An Innovative Scheme to Support Individual Borrowers

Individuals and households are not undertakings. However, any public funding of individuals or households may constitute indirect aid to undertakings. Such aid may be exempted on the basis of Article 107(2)(a) TFEU.

Introduction

Article 107(1) TFEU applies to indirect State aid as well as to direct aid. Since all State aid has both primary effects [i.e. the benefits that go directly to the recipient of the aid] and secondary effects [i.e. the benefits that may eventually go to persons other than the direct recipient], the 2016 Commission Notice on the Notion of State Aid clarifies that secondary effects fall outside the scope of Article 107(1) as long as the aid measure does not impose such restrictions on the recipient that would pre-determine who the secondary beneficiaries may be. By contrast, if the aid measure does specify who the secondary beneficiaries may be or that the direct recipient acts as an intermediary for the flow of aid to third parties, then the latter are considered to be recipients of indirect aid that must also be assessed for its compatibility with the internal market.

In August 2022, the European Commission approved a Greek aid scheme [with number SA.100529] whose objective was to support vulnerable and less prosperous households and micro or small enterprises that could not repay their mortgages and loans.[1] Those households and the micro or small enterprises were the direct beneficiaries. However, households are not undertakings and the aid to micro or small enterprises was below the de minimis threshold. So, none of the direct beneficiaries received State aid in the meaning of Article 107(1). Nonetheless, the Commission did have to assess the scheme because there were indirect beneficiaries involved. Those were the lending banks that were liable to benefit from the improved liquidity of the borrowers.

Background

In March 2022, Greece adopted legislation to assist vulnerable borrowers. The relevant legislation did not enter into force until the Commission could approve its State aid elements.

The need for such legislation was prompted by the fact that a significant proportion of households and businesses faced difficulties in repaying their mortgages and loans. As a result, there was increased likelihood of default and loss of the property that had been pledged as collateral.

Already in 2010, Greece introduced measures to protect certain borrowers by preventing lenders from foreclosing on their loans and seizing their primary residences.

In 2020, a new Insolvency Code established a permanent personal insolvency regime to enable financially troubled households and businesses to manage loans that were in arrears.

As explained in the Commission decision, “(6) a number of procedures were introduced to facilitate out-of-court debt restructuring, to minimise court involvement and to maximise recoveries in bankruptcy procedures. In addition, foreclosure protection has been provided to a more narrowly defined category of debtors based on the income and wealth eligibility criteria through the establishment of the Sale and Leaseback mechanism (the “SLB scheme”). Under the SLB scheme, vulnerable borrowers will give up the ownership of their primary residences but will be offered a long-term contract of up to 12 years to remain in their homes as tenants, under a subsidized rental contract and with an option to buy the properties back. The primary residences will be acquired and managed by a private concessionaire, the Sales and Lease Back Organization (the “SLBO”).”

Scheme SA.100529 [the current scheme] “(7) aims to provide an interim period until the SLB scheme enters into force, which is expected to take place at the latest by November 2023. It targets individuals as well as micro- and small undertakings that are either declared bankrupt or subject to enforcement procedures with loans that are collateralized by their primary residences. Under the Scheme, eligible borrowers will be expected to make pre-determined monthly contributions to their lenders, part of which will be subsidised by State’s contributions. In turn, all enforcement or liquidation procedures will be put on hold during the interim period. The Scheme is open to all lenders that provided credit to eligible borrowers.” [It is also explained footnote 2 of the Commission decision that “the Scheme covers micro- and small undertakings only to the extent that a natural person, usually the owner of the undertaking, has a business loan associated with the undertaking that is collateralized by that person’s primary residence.”]

In other words, both the SLB scheme and the current scheme seek to prevent evictions and homelessness with the consequent deterioration of the financial condition of the affected borrowers. The SLB scheme is not yet operational because it is necessary first to complete the procedure for awarding a contract to the eventual SLB manager and to afford sufficient time to individual borrowers to decide whether to participate in the SLB scheme. The current scheme provides relief to borrowers until the SLB scheme comes into force. The estimated budget of the scheme is EUR 4.7 million.

