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State aid days Brno, 16 April 2009

Latest developments in State aid policy – real economy crisis Temporary framework – Rescue and restructuring aid. State aid days Brno, 16 April 2009. Introduction. Autumn 2008 financial sector crisis  High risk aversion of banks  credit squeeze on firms active in the real economy:

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State aid days Brno, 16 April 2009

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  1. Latest developments in State aid policy – real economy crisisTemporary framework – Rescue and restructuring aid State aid days Brno, 16 April 2009

  2. Introduction • Autumn 2008 financial sector crisis  High risk aversion of banks •  credit squeeze on firms active in the real economy: • Downgrading of ratings of firms (gloomy business perspectives) • Downgrading of value of collaterals offered • Increased risk premiums •  no loans, or only substantially more expensive loans •  contraction of worldwide economic activity  Need for additional State aid measures: Temporary framework for state aid measures to support access to finance in the current financial and economic crisis (17.12.2008, amended on 25.2.2009)

  3. Objective and main principles of the Temporary Framework Objective: as part of European Economic Recovery Plan, to facilitate firms’ access to finance, to ensure continuity of activities and investments into the future Principles: • The existing aid instruments are maintained - but additional, well targeted measures are made possible • Legal basis: Article 87(3)(b) ECT: measures have to be necessary, appropriate and proportionate to remedy a serious disturbance in the economy of a Member State • Limited in time (17.12.2008 - 31.12.2010) • Scope: measures are applicable everywhere in EU, normally to all sectors, firms of all sizes, except firms in difficulty on 1 July 2008.

  4. Temporary Framework measures • Compatible limited amounts of aid • Aid in the form of guarantees • Aid in the form of subsidised interest rates • Aid for the production of green products • Other measures: • Temporary adaptation of the Risk Capital guidelines; • Simplification of the requirements to use the "escape clause" contained in the Communication on export credit.

  5. Compatible limited amount of aid • Until 31.12.2010, aid of up to € 500 000 per undertaking, for whatever purpose – including de minimis aid 2008-2010 • Not an increase of de minimis threshold => notification • Onlyapplicable to aid schemes, and transparent aid. • Certain sectoral limitations apply • Excluded: export aid or aidfavouring domestic products.

  6. Aid in the form of guarantees • Guarantees for investment and working capital loan contracts concluded before 2011 • Loan must not exceed thetotal annual wage bill of the beneficary, nor 90% of the (outstanding) loan amount. • Annual guarantee premiums can be defined for duration of ten years in line with safe harbour values offered in Amended TF (derived from SME safe harbour premiums in Guarantee communication), or on basis of a notified and approved method • For two years, reductionof the annual guarantee premium by up to: • 25% for SMEs; • 15% for large companies.

  7. Example: Guarantee measure: SMEs Medium-sized company with 250 employees, rating B and low collateralization Total annual wage bill*: € 9 mio Maximum guaranteed amount (90%): € 8,1 mio Safe-harbour (OLD) = 6,3% Premium (NEW) = 4,73% Aid element compatible under 87(3)(b):(6,3%-4,73%)* € 8,1mio = € 127.170 * Assuming average wage costs of € 3.000 (including social charges) per month per employee

  8. Aid in the form of subsidised interest rates/interest rate subsidies • Public loans for whatever purpose at an interest rate which is below the applicable reference rate, or interest rate subsidies for private loans • Maximum allowable interest rate reduction/subsidy depends on complex methodology based on the Central Bank Overnight Rates. • Measure applies to loan contracts concluded until 31.12. 2010. • Reduction applies for interest payments till 31.12. 2012. • At present, maximum annual interest rate reduction for Euroland is 1.24% annual  GGE: 2.94% .

  9. Subsidised interest rate methodology Commission accepts that loans are granted at an interest rate which is at least equal to Central Bank Overnight Rate plus Difference between average 1Y IBOR and average Central Bank Overnight Rate over the period 1/1/2007 to 30/06/2008 plus Risk Margins ranging from 60 to 1000 basis points(depending on creditworthiness and level of collateral offered)

  10. Subsidised interest rate: Example for 8.4.2009 (risk margins not taken into account) Aid element1.242% Reference Rate Base Rate 2.74% Average spread0,64% Compatible under 87(3)(b) EONIA 0.858%

  11. Soft loans for the production of green products • Interest rate reduction/subsidy for investment loans for new products which significantly improve environmental protection. • Exclusion of projects leading to large capacity increases on underperforming product markets. • Loans should be granted before 31.12.2010. • Starting point to calculate the aid is already the reduced interest rate, established on the basis of the Central bank overnight rate methodology, which can be further reduced, for up to two years, by up to: • 25% for large companies; • 50% for SMEs.

  12. Cumulation • De minimis + compatible limited amount of aid → max. € 500 000 for the period of 01.01.08 – 31.12.2010. • De minimis + rest of the measures contained in the Communication→ de minimis granted after 01.01.08 shall be deducted from the aid granted. • Temporary aid measures can be cumulated with other compatible aid, provided that the maximum aid intensities are respected.

