In the final months of 2008, European Union authorities adopted a series of important measures to relax EU laws on state aid and public procurement in the context of the current economic downturn. The aim was to ease some of the burdens on banks and financial institutions, and on commercial and industrial companies, across Europe.
This briefing describes the key features of the reforms.
- Government guarantees of banks’ liabilities for retail deposits and some inter-bank lending will be allowed under the EU state aid rules – provided that they are limited in time and scope, are available to foreign as well as domestic banks, and do not fund aggressive business expansion by the beneficiary banks.
- Government recapitalisation of banks and financial institutions will be allowed under the EU state aid rules – provided that there are incentives for share capital to be redeemed and, in the case of high-risk-profile banks, limits on dividends and executive remuneration.
- Government rescue and recapitalisation for banks will receive “fast-track” treatment by the European Commission following notification under the state aid rules, “if necessary within 24 hours and over a weekend”.
- For companies which have got into financial difficulties since 1 July 2008, there will be automatic European Commission state aid approval for government assistance up to the end of 2010 in the form of:
- cash grants of up to 500,000 euros
- certain loan guarantees with lower risk premiums than were previously allowed
- certain subsidies of interest rates for bank loans
- certain subsidies of investment loan finance for new products for environmental protection
- certain finance for risk capital for SMEs (small and medium-sized enterprises).
In major public works programmes, the EU rules on public procurement (compulsory competitive tendering) will be relaxed: tender processes under the “restricted” procedure can be reduced from 87 days to 30 days.
Details of each of these measures are set out in the following paragraphs.
Government help for banks – state aid rules relaxed
State aid to banks – general principles
In mid-October 2008, within weeks of the collapse of Lehmans, the European Commission had already set out general principles for dealing with rescue aid to banks and other financial institutions1 under the EU’s laws on “state aid”.1
The basic EU rules require that any “state aid” – that is, financial assistance or subsidy given to a business by national or local government or any of its agencies in any EU Member State – must be notified to the European Commission. If the state aid is not notified, or if it is notified but not cleared following an assessment by the Commission, it is unlawful and must be repaid.
The legal basis for a more lenient approach in the context of the current crisis is found in the provision in the EU legislation on state aid which allows government support to be approved “to remedy a serious disturbance in the economy of a Member State” of the EU (Article 87(3)(c) of the EC Treaty). This principle had already been applied in the EU’s Guidelines of 2004 on state aid for “rescuing and restructuring” firms in difficulty.
In its October 2008 statement, the European Commission said that the key criteria which will apply to all Government aid schemes for banks affected by the credit crisis are:
- the aid must be short-term
- the Member State government granting the aid must review the situation at least every six months and report back to the European Commission
- fundamentally sound institutions – i.e. those whose financial difficulties are not inherent, but are linked to the current financial crisis – will be treated more generously than those which are fundamentally unsound.
State guarantees of banks’ liabilities
In its October 2008 statement2, the Commission said that, “in the present exceptional circumstances”, it will treat favourably state guarantees of banks’ liabilities in respect of retail deposits and certain wholesale deposits and even short and medium-term debt instruments (to facilitate inter-bank lending). However, this favourable treatment will not apply to subordinated debt or to indiscriminate guarantees of a bank’s liabilities.
The criteria on which such guarantees will be approved include:
- the government in question must not discriminate against a foreign bank; eligibility for the aid must not be based on nationality
- the aid must be limited in time
- the aid must be clearly defined and limited in scope
- the private sector must cover part of the cost
- the aid must not facilitate the beneficiary gaining unfair competitive advantage over rivals through attracting new business; aggressive expansion by the bank is not allowed
- subsequent structural adjustment will be required.
State recapitalisation of banks and other financial institutions
The European Commission issued a further Communication at the end of 2008 – published in the EU’s Official Journal on 15 January 20093 – setting out how it will apply the EU state aid rules to the recapitalisation of banks and other financial institutions by governments in the EU.
The Commission divides recapitalisation into three categories for this purpose:
- Recapitalisation at current market rates: Where at least 30 per cent of the recapitalisation comes from private investors, and the state’s capital injection is on equal terms, the European Commission is committed in principle to approving the arrangement.
- Recapitalisation at cheaper than market rates – “fundamentally sound” banks: The European Commission will generally be supportive of state recapitalisations for which the price is below current market rates in the case of banks which have a “fundamentally sound” risk profile – measured in terms of capital adequacy, limited recapitalisation size (particularly below 2 per cent of the bank’s risk weighted assets), current CTS (credit default swap) spreads of no more than average, and current ratings of A and above with a stable or positive outlook. The main condition is that the Member State government concerned must give incentives for the share capital to be redeemed, for example the government requiring a relatively high price for the recapitalisation or, if this is not possible, having call options or other redemption rights. The particular government will have to submit a report to the European Commission after six months.
