Loans, Guarantees and Credit Worthiness

contract signing

This post examines the two latest judgments of EU courts on State aid. They do not introduce any novel approaches to the interpretation of Article 107(1) TFEU but they confirm and clarify the obligations of the State in its dealings with undertakings.

  1. T-387/11, Nitrogenmuvek Vegyipari v European Commission


On 27 February 2013, the General Court rendered its judgment in the case brought by Nitrogenmuvek Vegyipari [NV] which sought annulment of Commission Decision 2011/269. In this Decision the Commission had found that two loans and related State guarantees constituted incompatible State aid. It therefore had to be recovered. The loans had been granted by the 100% State-owned Hungarian Development Bank [MFB].

This is an interesting case primarily for two reasons:

  1. The attribution of the loans to the State, and
  2. The treatment of the loans and guarantees.


Attribution to the State

NV initially argued that it had received low-interest loans because it was a client which was well-known to MFB. The General Court dismissed this argument on the grounds that a client who is well known to a bank does not automatically receive more generous terms for new loans. “The bank may have better knowledge of the firm’s weaknesses and may apply a higher interest rate”. [paragraph 31]

Then the Court had to consider whether the decisions of MFB could be attributed to the Hungarian State. The Court first acknowledged that it is “very difficult for a third party” to demonstrate that a loan such as that received by NV is granted on the instructions of public authorities. This is because of the privileged relations existing between the Hungarian State and MFB. [paragraph 60]

The Court explained that “it is not necessary to show that in the particular case the public authorities actually induced the public undertaking to take the aid measures in question on foot of a specific instruction. In the first place, because the relationship between the State and public undertakings is close, there is a real risk that State aid may be granted through the intermediary of those undertakings in a non-transparent way and in breach of the rules on State aid laid down by the Treaty”.[paragraph 59]

“For those reasons, the imputability to the State of an aid measure taken by a public undertaking may be inferred from a set of indications arising from the circumstances of the case and the context in which that measure was taken.” [paragraph 61]

The Court provided the following indications [paragraphs 61-62]:

  1. Public undertakings take into account the requirements of public authorities or directives issued by interministerial committees.
  2. Links of an institutional nature connecting public undertakings to the State.
  3. The integration of the public undertaking into the structures of public administration.
  4. The nature of its activities and the exercise of those activities on the market in normal conditions of competition with private operators.
  5. The legal status of the undertaking (in the sense of its being subject to public law or ordinary company law).
  6. The intensity of supervision exercised by public authorities over the management of the undertaking.
  7. Any other indicator showing an involvement by public authorities in the adoption of the aid measure or the unlikelihood of their not being involved.

Then in paragraphs 63-65, the General Court identified the following reasons for which the MFB loan could be attributed to the State. First, the law which set up MFB provided that it had to pursue certain public policy objectives and that its core function was to promote economic development and to contribute effectively to the implementation of public economic and development policy. Second, the activities of MFB were aimed at financing the development of undertakings by offering preferential interest rates. Third, the specific law governing the activities of MFB provided that prudential rules pertaining to commercial banks were not applied to MFB and also that its shares were not subject to trading. Fourth, MFB was subject to intense supervision by the public authorities.

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Guarantees subsumed into loans

In its Decision 2011/269, paragraphs 30 and 31, the Commission concluded that “as the loans themselves are directly imputable to the State, the additional state guarantees do not increase the financial burden borne by the State or the advantage to Nitrogénművek. It therefore appears appropriate to subsume the [two] loans and the guarantees at issue under two measures to be assessed as straightforward loans from the State (for which the cost to Nitrogénművek will be the interest on the loan plus the premium for the guarantee). Consequently, the State aid assessment will be made in the light of the Reference rate communication which applies to loans.”

In other words, the Commission applied the methodology for assessing State aid in loans rather than the Notice on Guarantees.

The General Court agreed with this approach and that the Commission was correct in finding that it was “appropriate to subsume the loans and the guarantees” to be “assessed as straightforward loans from the State”. [paragraph 72].

