Austria could face years of legal battles over its decision to pull support of its "bad bank" Heta, the German BdB banking federation warned on Tuesday.
And the head of the German financial sector watchdog BaFin expressed concern that Austria's decision could set a precedent.
"Argentina also thought, 'Let’s just stop paying,'", BdB chief Michael Kemmer told Bloomberg News in an interview.
"And 10 years later, Argentina is still embroiled in hedge fund lawsuits. That's what's on the cards for Austria now."
At the beginning of this month, Austria's financial regulator decided to impose a 15-month moratorium on Heta's debts, freezing debt repayments until 2016.
Heta was set up as the so-called "bad bank" of the troubled Austrian group Hypo Alpe Adria (HGAA).
HGAA, the local public bank in Carinthia, ran into trouble after embarking on a breakneck expansion into the Balkans as well as Italy and Germany via acquisitions and risky investments.
Austria nationalised the bank and split it up, with the bad debts ring-fenced in Heta Asset Resolution.
A number of German banks hold bonds issued by Heta, with the combined exposure of the German financial sector estimated by the Bundesbank at 5.5 billion euros.
A small Duesseldorf-based property lender DuesselHyp ran into difficulty as a result, and was taken over by BdB a couple of weeks ago.
The head of the BaFin watchdog, Felix Hufeld, also criticized Austria's decision.
"It would not be good if it became a habit for a core member of the European Union to take political decisions not to service their obligations," Hufeld told the business daily Handelsblatt.