Tag Archives: state aid

State aid: Overview of decisions and on-going in-depth investigations in the context of the financial crisis

State aid: Overview of decisions and on-going in-depth investigations in the context of the financial crisis

In 2008/2009, the Commission adopted a temporary state aid framework to enable Member States to deal with financial problems in systemic banks, as well as support access to finance for real economy firms. The crisis rules for banks, which were tightened in July and December 2010, were extended on 1 December 2011. The Temporary Framework for state aid measures to support access to finance in the current financial and economic crisis expired in December 2011.

There are many interesting aspects to the cases mentioned at this link. The most interesting in my view however is the extent of rescuing banks in the first place, as an absolute number, but also as a temporal issue. Most of the cases are from 2008 and 2009, but 2011 is also a common year and there are still many really recent (2013/2014) cases.

And the list of cases currently under investigation has many Greek cases, one Belgian case and one…German case. There are in any case very many German cases.

I think Case N512/2008 – Aid scheme for financial institutions in Germany (guarantees, recapitalisations & other) is very interesting.

State aid: Commission approves German support scheme for financial institutions

The European Commission has approved, under EC Treaty state aid rules, a German rescue package intended to stabilise financial markets by providing capital and guarantees to eligible financial institutions. Following close cooperation with the German authorities and the submission of a comprehensive set of commitments to ring-fence the application of the measures, the Commission found the scheme to be in line with its Guidance Communication on state aid to overcome the current financial crisis (see IP/08/1495). The package constitutes an adequate means to remedy a serious disturbance in the German economy while avoiding undue distortions of competition and is therefore compatible with Article 87.3.b. of the EC Treaty. In particular, the package provides for non discriminatory access, is limited in time and scope and foresees adequate safeguards to minimise distortions of competition.

Competition Commissioner Neelie Kroes said: “Thanks to extensive and fruitful cooperation between the German authorities and the Commission, the German rescue package is an efficient tool to boost market confidence, but at the same time is ring-fenced against abuses. I hope that other Member States will soon follow course.”

On 14 October 2008, the German authorities notified a package of measures intended to stabilise the financial markets and to address the malfunction of the interbank lending. After a series of exchanges and discussion with the Commission on the details of the implementation, they submitted on 27 October a list of commitments. These commitments address important issues raised by the Commission and aim at limiting distortions of competition.

The rescue package consists of:

  • A recapitalisation scheme, making available new capital to banks and insurance companies in exchange for shares, to allow them to strengthen their balance sheets against possible losses;
  • A guarantee scheme covering new issuances of short and medium term debt, in return for market-oriented remuneration, to support sound banks that are unable to access interbank funding and
  • A temporary acquisition of assets under the condition that these assets are bought back after 36 months maximum without the state making a loss.

Recapitalisation conditions

The adequacy of the recapitalisation is ensured by strict conditions such as a dividend ban and several behavioural commitments including limiting beneficiaries’ future activities and capping managers’ remunerations. The Commission also ensured that the state will receive proper remuneration for the preference shares it receives in exchange for a capital injection.

Finally, beneficiaries must maintain a high solvency ratio during the recapitalisation and submit a restructuring plan within six months of any recapitalisation.

Guarantee conditions

The conditions of the guarantee scheme are in line with the state aid rules. The Commission considers the pricing of the guarantee to be adequate especially since specific behavioural conditions apply, limiting expansion and advertising of the state support.

Asset swap

The criteria for the temporary acquisition of assets are aligned on the rules of the guarantee scheme. In particular the state will take over the assets but not bear their risk, as the assets need to be bought back after 36 months maximum for essentially the initial sales price. Moreover, a minimum premium similar to that of the guarantee and the costs for the provision of liquidity must be paid by the beneficiary.

The aid scheme consists of three elements:
A. Recapitalisation of enterprises: Participation in enterprises in the financial sector. Acquisition of shares, silent participations or other items constituting own resources up to a maximum of EUR 80 billion.

B. Asset swap (“risk assumption”): Within the limits of the joint ceiling referred to at A of a total of EUR 80 billion, temporary assumption, whether by acquisition or otherwise, of the risk associated with the risk positions acquired by financial sector enterprises before 13 October 2008, including in particular receivables, transferable securities, derivative financial instruments, rights and obligations under loan commitments or warranties and participations, in each case including the related collateral.

C. Guaranteeing of liabilities: Provision, in return for an appropriate remuneration, of a guarantee up to an amount of EUR 400 billion for financial sector enterprises’ newly issued debt instruments with a term of up to 36 months.

