State aid in the form of guarantees

1) OBJECTIVE

To make as transparent as possible the policy on state aid in the form of guarantees.

2) INSTRUMENT

Commission notice on the application of Articles 87 and 88 of the EC Treaty to state aid in the form of guarantees [Official Journal C 71 of 11.03.2000].

3) SUMMARY

Background

This notice follows on from Commission Directive 80/723/EEC on the transparency of financial relations between Member States and public undertakings and is designed to make the Commission's policy on the matter as transparent as possible so as to ensure predictability of its decisions and equality of treatment.

A state guarantee enables a firm to obtain better financial terms for a loan than those normally available on financial markets. It can thus facilitate the setting up of new businesses and enable some businesses to raise money in order to pursue new activities or simply remain active instead of being eliminated or restructured. Such aid can easily result in distortions of competition

Scope

Without prejudice to the system of ownership in Member States, the notice applies to state aid granted in the form of guarantees by States or through state resources.

It covers all forms of guarantees except export credit guarantees. Any guarantees granted directly by the State, i.e. by central, regional or local authorities, and any guarantees granted by undertakings under the dominant influence of public authorities constitute state aid.

Generally speaking, aid is caught by Article 87(1) of the Treaty if it is likely to favour a borrower or a lender (defined as aid to the borrower or aid to the lender) and has the effect of distorting competition or affecting trade between Member States.

Aid beneficiaries: aid to the borrower or aid to the lender

The aid beneficiary is usually the borrower. However, in certain situations, the lender may also benefit.

The Commission considers that there is aid to the borrower in the form of a guarantee in cases where:

• the State forgoes the premium intended to cover the risks of non-payment of the guarantee;
• the legal form of the enterprise rules out bankruptcy or other insolvency procedures or provides an explicit state guarantee or coverage of losses by the State;
• the acquisition by a State of a holding in an enterprise if unlimited liability is accepted instead of the usual limited liability.

Even if the aid beneficiary is usually the borrower, it cannot be ruled out that, under certain circumstances, the lender too will benefit from the aid. This is the case, for example, where a guaranteed loan is used to pay back another, non-guaranteed loan to the same credit institution. It is then possible that the lender will also benefit from the aid in so far as the security of the loan is increased.

In the case of an individual state guarantee, the aid element must be assessed by reference to the details of the guarantee and loan (or other financial obligation). The relevant factors include the duration and amount of the guarantee and loan, the risk of default by the borrower, the price paid by the borrower for the guarantee, the nature of any security given, how and when the State could be called upon to pay a debt and the means (e.g. declaration of bankruptcy) to be used by the State to recover amounts owned by the borrower once the guarantee has been invoked.

Conditions for exemption from the competition rules

Guarantees granted individually or under a scheme are referred to as individual guarantees or public guarantee schemes. The Commission considers that any state aid fulfilling the following conditions is compatible with the competition rules and thus exempt:

Failure to comply with the above conditions does not mean that such a guarantee or guarantee scheme is automatically regarded as state aid.

Notification procedure and annual reports

Member States are required to notify the Commission in advance pursuant to Council Regulation (EC) No 659/1999.

Member States are also required to present an annual report to the Commission giving the total amount of state guarantees outstanding, the total amount paid in the preceding year by the State to borrowers and the premiums paid for state guarantees in the same year.

Last updated: 08.07.2002