Push to put Vienna on the finance map

By Yuri Bender

The Austrian coalition partners Alfred Gusenbauer and Wilhelm Molterer disagree on many points. But they make common cause when it comes to promoting the country's financial sector.

Both chancellor and vice-chancellor see a need to boost Austria's under-exploited expertise in investment management and private banking by encouraging existing operators and enticing newcomers.

"We need industry, not just tourism, as a strong pillar of our development," says Mr Molterer, who is Austria's finance minister as well as vice-chancellor and leads the Austrian People's party.

While the private banking centres of Geneva and Zurich have attracted assets by looking north, south and west to Europe and the US, Austria will be concentrating on its traditional sphere of influence in central and eastern Europe (CEE) to secure new clients.

"We are not in a unique position, but the Austrian banking sector has really not been affected by the subprime crisis, as the banks' engagement and basis for economic success is with new ventures in neighbouring countries to the east," says Mr Molterer, relaxing over a beer in Vienna's plush Imperial Hotel, an establishment frequented by the City's famous conductors and visiting classical musicians.

In the past three years, the country's banks have boosted employees by nearly 4,000 to 79,000, but few of the recruits are working in Austria. "The huge majority are in the new market," says Mr Molterer. "This is a signal of how we will develop the Austrian -economy."

The use of Vienna as a hub to access markets in the CEE region is central to the strategy of both the government and established financial groups.

"Austrian banks are already among the key players in the Czech Republic and Slovakia. We are also in Ukraine and Russia, so this policy makes a lot of sense," says Mr Molterer. "Some western countries still think Balkan states such as Serbia are living in the Middle Ages. But these regions have growth rates upwards of 6 per cent. Yes, they have risks, but without risks you will not be successful."

Tough competition for CEE hub status is expected from Prague and Budapest, and Mr Molterer understands the authorities must attract even more international operators to strengthen their hand, even if this does not please domestic competitors.

He understands the reluctance of some of the Viennese stalwarts to welcome in foreign rivals "but from a macroeconomic point of view, we have a standing invitation to new players", he says. "For economic development, the financial sector is the key."

Government discussions are currently taking place on the best way to deal with hedge funds and sovereign wealth funds. Protracted attempts to introduce capital gains tax on investments are under "intense discussion" in the financial industry.

Mr Molterer is also proposing a Europe-wide tax to curb commodities speculation, suggesting that $40bn (€26bn, £20bn) invested over the past five months has been partly responsible for food price rises that have led to riots in more than 30 countries.

A new supervisory structure employing the overseeing abilities of both the National Bank and the Financial Markets Authority has recently been introduced in Austria. New capital markets legislation to attract investors to private equity and venture capital is not far from the statute book. The recent blot on the landscape - the problems of Austria's fifth-largest bank, Bawag, bought by the private equity firm Cerberus in 2006, after its near-collapse owing to links with the futures broker Refco - is being dealt with in the courts.

"Bawag did not affect confidence in our financial sector, as it was more of a political scandal than an economic one," says Mr Molterer, about the bank that was previously 100 per cent owned by trade unions. "The question it raised was that, in principle, is a trade union a good owner of a bank? Events provided the answer for us."

Sonja Kohn, who is chairman and majority owner of the Vienna-based Bank Medici, one of Europe's oldest private banks, praises the authorities for having created a "commonsense environment. Here you are not guilty until you are found guilty, which is really not typical of what you find everywhere else."

Ms Kohn, one of the chief backers of the "Vienna: Your Investment Capital" initiative, says much work is still to be done. "Austria is currently known for its music and skiing, not for its location as a financial hub."

Her one criticism of the regulators is the difficulty for institutions such as hers in launching non-traditional instruments. "It is very hard to launch exotics, and there will be a learning curve. The regulator has not yet authorised hedge funds," says Ms Kohn.

Raiffeisen Capital Management, which hopes to boost assets under management from €40bn to €100bn ($155bn, £79bn) by 2015 by tapping clients from the neighbouring east European region, has mixed views of the initiative.

"We have quite a lot of wealth managers in Vienna already," says Mathias Bauer, chief executive of RCM, which is 100 per cent owned by Austria's co-operative banks. These enjoy captive distribution through acquisitions in the CEE region. "Our need here is more for a stronger legal environment, to be more liberal, like Luxembourg and Dublin, in order to create a financial centre for CEE.

"My advice to Mr Molterer for funds and wealth management is to try to keep the rest of the value chain here in Austria, rather than looking to other countries. The quality of asset management produced here is underestimated in the rest of Europe."