State Guarantees

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The amount of State aid in a guarantee that makes possible the granting of a loan to a well-collateralised firm in difficulty is not the difference in premium but the difference in interest rates. Beneficiaries of guarantees not notified to the Commission do not have any remedy under EU law.

Last week’s article examined State aid in the form of soft loans. This week, I focus on a related issue: guarantees. Four recent judgments had to determine whether state guarantees constituted State aid and, if yes, how much aid was involved. Of course, once the existence of State aid was established, then came the assessment of its compatibility with the internal market.The judgments concerned two cases from Portugal, one from Germany and another form Hungary. Both Portuguese cases dealt with the insolvency of Banco Privado Portugues. An important question that the courts had to address was the rights of beneficiaries. The Hungarian case also had to do with guarantees granted to a bank. The German case arose from a measure that granted guarantees as de minimis aid. Although this is a rather straightforward judgment, it has significant implications for the design of financial instruments in the current programming period 2014-2020.The article is almost twice as long as the typical article. But sometimes it is instructive to examine similar cases together because one gets a better understanding of the nuances in the analysis of guarantees from a State aid perspective.

  1. Judgment of the General Court of 12 December 2014 in case T-487/11, Banco Privado Português and Massa Insolvente do Banco Privado Português v European Commission[1]

The applicants requested the General Court to annul Commission decision 2011/346.[2] In that decision the Commission found that a state guarantee of EUR 450 million to BPP was incompatible with the internal market and had to be recovered. Before reviewing the specifics of the judgment, it is worth considering the reasoning of the Commission in that decision, especially the parts that referred to the existence and incompatibility of State aid.

With regard to the existence of aid, Portugal argued that the guarantee was not given for free. Indeed it charged a premium of 20 basis points [i.e. 0.2% on the guaranteed amount]. However, the Commission concluded, on the basis of the ECB recommendation of 20 October 2008 on the pricing of guarantees, that at least a flat fee of 50 basis points had to be charged.

In response to the Portuguese argument that BPP was highly collateralised, the Commission found, nevertheless, that the remuneration for the guarantee was considerably lower than would generally be considered as adequate for distressed banks. The guarantee made it possible for the BPP to obtain a loan of EUR 450 million at a rate of interest that was lower than what it would have to pay without the guarantee.

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Normally, a guarantee confers an advantage to the beneficiary undertaking when the premium that is charged is lower than the market rate for a guarantee covering the same amount and under the same degree of risk. In this case, the Commission considered that there was no market premium because BPP was distressed. Therefore, and in accordance with the Communication on guarantees, in the absence of a market premium, the amount of State aid in a guarantee is derived from the actual and market rates of interest for the underlying loan. It follows that the Commission implicitly rejected the ECB recommendation premium of 50bp, presumably because it applied to otherwise viable banks.

In order to determine a market interest rate for the loan interest, the Commission based its calculations on the Communication on the method for setting the reference and discount rates. This method is used by the Commission, first, to determine the existence of State aid and, second, if State aid exists, the amount of aid.

According to the Communication, the reference rate is a floor rate which has to be increased in accordance with the risk of the borrower. The aid element in this case is the difference between the interest rate that BPP would have paid for the loan under market conditions, i.e. without a guarantee, and the interest rate at which the guaranteed loan was actually provided. The Commission considered that that difference corresponded to the premium a market economy guarantor would have charged.

Therefore, without the guarantee, BPP would have paid a market rate of interest rate, say M, which would be at least equal to the reference rate plus 400 basis points because BPP was a company in difficulty but with a high level of collateralisation. The aid element, say S, of the guarantee was equal to the difference between M and G, where G was the interest rate at which the guaranteed loan was provided [i.e. euribor + 100 basis points], after deduction of the price actually paid for the guarantee, i.e. 20 basis points. In other words, the amount of State aid was S = ref rate + 400 bp – [euribor + 100 bp] – 20 bp = [ref rate – euribor] + 400 bp – 100 bp – 20 bp = [ref rate – euribor] + 280 bp.

The General Court agreed with the Commission that the granting of a guarantee at a low premium did not reflect market conditions and therefore constituted State aid [paragraphs 50-56]. The Court also agreed with the Commission that the fact that BPP ceased operations as of 1 December 2008 was not sufficient to conclude that BPP derived no advantage. BPP enjoyed an advantage because it retained a valid banking licence until the latter was withdrawn on 16 April 2010. Despite the fact that BPP’s operations were suspended, the Commission simply inferred that the state guarantee was still capable of affecting trade and distorting competition [paragraphs 59-64]. But it must be said that the Commission did not attempt any detailed analysis at all of how the guarantee could affect trade. But we will see in the next section that such detailed analysis is not really necessary.