  13. Uptake of Temporary Framework measures by Member States • A majority of MS notified, and more than two thirds of MS notified or prenotified at least one TF measure. • Favorites: « Limited amounts» and « guarantees». • Some 30 measures approved so far • Nearly all approved measures are framework schemes, to be applied by aid granting authorities at national, regional, or local level. • All approved schemes are applicable in the whole territory of the MS (except Flanders) and pluri-sectoral. • Several notifications (mainly measures limited to specific sectors or regions) were withdrawn. • So far, only 3 New MS notified TF measures.

  14. Temporary Framework – aid elements • Visible interest rate or guarantee premium reductions under the Temporary Framework are rather limited. • But today possibly invisible aid resulting from : • the continued application of pre-crisis risk premiums contained in the rating category/level of collateralisation grid of the reference rate communication • the continued application of pre-crisis SME safe harbour premiums contained in the guarantee communication • The extension of the SME safe harbour premiums to large undertakings (under TF amendment SH table) • The extension of SH to rating category CCC and below • The favorable treatment of lower levels of collateralisation in the guarantee and TF SH tables

  15. Guarantee measure: TF Safe harbour premiums

  16. Temporary Framework and rescue and restructuring rules • It is premature to assess to what extent the TF measures allow firms to avoid situations where further, and more substantive measures, under the rescue and restructuring aid rules, become necessary. • So far, we have few real economy R+R cases. • Where rescue and restructuring measures become necessary, the applicable rules will have to be respected. • Where restructuring is necessary, it may be more efficient to rely immediately on rescue and restructuring aid.

  17. Rescue and Restructuring rules I • R+R aid is only available to firms in difficulty. • R+R aid to large firms has to be notified individually. • Rescue aid • is only available in form of reversible liquidity (state guarantees or public loans), and limited to the amount necessary to keep firm in business for max. 6 months, to allow elaboration of liquidation/restructuring plan. • Rescue aid interest rate (base rate + 100 points)/guarantee premium substantially lower than under TF measures. • Obligation to reimburse loan/phase out guarantee after six months unless restructuring/liquidation plan is submitted.

  18. Rescue and Restructuring rules II Restructuring aid • is subject to implementation of restructuring plan (for large undertakings endorsed by Commission) • which restores long term viability within a reasonable timescale • and on the basis of realistic assumptions as to future operating conditions • requires (for large firms) compensatory measures (e.g. divestment of assets, reduction of market presence) • is limited to minimum necessary to enable restructuring • requires significant contribution from beneficary (-50%)

  19. Rescue and restructuring rules and global economic crisis • R+R rules are designed to address competition problems resulting from aid to single individual firms in an otherwise healthy environment • Are they applicable in a situation of global economic crisis?

  20. Thank you for your attention.

  21. Backup

  22. Guarantee measure: Large companies Until now safe-harbour rates not applicable. Temporary framework allows for application of safe-harbour rates reduced by 15%. In particular interesting for companies with low collaterization.

  23. Guarantee measure: Large companies Large company with 5.000 employees and rating BB and low collateralization Total annual wage bill*: € 180 mio Maximum guaranteed amount (90%): € 162 mio Reference rate top-up = 4,0% Premium (NEW) = 1,7% Implicit aid element compatible under 87(3)(b):(4,0%-1,7%)* € 162 mio = € 3,7 mio * Assuming average wage costs of € 3.000 (including social charges) per month per employee

  24. Subsidised interest rate: Current reference rate methodology (1) Reference Rate Based on one-year inter-bank offered rate (IBOR) plus Margins ranging from 60 to 1000 basis points(depending on creditworthiness and level of collateral offered) Base rate calculated on the basis of the 1Y IBOR recorded in September, October and November of the previous year.

  25. Subsidised interest rate: Current reference rate methodology (2)

  26. Subsidised interest rate: Current reference rate methodology (3) Update of reference rate will be made each time the average rate, calculated over the previous three months, deviates by more than 15% from the rate in force.

  27. Definition of firms in difficulty • Firms which were not in difficulty on 1 July 2008, on the basis of: • For large companies → Definition of R&R Guidelines (point 2.1); • For SMEs→ Definition of General Block Exemption Regulation(Art.1.7).

  28. Other measures • Temporary adaptation of the Risk Capital guidelines • Presumed market failure for SMEs over a period of 12 months: € 1.5 million → € 2.5 million • Level of private participation:50% → 30% Until 31.12. 2010

  29. Other measures • Communication on short-term export credit insurance • Simplification of the requirements to use the « escape clause » which allows to cover marketable risks with public support. • Currently,Member States should demonstrate the lack of private market to cover these costs by providing evidence from: - 2 large international Until → 1 international and 1 national private export-credit insurers 31.12.2010 export-credit insurer + - 1 national credit insurer → 4 national exporters state the refusal from insurers to cover specific operations

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