Well- targeted measures

The Commission found the scheme and the commitments to constitute an appropriate means to restore confidence in the creditworthiness of German financial institutions and to stimulate interbank lending. It considered that the measures are well-designed and that interventions will be limited to what is necessary to achieve the recovery of the Germany financial sector.

Finally, Germany has made the commitment to renotify the scheme after six months and to report every six months to the Commission on the implementation of the scheme. This will enable the Commission to verify that the measures are not maintained when the financial crisis is over.

The non-confidential version of the decision will be made available under the case numberN 512/2008 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Now, I don’t know enough of banking issues and these kinds of legal issues, but does it really say that the German state will buy risky assets from distressed banks temporarily to help relieve stress or risk on the balance sheet (the asset swap)? So could this mean, that some German bank with large exposures to Greece/Spain/Portugal swapped those assets to the state, thereby getting rid of large risks to its balance sheet? Could it be that that this same bank than also could apply for recapitalization funds? I can’t answer that, but it seems to me that German banks have gotten a very good deal here, given that they were supposedly heavily involved in the ‘Eurozone periphery.’ And what to think about the fact that this scheme was prolonged many times up to last year’s June? German banks really must have been in very bad shape.

Commission approves prolongation of German bank support scheme

The European Commission has authorised, under EU state aid rules, the prolongation of a German aid scheme for banks until 30 June 2013. The scheme covers guarantee, risk assumption, and recapitalisation measures in favour of banks operating in Germany. The conditions of the original scheme, as last amended on 29 June 2012, remain largely the same. New elements have been introduced with regard to the financing of the scheme and the remuneration of guarantees for debt instruments with a maturity longer than three years (step-up clause). Moreover, the prolonged scheme is reserved for banks, while other financial institutions are no longer eligible for support. The Commission found the prolongation of the measures, initially approved on 27 October 2008 (see IP/08/1589), modified on 12 December 2008 (see IP/08/1966), prolonged on 22 June 2009, 17 December 2009, 23 June 2010 (see MEX/09/0622 , MEX/09/1217 and IP/10/789), reactivated on 5 March 2012 and prolonged on 29 June 2012 (see MEX/12/0305 and MEX/12/0629) to be in line with its guidance on state aid to banks during the crisis (see IP/08/1495 , IP/08/1901 , IP/09/322 , IP/10/1636 and IP/11/1488). In particular, the prolonged measures are well targeted, proportionate and limited in time and scope. The Commission has therefore concluded that they represent an appropriate means of remedying a serious disturbance in the German economy and as such are compatible with Article 107(3)(b) of the Treaty on the Functioning of the European Union.

I find it very interesting to notice that e.g. France has not applied for/needed any such guarantee/rescue/recapitalisation scheme since 2009.

State aid: Commission authorises investment aid for ”energy from waste” gasification plant in Lahti, Finland

This appears to be good news. Sensible investment.

Link

State aid: Overview of decisions and on-going in-depth investigations in the context of the financial crisis

State aid: Overview of decisions and on-going in-depth investigations in the context of the financial crisis

This memo is good to have in the background.

State aid in the paper industry

Yesterday in the news:

After the annulment of its 2008 decision to authorise a regional investment aid granted by
Germany to Propapier for the construction of a paper mill in Eisenhüttenstadt
(Brandenburg, Germany), the European Commission has opened an investigation to
reassess the measure in light of the guidance provided by the judgment of the EU General
Court (case T-304/08). The Commission will assess whether the positive effects of the aid
on regional development outweigh the potential distortion of competition and negative
effect on trade between Member States created by the selective advantage granted to
Propapier. The opening of a formal investigation gives interested third parties a possibility
to comment on the measure. It does not prejudge the outcome of the investigation.

This brings back memories of my internship at Metsäteollisuus Ry in 2002. I wrote a report about state aid regulation and how it applied to the case of Zellstoff Stendal in former Eastern Germany, an investment by Mercer. Mercer apparently recently increased the capacity of this pulp mill.

It would be interesting to compare these two cases, on the basis of the publicly available evidence/documentation. Both rely on the frameworks for regional investment aid for jobs, but time has changed, in terms of the market situation.

EUROPA – PRESS RELEASES – Press Release – State aid: Commission temporarily approves rescue aid for SNS REAAL

http://europa.eu/rapid/press-release_IP-13-150_en.htm Not unexpected, because otherwise the whole excercise would already fall apart. But I hope this state aid will be scrutinized well, because Dutch taxpayers are already big into it from the previous state aid, which is apparently waived?