Eligible beneficiaries are borrowers who are natural persons or micro and small businesses who have obtained a mortgage or loan secured against the property of a natural person. In addition, the annual family income must be below EUR 7,000 for single person households, increased by EUR 3,500 per additional family member and capped at EUR 21,000. Furthermore, the value of the property must be below EUR 120,000 for single borrowers, increased by EUR 15,000 per family member and capped at EUR 180,000. [There are also other eligibility criteria concerning bank deposits and tax declarations.]

In order to be able to benefit from the current scheme, borrowers must have been declared bankrupt by a court or enforcement procedures on their primary residence must have been initiated by the lender.

Upon admission of borrowers to the scheme, “(18) the collateral enforcement or liquidation procedures relating to the primary residence as well as recovery from guarantors will be suspended during the interim period.” Then, an amount, to be paid monthly, will be determined. That amount will include payments by the borrower as well as a state grant. The total monthly instalment, including both the borrower’s payment and the state grant, will be equal to 0.292% of the value of the primary residence against which the loan is secured. The total amount paid to the lender during the interim period will capped at 4.4% of the value of the primary residence. The state monthly grant will also be caped at EUR 210. Therefore, the maximum amount of the state grant will be EUR 3,150 per beneficiary for the entire duration of the scheme. At the end of the interim period, borrowers will be automatically admitted to the SLB scheme.

The SLB manager will be a private entity operating in Greece and will be appointed on the basis of an open tender process. The details of the SLB scheme have not yet been finalised. At any rate the LB scheme will be subject to a separate notification to and approval by the Commission.

Existence of State aid

In its assessment of the existence of State aid, the Commission first explained, in paragraphs 30-34 of the decision, that although there are three groups of beneficiaries, individuals are not regarded as undertakings. Therefore, the scheme covers two distinct classes of beneficiary undertakings: micro and small enterprises which are the direct aid recipients and lenders which are the indirect aid recipients.

With respect to micro and small enterprises, Greece committed to comply with the provisions of Regulation 1407/2013 [the de minimis regulation]. Therefore, no State aid would be granted to those enterprises.

The Commission focused its assessment on lenders as indirect beneficiaries of the scheme. In determining the possible existence of an advantage to lenders, the Commission had to take into account that, on the one hand, lenders would receive a regular monthly payment, while, on the other, eviction or repossession procedures would be halted.

“(34-35) The Scheme provides for the State contributions to be channelled to eligible “borrowers via lenders (financial intermediaries or banks). […] The Commission therefore observes that the Scheme may confer an indirect advantage to those financial intermediaries.”

“(36) More specifically, the Scheme would have two distinct effects on lenders during the interim period:

(a) The lender will receive monthly cash payments representing up to 4.4% of the initial value of the primary residence securing the loan (recital (21)). These will benefit the lender to the extent that it would not be in a position to collect a portion of these payments in the absence of the Scheme.

(b) The lender will not be able to recover until the end of the interim period any amount that it could possibly have obtained through enforcement or liquidation procedures in the absence of the Scheme (recital (19)). This may result in a loss for the lender, due to discounting and adverse market developments.”

Then the Commission observed that “(37) under stable market conditions, the amount of payments received by the lender under recital (36)(a) will be greater than the amounts foregone under recital (36)(b) above. However, the lender may experience net losses if real estate prices drop significantly during the interim period, reducing amounts from the delayed recovery as described in recital (36)(b).”

A comment is in order here. Even if the property market would not decline during the interim period, a lender could still prefer to proceed with re-possession of a residence for the simple reason that the prospective introduction of the SLB scheme could contain unfavourable conditions for lenders. This creates commercial uncertainty and lenders may have acted to eliminate that uncertainty by re-possessing as many residences as fast as possible. The Commission decision is silent on the effect of this uncertainty.

At any rate, the Commission went on to “(38) observe that it cannot be excluded that lenders benefit indirectly from the Scheme. The advantage is selective as it is only available to financial institutions, as opposed to other undertakings, and only lenders that hold loans secured by the primary residence of the borrower may receive these indirect benefits.”

With respect to impact on the trade between Member States, the Commission noted “(44) that intra-Union trade should be considered to be affected once a national measure reinforces the position of an undertaking as regards its competitors. It is not necessary that the beneficiary undertaking takes part itself in intra-Union trade. The circumstance that an economic sector, such as that of financial services, has been the object of a significant process of liberalisation at the level of the Union, which has accentuated competition, gives rise by its nature to a real or potential effect of aid, such as the Scheme, on trade between Member States.”

