The European Commission has examined recent rescue schemes issued by Germany and Ireland in response to the financial crisis. Both countries had established plans involving bank guarantees in favour of national banks facing serious instability. The two inquiries resulted in quite different opinions from the Commission.
Hypo Real Estate Holding AG, Germany’s second largest property lender, has a balance sheet of EUR 400 billion and is composed mainly of three German banks. By the end of September, the group faced a liquidity crisis due to its short-term refinancing strategy as the crisis of confidence among banks worsened. The rescue aid package issued by the German Federal Government together with a group of German financial institutions involves loan guarantees totalling EUR 35 billion and is intended to provide for Hypo Real Estate’s refinancing needs until April 2009. This guarantee should attract liquidity from a private consortium of German financial institutions as well as from the German Bundesbank emergency liquidity lines.
Although the Commission considered that these measures constitute aid, they can be authorised as they are in line with the EU Guidelines on State aid for rescuing and restructuring or liquidating firms in difficulty. According to these Guidelines, rescue aid must be given in the form of loans or guarantees lasting no longer than six months.
In contrast, the first draft of the Irish rescue plans raised serious concerns over discrimination against foreign-owned banks operating in Ireland, as well as the extensive scope of the aid. Discussions are ongoing.
Furthermore, the Commission has announced that it will issue guidance to permit rapid assessment both of the State aid compatibility of national recapitalisation or guarantee schemes and of individual cases in which such schemes are applied. The aim is to preserve financial stability as well as a level playing field for other banks and EU Member States.