The General Court also found that the Commission was right to conclude that the aid was incompatible with the internal market on the grounds that Portugal failed to submit a restructuring plan. The Commission, therefore, did not abuse its powers by ordering the recovery of the aid. [Paragraph 99]

After the negative Commission decision, Portugal initiated domestic legal proceedings to secure recovery of the aid. These proceedings resulted in a reference for preliminary ruling to the Court of Justice, which gave rise to the judgment which is examined below.

  1. Judgment of 5 March 2015 in case C-667/13, Estado Português v Banco Privado Português SA and Massa Insolvente do Banco Privado Português SA[3]

The Portuguese referring court asked whether Commission decision 2011/346 was invalid because the Commission did not establish how the guarantee could affect trade.

The Court of Justice explained that the Commission was not obliged to establish that a state measure had a “real effect” on trade. It only had to show that the measure was “liable to have such effects”. [Paragraph 46]

“47 It must be pointed out that the Commission presented evidence that the advantage enjoyed by BPP was liable to affect trade between Member States. The Commission refers in this regard […] to i) the strengthening of BPP’s competitive position in comparison with other banks. It also notes […] ii) BPP’s activities and its position in national and international financial markets and […] states that iii) BPP is active in two Member States and provides private banking, corporate advisor and private equity services.” The Court held that the Commission had provided adequate reasons.

With respect to the question whether the guarantee affected trade between Member States, the Court noted that the guarantee conferred an advantage on BPP which “was liable to affect trade between Member States in view of BPP’s activities and its position in national and international financial markets” [paragraph 52]. This is because “when aid granted by a Member State strengthens the position of an undertaking in comparison with other competing undertakings in trade between Member States, that trade must be regarded as being affected by that aid” [paragraph 51].

Then the Court clarified that despite the fact that BPP had ceased operations in December 2008, it could still re-enter the market up to the moment its banking licence was revoked in April 2010. That was sufficient for the Commission to conclude that the guaranteed could “potentially affect trade” [paragraph 54].

  1. Judgment of the General Court of 17 March 2015 in case T-89/09, Pollmeier Massivholz v European Commission[4]

Pollmeier appealed against Commission decision N 512/2007 in which the Commission found that i) regional investment aid and ii) guarantees granted by the Land Hessen to Abalon Hardwood Hessen to support the construction of a new sawing mill in Hessen were compatible with the internal market and did not constitute State aid, respectively. Pollmeier was a competitor of Abalon.

The investment aid was granted under a regional aid scheme while the guarantees were awarded under a regional guarantee scheme that was implemented on the basis of the then de minimis Regulation 69/2001. The scheme provided a 70% guarantee for an investment loan of EUR 19.5 million and a 50% guarantee for an operating loan of EUR 10 million.

The aid element of guarantees granted by the German authorities to healthy firms was calculated as 0.5% of the guarantee amount. According to decision N 512/2007, the Commission considered that the aid element of the two guarantees was EUR 68,250 [= 19,500,000 x 0.7 x 0.005] and EUR 25,000 [= 10,000,000 x 0.5 x 0.005], totalling EUR 93,250. The Commission then found that the scheme of the Land Hessen respected the provisions of the de minimis Regulation 69/2001 such as the maximum allowable amount and the conditions regarding excluded sectors, firms in difficulty and export aid. For this reason, the Commission concluded that the measures did not constitute State aid.

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The first plea of Pollmeier was that the Commission had not examined the measure properly. The General Court held that the Commission does not have to examine individual investment aid that is granted in compliance with an already approved regional aid scheme. The Commission may only examine whether the individual aid is covered by the approved scheme. Otherwise, if the Commission would examine the compatibility of each individual aid, it could revise its previous decision on the scheme and that would undermine the principles of legitimate expectations and legal certainty. After what is necessarily a limited assessment of whether individual aid stems from an approved scheme or not, the Commission may classify and treat the aid as either existing or new. [Paragraphs 66 & 67]

Pollmeier also argued that the Commission had failed to assess the guarantees. Unlike the regional aid scheme, the guarantee scheme had not been notified to the Commission. The Court first noted that to the extent that the guarantees do not fall within an approved measure, they had to be examined on the basis of Article 107(1) TFEU. [Paragraph 155]

At this stage the reader should perhaps be reminded that, unlike the current de minimis Regulation 1407/2013, Regulation 69/2001 did not mention any specific method for calculating the amount of aid in a guarantee. The Commission admitted that it did not apply to the Hessen guarantees the then applicable method that was laid down in its Communication on guarantees that was issued in the year 2000. The reason, according to the Commission, was that it applied the method of the Communication only when the amount of aid exceeded the then de minimis threshold of EUR 100,000. [Paragraph 168]

