State aid — guarantees

KEY POINTS

Guarantees

• A state guarantee enables a firm to obtain better financial terms for a loan than those normally available on financial markets.
• A state guarantee may or may not constitute State aid. If it doesn’t, it is deemed not to distort competition. The notice lists conditions under which the existence of aid is ruled out. The Commission is neutral as regards public or private ownership.

Scope

• The notice applies to all economic sectors and to all guarantees where a transfer of risk takes place with the exception of export credit guarantees.
• Guarantees granted by a EU country directly — i.e. by central, regional or local authorities — and guarantees granted by businesses under the dominant influence of public authorities may constitute State aid.

Aid beneficiaries

• Aid beneficiaries are usually borrowers but can, in certain circumstances, also be lenders.
• For example:
  • if an EU country forgoes the appropriate premium (charge) intended to cover the risks of non-payment of the guarantee there is aid to the borrower;
  • if a State guarantee is given after a loan or other financial obligation has been agreed, the lender may benefit through increased security of the loan.

Conditions ruling out State aid

• If an individual guarantee or a guarantee scheme does not bring any advantage to a business, it will not constitute State aid.
• To determine whether an advantage is being granted through a guarantee or a guarantee scheme, the Commission should base its assessment of the ‘market economy guarantor principle’¹.
• An individual state guarantee will not be considered State aid if all of the following conditions are fulfilled:
  • the borrower is not in financial difficulty;
  • the extent of the guarantee can be properly measured when granted;
  • the guarantee does not cover more than 80% of the outstanding loan or other financial obligation; this limitation does not apply to guarantees covering debt securities;
  • a market-oriented price is paid for the guarantee.
• A state guarantee scheme will not be considered State aid if all of the following conditions are fulfilled:
  • the scheme is closed to borrowers in financial difficulty;
  • the extent of the guarantee can be properly measured when granted;
  • the guarantee does not cover more than 80% of the outstanding loan or other financial obligation;
  • terms of the scheme are based on a realistic assessment of the risk so that the premiums paid by the beneficiaries make it, in all probability, self-financing;
  • the adequacy of the level of the premiums is reviewed at least once a year on the basis of the effective loss rate of the scheme over an economically reasonable future time-period, and premiums adjusted accordingly if there is a risk that the scheme may no longer be self-financing;
  • premiums charged must cover the normal risks associated with granting the guarantee, the administrative costs of the scheme, and a yearly remuneration of an adequate capital even if the capital is not constituted or is only partially constituted.

Assessment and reporting

• Guarantees that are not on market terms are State aid. The Commission has to assess whether such a guarantee is compatible with the internal market under one of the State aid Guidelines. The Commission will take into account the aid intensity, the characteristics of the beneficiaries and the objectives pursued;
• EU countries must also present reports to the Commission on approved guarantee schemes.