Today, the European Commission (EC) announced its approval, under EC Treaty state aid rules, of Spain’s “scheme to support the financial sector by providing guarantees to eligible financial institutions,” and Latvia’s “support scheme to stabilize financial markets by providing guarantees to eligible banks to ensure their access to financing.” This approval is separate from last week’s decision by the EU and the IMF to provide the Latvian government over €4 billion of aid in light of the present economic crisis and its effect on the Latvian economy.

The EC found both the Spanish and the Latvian schemes to be “in line with its Guidance Communication on state aid to overcome the financial crisis.” Specifically with respect to the Spanish program, EU Competition Commissioner Neelie Kroes, stated that “[i]n the current financial crisis it is important to address the liquidity problems of banks as they can adversely affect lending in the real economy. The Spanish scheme takes into account national particularities of the banking market in Spain while ensuring the coherence necessary to maintain a level playing filed for all European banks.”

Under the Spanish scheme, the government will guarantee up to €100 billion of the ‘issuance of notes, bonds and obligations admitted to the official secondary market in Spain,” although depending on market conditions the Spanish government can increase the scheme’s budget to €200 billion. According to the scheme’s framework, only solvent banks “having a share of at least 1/1000 of the credit market, in as much as the guaranteed instruments have been issued during the past five years” will be eligible to participate by paying a ‘market-oriented fee’. Further, “[t]he guarantee is limited in time and scope, as both its global budget and individual guarantees are capped. For instance, each bank may receive guarantees linked to its historical market share and the state can limit the guarantee amount when the risk in regard to the benefitting credit institutions is deemed too high.”

The Commission’s approval of the Spanish scheme remains valid for a period of six months. After that time the Spanish government can decide to “terminate the scheme or renotify its extension to the Commission.”

With respect to the Latvian support scheme, Commissioner Kroes noted that it “demonstrates again the great strength of the Commission in this crisis: the ability to supervise Member States’ support schemes with enough flexibility to take into account national particularities, whilst ensuring coherence to maintain a level playing field for all European banks.” The Latvian government will guarantee “all liabilities with the exception of interbank deposits, subordinated liabilities and collateralized liabilities such as covered bonds which have a maximum of three years. Instruments guaranteed under this scheme may be issued within six months following the decision.” Only solvent banks will be eligible to participate in the Latvian support scheme. In addition, the measures adopted under this program will permit the Latvian government to takeover distressed financial institutions in exceptional circumstances. Last month the Commission approved the Latvian government’s bail-out of its second largest commercial bank, JSC Parex Banka.

The Commission’s approval of the Latvian scheme also remains valid for a period of six months. After that time the Latvian government can decide to “terminate the scheme or re-notify its extension to the Commission.”