, she recalls. “And therewere absolutely no IPOs.”

The market was “kissed tolife” – her expression – by JimRogers, a US investor whospecialised in looking forniches with potential.

After a seminal interview

with him in the US financialmedia in the mid-1980s,investors woke up to a marketMs Kuras describes as a“sleeping beauty”.

The rest is familiar: thecollapse of communism wassoon seen by investors as aonce-in-a-lifetime opportunityfor Austrian business.

Soon after, followedprivatisations, notably underthe Schüssel government,which broke former taboosabout state ownership.

“After about 13 years ofnothing, suddenly, we hadprivatisations, we had IPOs,you name it,” she says.

“What has been so appealingis the development of thismarket, from cottage industryto absolutely state of the art.And I followed it all.”

During that period, Ms Kuraschanged from being a simpleanalyst into an equity capitalmarkets specialist, working atthe bank involved with almostall the big deals of the period.

So why did she move to thebourse?

“What was decisive for mewas that, after so many years,this market had become mypassion. I wanted to be evenmore closely involved.”

In the bourse’s division oflabour, Michael Buhl, the otherchief executive, handlesinternational business,including the exchange’sholdings in the Budapest,Prague and Ljubljana markets.

Ms Kuras is responsible forfinancial control, humanresources and communications.But it already looks as thoughmarketing may be her mainmission.

She has three targets:persuading privately ownedcompanies to float; lobbyingpoliticians to pass market-friendly legislation; andboosting an “equity-friendly”culture among the public,especially young people.

On top of that, she isdetermined to ensurecompanies already listed feelthey are being well lookedafter. That includes persuadingthose with relatively small free

Passion for privatisations and initial public offeringsInterviewBirgit KurasThe co-chief of thestock exchange talksto Haig Simonian

‘We need to bring infresh blood to themarket through moreIPOs to get a wider

range ofcompanies’

If one sector encapsulates boththe opportunities and difficul-ties facing Vienna as a financialcentre, it is Austria’s quotedproperty funds.

In little more than a decade,companies, often previouslypart of banks, were split off andfloated, their shares surged in aboom fuelled by euphoria aboutcentral and eastern Europe andstoked by takeovers and break-neck growth, only to collapse inthe financial crisis and home-grown corporate governancescandals.

“You know the story of Her-cules and the Augean stables?That’s what it looked like here,”says Eduard Zehetner, chiefexecutive of Immofinanz, thebiggest property fund in easternEurope and fifth biggest inEurope.

Mr Zehetner, a respected com-pany doctor who was previouslychief financial officer at the RHIindustrial group, arrived in late2008 to restructure a group thatwas overextended and mired ina complex corporate governancescandal just as the credit crisispeaked.

Matters have stabilised underMr Zehetner’s prescription of

withdrawing from plans for€6.9bn of development on 180projects in eastern Europealone, securing liquidity andtackling corporate governanceissues.

But while allegations of mis-management were focused onImmofinanz – whose formerboss, Karl Petrikovics, faceslegal action – streamlining port-folios and securing finance wereshared challenges for CA Immoand Conwert, the two otherleading quoted property groups.

All three have now stabilised,cutting projects, deleveraging,focusing on raising returns andensuring cash flows.

Yet although the immediatecrisis has passed, all threeremain becalmed: share priceshave barely recovered fromtheir lows and all are still trad-ing at 50 to 60 per cent dis-counts to net asset value (NAV).

By contrast, in Germanyquoted property funds tradebetween 5 per cent below and 5per cent above NAV.

Immofinanz’s shares areworth about a quarter of theirvalue at their peak, when thegroup traded about 15 per centabove NAV, says Mr Zehetner.

Johannes Meran, Conwert’sexecutive chairman, says: “Ourshare price fell from about €17in 2008 before the collapse ofLehmann Brothers to €2.90 inJanuary 2009.

“By April 2010, it had recov-

ered to about €8.50 and eventu-ally hit €12, only to be becalmedat about €9 now.

“The most frustrating thing,”he adds, “is that, though our2011 results were well ahead ofmarket expectations, nothingreally happened to the shares.”

