European Commission adopts new Temporary State Aid Framework
“The covid-19 pandemic will cause a global economic setback”, says Klas Eklund, Mannheimer Swartling’s Senior Economist and former Government adviser. “To alleviate the pain, central banks and Governments are now injecting unprecedented amounts of liquidity and purchasing power into our economies”.
Mannheimer Swartling’s covid-19 - State Aid Response Group
Forward-looking fear of a recession is underpinned by uncertainty amongst businesses surrounding more immediate steps. Providing advice on State aid is a standard part of what we do. However, there is nothing standard about the situation we all now find ourselves in with the global spread of covid-19 and associated fallout. For that reason, we have formed a State aid Response Group, drawing on firm-wide expertise, to help companies seeking to navigate their way towards support, those administering it or otherwise in the mix.
Not all government support is State aid but where it does qualify, EU law must be followed. In such uncharted waters, it is important to be nimble to weather the storm. But, as with all things, applying less haste and more speed will help in securing solutions and avoiding missteps.
In this bulletin, we provide some bigger picture context and map out the most recent developments on State aid and covid-19, including the European Commission's newly adopted Temporary Framework. It is a fast-evolving landscape, however, and we invite you to contact Johan Carle, Stefan Perván Lindeborg or Fredrik Sjövall, Partners in our EU & Competition practice group, for further information.
Is this 2008 all over again?
No, covid-19 is quite different. While the world has seen other pandemics, we are now interconnected on an economic, political and social level like never before. This means that the pandemic itself, but also the containment measures taken to combat it, have unprecedented effects both within and outside the borders of each instigating country.
The current situation cannot be compared to the financial crisis of over a decade ago. Then, it was the financial system and banks that caused the troubles, now it is regular businesses suffering from supply disruptions and sudden diminished demand. The sectors most immediately affected are services dependent on a revenue stream which now falters – transport, tourism, leisure and entertainment, for example. Companies within these industries are losing revenue at a rapid pace and are risking a “cash crunch”, with a desperate need for liquidity to stay in business. We are also now beginning to see the effects in industrial sectors, with half-empty containers arriving on European shores from China. Down the road, we can expect more disruption in global value chains.
In recent days, a wide range of economic measures has been introduced by countries seeking to help struggling businesses. Central banks have tried to hold credit lines and payment systems open via commitments to buy vast amounts of bonds and supplying banks with credit. Fiscal policy is being loosened in a number of countries. More will come.
How has Sweden reacted?
The Swedish Government, the Swedish central bank (Riksbanken) and Sweden's financial supervisory authority have to date presented a number of counteracting measures, for example:- The Swedish central bank has announced that it will lend an additional SEK 500 billion to banks, in order to maintain a supply of credit to Swedish companies to avoid robust companies being knocked out as a result of the outbreak. However, it is still an open question as to how much of this will actually be used and under what conditions.
Riksbanken has also taken other measures, including extending its purchases of government bonds and assets to further facilitate credit supply; broadening the QE program to include corporate bonds and commercial papers; setting up a new swap facility with the Federal Reserve; and offering USD loans to banks. The limit rules for mortgage bonds (covered bonds) are also being removed.
- Sweden's financial supervisory authority will temporarily allow commercial banks to fall below the liquidity coverage ratio to ease access to credit for companies; and also let private households postpone amortisation on mortgage loans.
- The Swedish Government has presented a crisis package, covering:
- subsidising short-term layoffs – the employers’ wage cost can be halved and the government will cover a larger share of the costs;
- sick-pay – the government assumes responsibility for sick-pay for two months (April and May);
- abolition of the qualifying day for sick pay – sick-pay to be available from Day 1 (i.e. no karensdag);
- liquidity reinforcement via tax accounts – companies can defer payment of employers’ social security contributions, preliminary tax on salaries and value added tax;
- specific credit guarantees to the aviation and shipping industries of SEK 5 billion, whereby SEK 1.5 billion goes directly to SAS.
More on these themes can be expected in the coming days and weeks, including economic relief to specific sectors and companies.
“This will help soften the economic blow from covid-19, but may not be sufficient to compensate for the economic losses of the pandemic and the lockdowns and quarantines enforced to slow the spread of the virus” warns Klas Eklund.
What is State aid?
Most Member States of the European Union are now engaging in support to embattled sectors and companies. This may look like a breach of EU rules but state support does not necessarily constitute ‘State aid’. In practical terms, this means that not all measures now being announced by European Member States need comply with the State aid rules. Nevertheless, failure by a Member State to follow the correct protocol leaves any recipient of ‘State aid’ vulnerable to a repayment obligation - with interest - further down the line.
The driving force behind the State aid rules is that all companies should compete on a “level playing field” throughout the European Union. This central principle prevents Member States from providing financial assistance in a way that distorts competition and inter-state trade (for example, by favouring national champions). The upshot of this is that State aid cannot typically be granted until approved by the European Commission, subject to certain exemptions (the scope of which is central to ongoing covid-19 reaction planning).
