Blackest Monday

When America sneezes, all of Europe - including Austria - catches cold

News | Dardis McNamee | October 2008

B. Frank (center) and N. Pelosi (right) in press conference after failed bailout negotiations (Photo: AP)

All week, the media were full of the negotiations going on in Washington D.C. to bailout failed and failing US financial institutions. Facing the possible implosion of the entire system, the Bush administration had proposed a fixit package financed by $700 billion in public money. It seemed to have the support — in body language if not words — of the leadership of both parties.

"Rarely had Washington responded so quickly with something so large, to a problem so dire," wrote the Associated Press – grace à Winston Churchill. "And it was, like the credit bubble itself, an illusion."

By midday Thursday, Sept. 25, Democratic and Republican lawmakers had announced a tentative deal, only to have it fall apart by evening. Senator Barack Obama told the CBS Evening News he was not sure what had gone wrong.

In Austria, all this seemed very far away. With three days to go before the parliamentary elections, Social Democrat Werner Fayman was stewing over the failure of his proposal to halve the value added tax on food, considered the most important of his pre-election give-aways, although he had succeed in securing support for higher pensions and family support payments. The canceling of university fees had also gone through, although most expected it would be put right back as part of negotiations for the new coalition.

Nobody seemed to be too worried about the financial crisis.

"So far the crisis has not affected us very much," said Eberhard Winkelbauer, Executive Vice President and Division Head of International Business Units at Raiffeisen Bank in what seemed like a reasonable position at the time. "Yes, there are losses, but nowhere critically."

Austrian banks had never invested much in the sub-prime market. ("We never went for these aggressive products.") All their attention had been focused on Eastern Europe, a decision he felt would now insulate them from the most sever effects of the crisis.

Growth rates would be lower – in Austria itself possibly flat – but they would be strongest in the newest accession countries of Bulgaria and Romania, where Austrian companies are most heavily invested, and closer neighbors like Slovakia (with its car industry) and Poland.

But worried him, even then, were the potential ripple effects. "We can’t isolate ourselves completely," he admitted. "We will be affected because other are."

Still, by Friday afternoon, talks in Washington had revived. Even Massachusetts Democrat Barney Frank, a key negotiator on the bailout package, was cheered up.

"I’m convinced that by Sunday we will have an agreement that people can understand on this bill," he told the press later that day.

On Sunday, Sept. 28, Austrians went to the polls. Turnout was higher than expected in many areas, although there were technical problems; mailed ballots were unclear and Winkelbauer was turned away at the polls because he had already signed his ballot at home, and not signed in the presence of election officials. He would have to mail it in.

Later it turned out that thousands of votes had been similarly delayed. Nobody knew how many would never make it to the post office.

By mid afternoon, early returns confirmed a radical shift to the right; disgruntled voters had chosen the most outspoken critic of the ruling coalition, Heinz Christian Strache of the Freedom Party (FPÖ), who came out with a surprising 19% of the vote. Most Austrians ate their supper in a cloud of gloom.

It wasn’t until Monday afternoon that the impact of the financial news hit home; The Dow Jones Industrial Average had fallen 777 points Monday, or 6.8%, after Congress refused to pass the bailout plan. This was its biggest single-day fall ever, nearly a hundred points more than on the first day of trading after the Sept. 11, 2001, terrorist attacks.

In Austria, the ATX index plunged 241,38 at the Vienna Stock Exchange, an even larger fall (8.05%) in percentage terms, and a total of 38,92 % down from it’s high a year ago.

By Tuesday morning, Winkelbauer was exploding with frustration.

"These guys in congress have no idea what they are doing," he fumed. "These were the Republicans… There is just so much greed."

Directors Michael Buehl and Heinrich Schaller at the Vienna Stock Exchange remained closeted in meetings all day and late into the evening. "This is a very rough situation," Buehl told the Vienna Review. "The bailout package has not been settled; until it is, there is little we can say."

It was, once again, the old nightmare come true: When America sneezed, Europe would end up getting a cold.

It was clear to everyone that more controls were needed. Which made the rejection of the bailout seem particularly irresponsible. However, at this writing, it was not yet clear exactly the no vote had prevailed; some appeared to have rejected the plan because it had not gone far enough.

Over all, House Republicans voted 2 to 1 against the plan. Approval is expected in the Senate, where the Democrats hold the majority.

In Austria, no one had any clear idea what would happen next.

"There is no way to tell how long this will last," said Buehl. "Somehow, trust and calm will have to be restored."

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