Since all of the criteria of Article 107(1) TFEU were satisfied, the Commission found the measure to constitute State aid for lenders.

Compatibility with the internal market

First, the Commission pointed out that it was necessary to identify the legal basis of the compatibility assessment.

“(43) With respect to the different groups of eligible beneficiaries, the compatibility of the indirect aid to the financial institutions will be assessed under two distinct legal bases, depending on the nature of each of the aid recipients. More specifically, with regard to individual borrowers (not constituting undertakings) as final beneficiaries, Article 107(2)(a) TFEU constitutes the compatibility basis. With regards to micro- and small enterprises, Article 107(3)(c) TFEU serves as the applicable compatibility basis. For the avoidance of doubt, the indirect aid to the financial institutions will not be assessed under Article 107(3)(b) TFEU, which is the legal basis under which the Commission has been consistently assessing any restructuring or liquidation aid to financial institutions since the beginning of the financial crisis. Taking account of the eligible loans, any disturbance caused by the possible bankruptcy of the direct beneficiaries is not of a magnitude capable of affecting the whole economy of Greece. Therefore, the Crisis Communications detailing the compatibility assessment under Article 107(3)(b) TFEU for aid to financial institutions are not applicable for any of the indirect aid.”

Article 107(2)(a) TFEU: Indirect aid to banks from support to individual borrowers

“(44) The Commission considers that the indirect aid to financial institutions flowing from support to individual borrowers can benefit from the derogation laid down in Article 107(2)(a) TFEU relating to aid having a social character.”

Article 107(2)(a) TFEU declares State aid to be compatible with the internal market when it has “a social character” and is “granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned”.

“(46) The proposed Scheme aims to safeguard the primary residences of eligible borrowers from the risk of repossession. […] the Scheme aims primarily to mitigate the negative social repercussions of the new bankruptcy and enforcement procedures under the new Insolvency Code until the SLBO becomes operational. Primary residences have enjoyed a status of absolute protection under the pre-existing legal regime, effectively preventing creditors to proceed with foreclosures. Introduced initially in 2010 in the wake of the financial crisis, these protections were rescinded when the new Insolvency Code came into force. The threat of foreclosures has thus emerged once again, which is particularly acute for vulnerable households with limited incomes and wealth. It is for this reason that the new Insolvency Code has also foreseen the introduction of the SLB scheme, which will, once in place, present those borrowers with the option to remain in their primary residences as long-term tenants. To that extent, the Scheme also alleviates social concerns by safeguarding the main residences of those vulnerable borrowers and giving them the option to join the SLB scheme once it is put in place.”

“(48) Regarding the additional conditions of Article 107(2)(a) TFEU, the Commission concludes that these are also met. First, the measure presents an individual character since it is addressed to borrowers in need. In addition, the Scheme fulfils the condition that aid must be “granted without discrimination related to the origin of the products concerned” since all financial institutions operating in Greece may participate into the Scheme.”

Article 107(3)(c)TFEU: Indirect aid to banks from support of micro and small enterprises

According to the case law, Article 107(3)(c) TFEU lays down two conditions – a positive and a negative – for the compatibility of State aid. The positive condition requires that the aid promotes the development of an economic activity while according to the negative condition the aid may not affect trade to an extent that would be contrary to the common interest.

Targeted economic activity

“(51) With regard to facilitation of the development of an economic activity, the Commission observes that beneficiaries under the Scheme are small entrepreneurs. Micro- and small undertakings in Greece are an essential part of its economy, accounting for the vast majority (more than 90%) of firms and for around 78% of the total labour force. At the same time, access to finance, which has been particularly challenging for smaller enterprises, has been further constrained due to the prolonged uncertainty of the pandemic outbreak and more recently due to Russia’s aggression against Ukraine. The purpose of the Scheme is to safeguard the main residences of small entrepreneurs and give them the option to join the SLB scheme once it is put in place. Without it, the activation of foreclosure proceedings would likely involve serious detrimental effects on their economic activities as well as social hardships, as these entrepreneurs could face evictions from the house in which they live, which can also undermine their ability to exercise their main economic activities. The Commission therefore considers that the Scheme aims at facilitating the continuation of the economic activities of these entrepreneurs and addressing the social hardships that may arise from evictions.”