Well, whaddaya know: Dutch banking sector update – SNS Reaal

A few days ago I posted some links about the state of the Dutch banking and housing sectors, to show that contrary to what some believe, the Dutch economy isn’t that stable.

And now comes the news about the SNS Reaal banking/insurance company, which might need bailing out by the state. The article I linked to is in Dutch, but here is a rough translation:

The stock value of SNS Reaal decreases sharply. Yesterday it fell by about twelve percent, to 77 cents. After opening of the stock exchange this morning share fell sharply again. This time by nearly 8.5 percent to 71 cents. Confidence in the bank and insurance company has plummeted now a rescue operation by the government seems imminent.

De Telegraaf reported Wednesday based on anonymous sources that pressure is mounting to devise a rescue plan for the bank. The plan would be announced in the coming days. Nationalisation of SNS is a serious option,  the newspaper reported.

SNS received state aid in 2008, and is still in big trouble. It badly needed capital, causing the pressure  to intervene to increase. The bank can not repay state aid from 2008. The three other major Dutch banks, ING, ABN AMRO and Rabobank, are not allowed to take over SNS by the European Commission.

SNS is listed on the AMX since 2006. The offering price was seventeen euros.

So who says that the Eurocrisis’ problems are restricted to ‘Club Med’ countries? Well, not the writers I just linked to.

UPDATE: This graph shows on a very limited scale what is happening to the Netherlands (blue). Sorry about the smallish quality. It is the house price index since 2005, and as is quite clear, Dutch housing prices now follow a similar path to the Spanish ones (green). Finnish housing prices are indicated by the brown line.

Eurostat_Graph_tipsho30

In particular this graph is interesting compared to household indebtedned (gross debt-to-income ratio) below, for Spain, Finland and the Netherlands. It is quite well-known, that the Netherlands for many years had a banking system that was eager to loan money, and many people were encouraged to take as much mortgage as possible, given the believe (then) that housing prices will continue rising (given that the Netherlands is a small country, with little space etc. See the second link in the post on the Dutch economy). So the high level of household indebtedness together with a declining housing price is a very, very bad thing for the Dutch economy – many people will become ‘underwater’ with their mortgages; the whole negative equity drama. Of course, this is the gross debt-to-income ratio, so it does not take into account the possibility of tax deducting mortgage interests etc but still, the picture is quite clear I think.

Debt ratio

‘Commission approves amendments to Finnish scheme supporting investment in cleaner ships’

This is a positive development – state aid is a tricky thing, even when the competitiveness of the own industry is only a secondary effect of the state aid.

The European Commission has found amendments to an existing Finnish scheme supporting investment in cleaner ships to be in line with EU state aid rules. In particular, the amendments aim at giving ship-owners incentives to use less polluting fuel, ahead of the entry into force of EU standards to that effect.

Obviously, this scheme is to mediate the impact of the Sulphur Directive, and as such is to be applauded. The fact that the EC approves this scheme is an important moment in the Finnish debate on the impact of the Sulphur Directive, as the industry still insists that the Finnish state should do more to diminish the impacts.  From the original decision on this scheme (from 2011) we can see that this investment support is not quite negligible:

2.3.5. Aid intensity
14. In line with the provision of the Environmental guidelines, aid granted by virtue of the
present scheme may total a maximum of 50 per cent to large enterprises, 60 per cent to
medium-sized enterprises and 70 per cent to small enterprises of extra investments
included in the vessel project6. The maximum aid rate may be increased if the project
meets the definition of eco-innovation as defined by the above said guidelines.

Furthermore:

41. The Commission notes furthermore that the scheme is open to all operators in a nondiscriminatory
way.

In other words, it is not only open to Finnish operators, but to all operators. This is an obvious requirement, because otherwise it would be totally discriminatory. And, as said, this state aid can be used either for new vessels or upgrading old vessels. Thus, this can be seen as an important incentive to invest in new technology – whether through new ships or updated technology.

I expect, nonetheless, that the Finnish industry will not be satisfied with this. I assume that transport of the industry’s products is not done by the companies themselves but by specialized transport companies. So for the Finnish industry, this means they have to consider whether they change contracts now to companies which invest in clean ships, with the aid of this state aid scheme or whether they will pay much more for transport starting from 2015, when the Sulphur Directive enters into force.