- Recapitalisation at cheaper than market rates – other banks: The European Commission takes a more stringent view of recapitalisation measures for banks which are not fundamentally sound. It would expect remuneration for the guarantee to be higher than that for fundamentally sound banks and/or conditional on the bank being wound up or undergoing a “thorough and far-reaching restructuring” which might include changes in management and corporate governance; such a winding-up or comprehensive restructuring plan would have to be presented within six months of recapitalisation. In addition, the Commission would expect to see limits on dividends (including a ban on dividends at least during the restructuring period), limits on executive remuneration or bonuses, an obligation to restore and maintain an increased solvency ratio, and a timetable for redemption of the government shareholding.
Fast-track European Commission process for bank rescue schemes
Whereas generally the European Commission has two months from notification to reach an initial decision on a state aid measure – to clear it, or to launch a full investigation – in the case of rescue aid for banks and financial institutions in the current crisis, the Commission says that it will “ensure the swift adoption of decisions upon complete notification, if necessary within 24 hours and over a weekend”4.
Government assistance for corporates – state aid rules relaxed
The European Commission has also announced that it will take a more favourable view than normally under the state aid rules towards government assistance to companies and businesses which have been affected by the downturn. In a Communication which it published in December 20085, after EU governments had indicated that this should be an objective6, the Commission said that the more lenient rules would apply to:
- companies in difficulty only because of the financial crisis; specifically, in order to qualify, the beneficiary company must have entered into financial difficulty only after 1 July 2008
- aid to such companies which is purely temporary, for the expected duration of the economic downturn; specifically, to qualify, the aid must not last beyond 31 December 2010.
The legal basis was, again, the legislative provision that the Commission will allow aid “to remedy a serious disturbance in the economy of a Member State” of the EU (Article 87(3)(b) of the EC Treaty).
The European Commission says that these forms of state aid will be approved:
- Government cash subsidies up to 500,000 euros: Where the total cash subsidy to this company in the period 1 July 2008 to 31 December 2010 does not exceed 500,000 euros. (Such aid – where it is above the de minimis threshold of 200,000 euros over three years7 – will nevertheless need to be notified to the European Commission before it can be approved.) Certain aid will not benefit from this measure: export aid, aid favouring domestic over imported products, aid to firms in the fisheries sector, and aid to firms in the primary production of agricultural products.
- Loan guarantees – i.e. guarantees of banks’ loans to businesses: These will be permitted where:
- the guarantee does not exceed 90 per cent of the loan;
- the maximum loan does not exceed the beneficiary company’s total annual wage bill; and
- the annual premium for the loan is subsidised – and may be a substantially lower price than that permitted under the “safe harbour” provisions in the European Commission’s Notice on loan guarantees of June 20088: for SMEs (small and medium-sized enterprises9), 25 per cent less than under the “safe harbour” provisions, and for large companies, 15 per cent less than under those provisions.
- Subsidised interest rates: These will be allowed where the interest rate is at least equal to the central bank overnight rate, plus a premium being the difference between the average one year inter-bank rate and the average central bank overnight rate in the year to 30 June 2008, plus a credit risk premium appropriate to the risk profile of the recipient.
- State subsidies of loans for “green” products: The Commission will approve subsidised loans, with an interest rate reduction of 25 per cent for large companies and 50 per cent for SMEs (small and medium-sized enterprises10), for investment finance to launch new products which “significantly improve environmental protection”.
- State finance for risk capital for SMEs (small and medium-sized enterprises11): The Commission will approve this to a level of 2.5 million euros in any one year (previously12 the level was 1.5 million euros), and with a private participation requirement of 30 per cent (previously it was 50 per cent).
Public works projects – accelerated public procurement (competitive tender) process
A major element of many governments’ plans to promote economic recovery is the commissioning of public works projects.
On 19 December 2008, the European Commission announced13 that – “for all major public projects” to be procured in 2009 and 2010 – the public authorities putting the contract out to competitive tender may make use of the accelerated procedure which applies in cases of urgency, where they opt for the “restricted” procedure (i.e. the public authority invites suppliers to submit tenders, and the process is only open to those invited).
The effect is to reduce the total overall time for the procedure from 87 days to 30 days, as follows:
- the time limit for requests to participate reduced from 37 days to 10 days (if the contract notice was sent electronically)
- the time limit for the selected candidates to submit their tenders reduced from 40 days to 10 days
- the “standstill” period (from the award decision to conclusion of contract) remains at 10 days.