While it is true that eviction is harmful, the Commission decision does not indicate how many enterprises are likely to affected by such possible evictions or what is the percentage of enterprises that may benefit from the scheme.

Appropriateness

“(52) With regard to the appropriateness of the Scheme, the Commission considers that the measure is suitably designed to achieve its objective. The State will cover part of the monthly payment obligations of the beneficiaries to prevent foreclosures. Given the limited incomes and wealth of eligible beneficiaries, as set out by the criteria outlined in recital (14), the Commission considers that subsidizing part of these payments is the appropriate tool to ensure that the beneficiaries may continue meeting their payment obligations and for the Scheme to achieve its objective.”

Necessity

“(53) With regard to the necessity of the Scheme, the Commission observes that the eligibility criteria, […], identify well-targeted categories of vulnerable borrowers. […], the eligible undertakings play an important role in the economy of Greece and have been exposed to economic challenges since the global financial crisis of 2008. In the absence of the Scheme, the beneficiaries would be exposed to an imminent risk of foreclosure, due to the status of their loans and the current applicable legal framework. The Scheme therefore is considered necessary.”

Proportionality

“(54) With regard to the proportionality of the Scheme, the Commission considers that the measure is limited to what is necessary to achieve the objective pursued. The State contributions are limited to a pre-determined portion of the monthly payment schedule and will be available for a limited period. […] Finally, the banks will continue to bear the credit risk for borrowers both within and following the end of the interim period. The aid cannot generate disproportionate advantages to financial institutions for the reasons explained in recital (37). More specifically, the total subsidy instalments during the interim period cannot exceed 80% of the total instalments, or around 3.5% of the value of the primary residence (recitals (20) to (22)). The scheme is also costly for financial institutions since they will be deprived from the possibility to collect their debts through foreclosure, during the period of application of the Scheme (recital (19). Moreover, most of the benefits from the subsidy instalments are passed on to the borrower to the extent that they reduce the borrower’s recoverable debt (recital (23)). Lastly, the budget of the Scheme (recital (11)) is much smaller than the entire stock of non-performing loans in the Greek banking sector (around EUR 14 billion at end-2021). Thus, the Scheme cannot generate undue competition distortions.”

Then the Commission concluded that “(55) the positive effects of the Scheme, in terms of protecting vulnerable micro- and small entrepreneurs from foreclosure from their primary residence, outweighs the negative effects of the aid on competition and trade.”

Compliance with the rules on the resolution of banks

According to Directive 2014/59 and Regulation 806/2014, any “extraordinary public financial support” [EPFS] which satisfies the criteria of Article 107(1) TFEU and is granted to a bank triggers its resolution as it is automatically considered to be “failing or likely to fail”.

However, the EPFS must be granted for the purpose of preserving or restoring the viability, liquidity or solvency of the bank.

Indeed, the Commission noted that “(60) that definition does not encompass any type of aid, but only aid whose objective is “to preserve or restore the viability, liquidity or solvency” of a bank. The Scheme’s objective is two-fold depending on whether the direct beneficiary is a natural person or a micro- or small undertaking. In the first case, the aid pursues the social purpose of Article 107(2)(a) TFEU. In the second case, the aid pursues the goal of contributing to the development of economic activities of those entrepreneurs by addressing the social hardships particular to the vulnerabilities faced by undertakings under Article 107(3)(c) TFEU. Nevertheless, in both cases, the predominantly social objective indicates that the Scheme’s objective is not to preserve or restore the viability, liquidity or solvency of a bank. The financial institutions that fall within the scope of Directive 2014/59/EU and Regulation (EU) 806/2014 benefit only indirectly through the repayment of debts supported by the State. In addition, such support, limited in terms of size and duration is designed so that it cannot have any material effect on banks’ viability, liquidity or solvency”. This is corroborated by the fact that the aid does not qualify as one of the types of aid contemplated by the Crisis Communications (recital (43)).”

Conclusions

Since the objective of the scheme was not to support banks directly and that the direct aid was compatible with Article 107(2)(a) or Article 107(30(c), the Commission approved the scheme.

[1] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition/state_aid/cases1/202236/SA_100529_90C9E982-0000-C47D-883A-1BFFAAD3EBCB_70_1.pdf

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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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