When considering whether to seek support of some kind, and the potential implications of doing so, it is helpful to bear these high-level categories in mind:- No state aid – State intervention aimed at boosting the economy in general, without distinguishing specific companies or sectors, is normally not State aid. This would include general wage subsidies or suspension of taxes, social security contributions, or aid to consumers (e.g. for cancelled services). Many of the economic measures proposed by the Swedish government as a response to covid-19 fall within this category. The European Commission has already sought to clarify in its Communication of 13 March what can be done outside the scope of the State aid rules.
- State aid – The State aid rules come into play where a supportive measure involves a transfer of state resources (anything from subsidies, guarantees, sales under market price, discounts on rent, loans and similar) conferring an advantage that is selective by favouring particular companies over others. In such cases, there is a more complex web to untangle to determine whether the aid needs notified and approved by the European Commission.
- Not all State aid needs to be authorised – It may be possible to rely on existing support schemes that are already exempt or authorised within the standard State aid framework, including the General Block Exemption Regulation, such as de minimis aid (of less than EUR 200,000, depending on the sector) or liquidity aid to small and medium-sized enterprises. These do not require pre-approval by the European Commission.
What is the European Commission doing in relation to State aid and covid-19?
There is a lot going on in this space right now. The European Commission has stated that, given the limited size of the EU budget, the main support must come from Member States. Exercising hard-won muscle memory built up during the financial crisis, the European Commission is working very fast to facilitate within the State aid rules the provision of essential support.
The European Commission considers the impact of covid-19 to be a serious disturbance in the economy of the Member States. On this basis, a new Temporary Framework was adopted on 19 March under Article 107(3)(b) TFEU, to be in place until the end of December 2020. The Framework was first sent to the Member States for consultation on 16 March 2020 and was formally launched only a few short days later. The following types of aid are to be covered:- Direct grants, tax advantages and repayable advance payments – Member States will be able to set up schemes to grant up to EUR 800,000 per company to remedy urgent liquidity needs.
- State guarantees on bank loans taken by companies – Member States can support bank loans to companies by granting State guarantees or guarantee schemes with subsidised premiums.
- Subsidised public loans to companies – Member States will be able to grant loans with subsidised interest rates to help cover immediate working capital and investment requirements.
- Safeguards for banks acting as conduits for aid – Member States will be able to build on banks’ existing lending capacities to enable them to operate as channels to support businesses. The Temporary Framework underscores that such aid would be considered direct aid to the banks' customers, not to the banks themselves.
- Short-term export credit insurance – there is now further flexibility to demonstrate that certain countries are not-marketable risks, which enables short-term export credit insurance to be provided by the State if necessary.
The European Commission has stated that the new Temporary Framework complements other measures already available to Member States in line with State aid rules, such as:
- Aid to compensate undertakings for damage caused by exceptional occurrence - the European Commission has confirmed that covid-19 constitutes an “exceptional occurrence” under Article 107(2)(b) TFEU. Under this provision, Member States can compensate companies that have suffered damage as a direct result of the outbreak, for example companies within the transport, tourism and hospitality sectors. In this regard, the European Commission has made clear that the usual “one time last time” principle does not apply, meaning that it is possible to access support even if a company has already received aid within the last ten years. The European Commission has published a notice describing the information necessary when notifying an aid under this provision.
Denmark applied to the European Commission for this kind of support last week, and approval was given within 24 hours. The aid involved a EUR 12 million support scheme to compensate companies required to cancel or delay events of more than 1000 participants or with a particularly vulnerable target audience.
- Aid to compensate under the Rescue and Restructuring State Aid Guidelines – on the basis of Article 107(3)(c), Member States can notify aid schemes to the European Commission to meet acute liquidity needs and support companies facing bankruptcy due to the covid-19 outbreak.
Whether acting within the existing or Temporary Framework, there will still be focus on ensuring that aid is dispensed without skewing the playing field and going beyond what is proportionate and necessary as a direct result of the covid-19 outbreak. Any pre-existing weaknesses are not to be addressed via these mechanisms.
What next?
State aid will be an important part of the reaction plan to stabilise businesses throughout this challenging time. Clarifying who is eligible for what and following the correct path to access such support will be key to its success.
We are already involved in helping clients identify what kind of support may be available to them. Due diligence when giving or receiving State aid is as important in this climate as ever.
Final thoughts
Standard competition rules – If involved in industry cooperation to address the challenges of the covid-19 outbreak – even with laudable goals to tackle supply shortages or other logistical challenges, bear in mind that standard competition rules will continue to apply in the absence of an exemption (for example, as granted to the transport sector in Norway or supermarkets in the UK). High standards of compliance will be important to achieve important objectives whilst keeping on the right side of the line.
Merger control – this area does not escape the kickback from covid-19 containment measures either. Delays in ongoing reviews can be expected. Some jurisdictions have suspended merger deadlines (for example, Denmark) and others such as Finland, France and the European Commission are actively discouraging new notifications at this time. Checking long stop dates in any signed SPA would be prudent in order proactively to consider these timing issues. Standstill restrictions may also weigh heavier with the potential for a drawn out period of regulatory limbo.
Prepared by Sarah Hoskins and Victor Sand Holmberg, Senior Associates in our Stockholm and Brussels offices respectively.
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