The Court immediately recognised the faulty logic in this line of argumentation. The purpose of applying the method of the 2000 Communication, and subsequent methods, is to calculate the gross grant equivalent of the aid in a guarantee. Without applying this method [or any other equivalent method], it is impossible to know whether the amount of aid exceeds the de minimis threshold. More specifically, the Commission did not examine whether the factor of 0.5% was correct or not. [Paragraph 169]

For this reason, the General Court annulled Commission decision N 512/2007 to the extent that it found that the guarantees did not constitute State aid.

  1. On 19 March 2015, the Court of Justice rendered its judgment in case C‑672/13, OTP Bank v Magyar Allam [Hungarian state][5]

The judgment was in response to a request for a preliminary ruling concerning the interpretation of Articles 107 and 108 TFEU. OTP Bank had initiated proceedings concerning a claim for reimbursement under a guarantee granted by Hungary to OTP Bank.

In the period from 2000 to 2002, Hungary adopted a series of measures to make housing more affordable to citizens. Aid was given to persons purchasing houses. The aid was granted through the banks that provided the corresponding loans and mortgages. The government reimbursed participating banks with the amount of capital, interest and other expenses that were passed on to house buyers.

In this context, the Hungarian Ministry of Local Government entrusted OTP Bank, through an agency agreement, with the task of making payments of State aid for housing. OTP Bank performed the following tasks: It assessed the claims made by applicants for housing aid and subsidised mortgage loans, made aid payments and registered mortgages in the Registry of Mortgages in favour of the State. As a consideration for those tasks, OTP Bank received reimbursement of the expenses which were fixed at 1.5% of the amounts granted as housing aid and 3% of the amounts fixed in loan agreements paid in the form of advances and housing aid for young people.

The Ministry was, under certain conditions, also required to reimburse OTP Bank 80% of the amount of loans made by the bank and, which had become irrecoverable, together with interest and expenses due to the loans. In addition, the Ministry also guaranteed the repayment to OTP Bank the amount of the capital, the interest and the expenses of the loan paid in the form of an advance and which had become irrecoverable.

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A dispute arose between OTP Bank and the Hungarian state after OTP Bank on several occasions requested unsuccessfully payments from the Hungarian state which had considered that it had fulfilled its obligations under the agency agreement.

Hungary refused to honour a guarantee provided by itself on the grounds that it constituted prohibited State aid under EU law. Two legal questions arose: First, was the guarantee State aid? If yes, was the guarantee existing or new aid?

Under the Treaty of Accession of Hungary to the EU, existing aid fell into three categories:

  1. aid measures put into effect before 10 December 1994 [the date that the Association Agreement became effective];
  2. aid measures listed in an Annex IV of the Treaty of Accession;
  3. aid measures that prior to the date of accession were found to be compatible by the State aid monitoring authority of Hungary which informed the Commission to that effect.

With respect to the admissibility of the case, the Court of Justice recalled that “30 […] the Commission’s powers for the purpose of determining whether aid is compatible with the internal market do not preclude a national court from referring to the Court of Justice a question on the interpretation of the concept of aid.” Irrespective of the Commission’s views concerning the classification of the guarantee as State aid, the Court of Justice could still provide guidance to the national court.

With respect to the difference between existing and new aid, the Court noted that “35 Article 108 TFEU establishes different procedures according to whether the aid is existing or new. Whilst under Article 108(3) TFEU new aid must be notified to the Commission and may not be implemented until that procedure has led to a final decision, under Article 108(1) TFEU existing aid may be lawfully implemented so long as the Commission has made no finding of incompatibility.”

“37 […] proceedings may be commenced before national courts requiring those courts to interpret and apply the concept of aid contained in Article 107(1) TFEU, in particular in order to determine whether State aid should or should not have been made subject to the preliminary examination procedure provided for in Article 108(3) TFEU. If those courts reach the conclusion that the measure concerned should in fact have been previously notified to the Commission, they must declare it to be unlawful. On the other hand, national courts do not have jurisdiction to give a decision on whether State aid is compatible with the internal market, that assessment falling within the exclusive competence of the Commission.”

