VIENNA, May 4 (Reuters) - Nationalised Austrian bank Hypo Alpe Adria has failed to justify the state aid it has received and may have to pay it back if it does not improve on its latest restructuring plan, according to a letter from Europe's competition chief.
Hypo Group Alpe Adria (HGAA) has received 1.5 billion euros ($2.0 billion) in repeated injections of government aid since its 2009 nationalisation and is expecting another 700 million euros soon. It has put all its operating units up for sale.
The bank, which was pushed to the brink of insolvency by a decade of expansion into the Balkans, hopes to sell its Austrian unit this year as a first step, but has said the sale of units in Italy and southeastern Europe will be slower.
Hypo has pleaded for more time for its revamp, which it says has been slowed down by tough markets that make it impossible to fetch decent prices for the sale of units, and Austria and the EU are now in last-ditch talks over a timetable.
The letter from European Union Competition Commissioner Joaquin Almunia, published by Austria's profil magazine on Saturday and also seen by Reuters, says the bank is not meeting Austrian commitments that allowed the EU to approve the aid.
'The bank has, due to fundamental deficiencies in credit and risk management, been continuing in the last years to engage in risky business at unprofitable terms,' Almunia wrote in the March 14 letter to Austrian Finance Minister Maria Fekter.
'I have to inform you that it is not possible for me to propose to the College of Commissioners a positive decision for HGAA based on the provided plan,' he wrote, adding Hypo could have to pay back the aid.
'The only alternative to a negative decision with recovery is a true liquidation scenario, where the operational parts of the bank are sold within a short timeframe, i.e. by the end of 2013, or put into run-down if the sales are not achieved.'
The Austrian Finance Ministry and Hypo did not immediately respond to requests for comment on the letter.
Fekter has rejected the idea of creating a 'bad bank' to handle toxic bank assets along the German model, but Chancellor Werner Faymann said last week Austria was seriously considering such a move.
Hypo has said emergency asset sales could trigger a need for more state aid, and a quick shutdown could saddle taxpayers with losses of 5 to 6 billion euros. ($1 = 0.7624 euros)
(Reporting by Georgina Prodhan; editing by James Jukwey) Keywords: AUSTRIA EU/HYPO
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