The Austrian groups are vic-tims of investors’ malaise withthe sector, as a result of therollercoaster ride and lingeringdoubts about corporate govern-ance, in spite of clean-up efforts.And, for big Anglo-Saxon insti-tutions in particular, marketcapitalisations have sunk so lowthe property groups are almosttoo small to stimulate interest.

The gloom comes in spite ofthe fact that the three groupsare very different.

Immofinanz, which is widelyheld, has almost half its portfo-lio in central and easternEurope, a product of the 2010merger with Immoeast, formerlya separately quoted companybut 55 per cent owned byImmofinanz. Austria accountsfor a further 40 per cent of theportfolio, while holdings in Ger-many and western Europe makeup the remaining 12 per cent.

The overwhelming bulk of theportfolio is commercial, thoughthere is a sizeable residentialchunk in Austria.

CA Immo, which is 18 per centowned by Italy’s UniCreditGroup, is also focused on officesand other commercial property.About 45 per cent of its holdingsare concentrated in Germany.Eastern Europe accounts for afurther 41 per cent, with Austriacomprising the remaining 14 percent, explains WolfhardFromwald, chief financialofficer.

Conwert is different again.Last March, Hans Peter Hasel-steiner, chief executive of lead-ing building group Strabag,bought an indirect stake fromthe previous private equity dom-inant shareholder, and is seek-ing a 25 per cent blockingminority.

The group has no central oreastern European exposure,with holdings divided roughlyequally between Germany andAustria. Moreover, the bulk ofits properties are residential,unlike its two predominantlycommercial counterparts.

“Given that residential prop-erty is believed to be more sta-bile, you’d think we would havebeen less affected,” complainsMr Meran. “But that’s just notbeen so. Investors have put usall in the same boat.”

All three groups hope that aperiod of stability and solidearnings will help them toregain investors’ confidence. Allare emphasising consolidation –not least because funding hasbecome much more difficult.

The three also hope that thecalm will help investors tounderstand better the differ-ences in the regions in whichthey operate, rather than takinga universally negative view.

Whether London and NewYork fund managers, sittinghundreds or thousands of milesaway, will be interested isanother matter. So far, thedepressed share prices suggestthe sector remains firmly out offavour.

But the Austrian bosses hopesentiment will turn eventually.“The stock exchange punishescompanies, but it also forgets,”says Mr Zehetner.

Tough timesleave mainoperatorsdiminishedProperty fundsGroups hope that aperiod of stability willrestore confidence,writes Haig Simonian

‘You know the storyof Hercules and theAugean stables?That’s what it lookedlike here’

Eduard Zehetner,Chief executive, Immofinanz

A fter years of stagna-tion, house prices inVienna took off in2008, just as the prop-erty market in many other partsof the world tumbled.

After rising by an average 20to 30 per cent in four years, therate of increase has recentlyslowed, but market participantsstill see room for solid gains inthe coming years.

Richard Buxbaum, a realestate agent at Otto Immobilien,says: “There are so manyfactors that point to furtherprice increases in Vienna – pop-ulation growth, the quality oflife, the solid financing – that Ijust cannot see any downsiderisk.”

Most of the focus has beenon Vienna’s First District, theold town centre, three squarekilometres surrounded by thegrand Ringstrasse, lined withmuseums and governmentbuildings.

There, international buyerspushed up apartment prices as

high as €25,000 per sq m, a levelthat may be common in Paris orZurich, but was unheard of inVienna.

Some of the most expensiveapartments, often penthousesbuilt on top of old buildings,were snapped up by buyers fromRussia, Ukraine and otherformer Soviet republics lookingfor solid investments and ahome in a politically stablecountry.

“But we also saw buyers fromEngland, from Arab countries,from Israel – from all over theworld,” says Michael Ehlmaier,head of EHL, a property com-pany.

“Vienna is becoming a popu-lar place as a second home forwealthy foreigners.”

There is also growing interestfrom Asian buyers, who areattracted by political stabilityand the high quality of life.