In determining whether the guarantee constituted State aid, the Court established first whether there was transfer of state resources. It referred to the facts that the guarantee was provided in an agreement between the state and OTP Bank and that the state made payments to OTP Bank. On the basis of these facts, the Court concluded that the guarantee was funded by the state or through state resources. [Paragraph 43]

With respect to the selectivity of the measure, the Court pointed out that “47 […] where aid is granted in the form of a guarantee it is essential that the national courts identify the beneficiaries of the aid, those beneficiaries being either the borrower or the lender or, in certain cases, both of them together.” In this case, the beneficiaries were credit institutions which implemented the Hungarian measure. [Paragraphs 47 & 48]

“49 […] aid may be selective with regard to Article 107(1) TFEU even where it concerns a whole economic sector.” “50 Therefore, the State guarantee may be regarded as selective. The fact that, in certain circumstances, it also favours recipients who are not credit institutions, such as, in the present case, certain households whose income does not enable them, by themselves, to envisage purchasing a property, does not call that finding into question, which is sufficient for the application of Article 107(1) TFEU.”

With respect to possible conferment of advantage, the Court found that “57 […] the State guarantee enables the credit institutions to conclude loan agreements without having to assume the financial risk. Thus, credit institutions which have concluded an agency agreement, […] do not necessarily have to examine the solvency of the borrowers or provide for a guarantee fee. Furthermore, borrowers will usually request additional services from those institutions, such as opening a current account. Therefore, the State guarantee confers an advantage on those institutions as it increases the number of their clients and their revenue.”

With respect to the affectation of trade between Member States and distortion of competition, the Court reminded us that “56 […] it is not necessary that the beneficiary undertaking should itself participate in the intra-Community trade. Aid granted by a Member State to an undertaking may help to maintain or increase domestic activity, with the result that undertakings established in other Member States have less chance of penetrating the market of the Member State concerned. Furthermore, the strengthening of an undertaking which, until then, was not involved in intra-Community trade may place that undertaking in a position which enables it to penetrate the market of another Member State.”

“58 It follows that the State guarantee has the effect to strengthening the position of the credit institutions as compared with that of other operators in the market and makes it more difficult for operators established in other Member States to penetrate the Hungarian market. Therefore, that guarantee is liable to affect trade between Member States and distort competition within the meaning of Article 107(1) TFEU.”

The Court concluded that “59 […] having regard to the foregoing considerations, it must be held that the State guarantee granted exclusively to credit institutions constitutes, prime facie, ‘State aid’ within the meaning of Article 107(1) TFEU.”

Then the Court examined whether the guarantee was subject to the notification procedure laid down in Article 108(3) TFEU. For that purpose it had to establish whether the guarantee constituted existing or new aid.

The Court found that the guarantee entered into force after 10 December 1994, was not mentioned in the list of aid measures in Annex IV of the Treaty of Accession, nor was it notified to the Commission under the transitional measures while Hungary had the status of a candidate country. Inevitably, the Court concluded that the guarantee was new aid and was implemented unlawfully.

Illegality has dire consequences. “69 […] as far as concerns the beneficiaries of the unlawful aid, […] it is for the national courts to draw the necessary conclusions with respect to the infringement of Article 108(3) TFEU, in accordance with their national law, with regard to both the validity of the acts giving effect to the aid and the recovery of financial support granted in disregard of that provision.”

“70 The logical consequence of the finding that aid is unlawful is its removal by means of recovery in order to restore the previous situation.” And “73 […] the national court is, in principle, bound to order the repayment of the aid at issue in that case in accordance with its national law.” And, “76 […] Even if the Commission were to declare, in a future final decision, that the State guarantee is compatible with the internal market, the national court is still required to order the recovery of that State aid, in accordance with its national law.” These are unusually strong and stark statements. Normally EU courts simply refer to the obligation of national courts to draw all necessary conclusions [as indicated in the previous paragraph].

“77 […] Finally, and as regards in particular the beneficiaries of the State guarantee, it must be stated that, taking account of the mandatory nature of the review of State aid by the Commission pursuant to Article 108 TFEU, first, undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in that article and, second, a diligent economic operator should normally be able to determine whether that procedure has been followed. In particular, where aid is implemented without prior notification to the Commission, so that it is unlawful under Article 108(3) TFEU, the recipient of the aid cannot have at that time a legitimate expectation that its grant is lawful.”

The conclusion of the Court is particularly bleak for OTP Bank. “79 […] The beneficiaries of a State guarantee, […] granted without regard for Article 108(3) TFEU and, therefore, unlawful, do not have any remedies available in accordance with EU law.”


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

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

[3] The full text of the judgment can be accessed at:

[4] The full text of the judgment can be accessed at:

[5] The full text of the judgment can be accessed at:;jsessionid=9ea7d2dc30ddb88fa6bf94824171b5a9df8f428aa46d.e34KaxiLc3qMb40Rch0SaxuPbxf0?text=&docid=163024&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=534909.




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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