“In the present case, the Commission … had to establish whether a private investor would have granted loans in the situation of the Hungarian authorities, rather than establish whether a private investor would have granted loans in the situation of MFB as a result of the guarantees provided by the State. The guarantees thus cannot be regarded as supplementary guarantees, as the State does not dispose of such guarantees. The Commission was therefore correct not to apply the Notice on guarantees.” [paragraphs 74-75]

The Commission concluded that the two loans contained State aid which was the difference between the actual rate of interest (to which the guarantee premium was added) and the benchmark rate. This benchmark rate was calculated on the basis of the prevailing market rates and included a risk margin of 4% that reflected the credit rating of the company.

  1. C-246/12 P, Hellenic Shipyards v European Commission and T-391/08, Hellenic Shipyards v European Commission


On 28 February, the Court of Justice dismissed an appeal lodged by Hellenic Shipyards against the judgment of the General Court in case T-391/08, Hellenic Shipyards v European Commission, of 15 March 2013.

This is probably not the end of a very long saga which started in the early 1990s. About half of the ruling of the Court of Justice is devoted to a description of the background to the case. The ruling of the General Court of a year ago runs into more than 60 pages. The case is complex and convoluted with several Commission decisions – some of them positive and some negative – taken over the years. The present case concerns 16 different aid measures almost all of which were found to be incompatible with the internal market.

An added complexity, which in fact makes the case interesting, is that Hellenic Shipyards was involved in the construction of both civilian and military vessels.

This judgment is important for two reasons:

  1. It confirms the need for strict separation between military and civilian operations, given the fact that the former are not subject to internal market and competition rules.
  2. It confirms the approach of the Commission in assessing the credit worthiness of undertakings which receive public loans.


National security

Article 346(1)(b) TFEU provides that:

“Any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes.”

Given that this provision is an exception to the normal rules of the internal market it has to be applied narrowly and interpreted strictly. For this reason, the Court of Justice rejected the arguments of Hellenic Shipyards that

  1. Its civilian operations were inseparably linked to the military operations, that
  2. State aid to the civilian operations was necessary for the continuation of the military operations and that
  3. The State aid was non-separable.

The most innovative aspect of the Commission’s treatment of the subsidies to the military operations of the Hellenic Shipyards is in fact to be found in the judgment of the General Court, paragraphs 292-295. It appears that, in addition to other loans and guarantees, the Greek State had also paid other large amounts to the Shipyards. These amounts were classified as an “advance” for certain military contracts. However, in view of the fact that work on those contracts had not started, the Commission considered that the advances were used to cover the operations of the whole Shipyards, including civilian ship construction. It therefore re-categorise 25% of the advances as payments to civilian operations. The 25% ratio corresponded to the overall proportion of civilian to military operations. Both the General Court and the Court of Justice accepted that it was a credible method for allocating revenue between the two sides of operations of Hellenic Shipyards and that the label attached to such payments is not relevant given that no work was undertaken in return for those payments.

Credit worthiness

The Court of Justice confirmed the correctness of the analysis of the credit worthiness of Hellenic Shipyards by the General Court, but the precise explanation can be found in the judgment of the General Court of 15 March 2012. The General Court had agreed with the assessment of the Commission that the credit worthiness of Hellenic Shipyards was so low that no private investor would be willing to provide a loan to it even at a high interest rate and no bank would be willing to extend a guarantee even at a high premium [paragraphs 98-106]. The credit worthiness of Hellenic Shipyards was very low for the following reasons:

  1. The equipment of the Shipyards was old.
  2. The order book of the Shipyards was empty.
  3. A restructuring plan was not fully or properly implemented.
  4. A large proportion of the assets of the Shipyards were already mortgaged.
  5. In case of liquidation, the assets of the Shipyards had a small value.
  6. The management was at odds with the unions.

The General Court also agreed with the Commission that the poor profitability prospects of the Hellenic Shipyards could not justify the loans that had been granted to it by the Greek state allegedly on the grounds that the low interest could be counterbalanced by the increase in the price of the shares of Hellenic Shipyards.



Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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