Georg Spiegelfeld, a propertyagent, believes that in the topsegments, prices are bound torise as the number of newprojects cannot keep up withdemand.

“Prices will double again inthe next few years. Whoeverbuys today for €27,000 on HoherMarkt will be glad five yearsfrom now that he did it,” saysMr Spiegelfeld, referring to oneof the most expensive addresses

on the market. He expectsprices for top luxury apartmentsto rise above €30,000 per sq msoon.

The boom in the Innere Stadthas spilled over into neighbour-ing districts that are still closeto the city centre and offer someof Vienna’s most charmingneighbourhoods. These includethe area around the Nas-chmarkt, the largest fruit andvegetable market, which hasbecome a place for gourmets,the quaint houses in the Josef-

stadt, the Eighth District, andthe old Jewish quarter in theLeopoldstadt, the SecondDistrict that is separated fromthe old town by an arm of theDanube.

There, foreigners also boughtup some prime properties,though most of the freshdemand comes from domesticbuyers.

Faced with worries about the

stability of their banks and thefuture of the euro, thousandshave put their savings into theproperty market and pushed upapartment prices, even inperipheral districts. As rentshave not kept up with prices,investors need to accept returnsof less than 4 per cent and some-times as low as 1.5 per cent,property experts say.

“For those buyers, property isa substitute for other assets,”says Mr Ehlmaier of EHL.“These apartments are not heldfor speculative reasons, but areheld for the long term, kept as afuture living place for childrenand often passed on in the fam-ily.”

As a consequence, more andmore buildings, mostly datingback to the late 19th century,are being renovated andbrought up to 21st-centurystandards.

While new construction ismostly limited to the outskirts,the renovation boom is chang-ing the face of the more centraldistricts.

Most of Vienna property isstill in apartment blocks, withone-family homes a rarity, evenin most residential districts.

While rents are freely negotia-ble in new buildings and moreexpensive apartments, oldmiddle-class flats are rent-

controlled through a complexset of laws and rules, while newones are subsidised by the state.

This system, experts say, iskeeping a tight lid on the wholerental market. “For renters,Vienna remains extremelyfavourable,” says Mr Spiegel-feld.

Calls for changes in the oftenconfusing rental laws in either astricter or more liberal directionwere thwarted by deadlockbetween the two ruling parties,the social democrats and theconservatives.

Commercial property, mean-while, has remained relativelysoft, as some of the plentifulnew office buildings on the out-skirts of Vienna are strugglingto find tenants.

A change in the taxation ofprofits from real estate transac-tions will have little effect onprices in the short run, but mayliven up the business in thecoming years.

Until now, individuals havehad to pay the full income taxrate of up to 50 per cent ongains in the first 10 years andnothing thereafter, but as ofApril 1, all profits from propertysales will be taxed at 25 percent. “We may see more turn-over, but I expect no impacton prices,” says Mr Buxbaumfrom Otto.

A popular place for wealthyforeigners to set up homeReal estateBuyers put a premiumon political stability,reports Eric Frey

Charming: the neighbourhood around the Naschmarkt, Vienna’s largest fruit and vegetable market, is popular with gourmets Alamy

Faced with worriesabout the stability oftheir banks and thefuture of the euro,thousands have putsavings into property

floats to up their proportion ofpublicly traded capital.

“We need to bring in freshblood to the market throughmore IPOs, and especiallydifferentiated ones, to get awider range of companiesquoted,” she says.

Ms Kuras is planning tospend significant amounts oftime on the road, canvassingpotential flotation candidates.

She admits many of Austria’srespected Mittelstand – thesmaller and medium-sizedfamily-owned companies – areoften fiercely proud of theirindependence and reluctant togo public because of thereporting burden, publicity andneed to maintain contact withinvestors.

She also wants to ensure anycompany considering quotationopts for Vienna, rather thanbigger neighbouring marketssuch as Zurich or Frankfurt.

The Vienna market hasmanaged to lure most of thecompanies that opted for aforeign flotation back to thehome market.

VIE_1VIE_2VIE_3VIE_4