How Europe Will Relax Handout Rules to Allow State Bailouts

(Bloomberg) --

The European Union is loosening its curbs on state handouts, allowing cash injections and other government support to thousands of companies hit by a virus-induced recession, according to draft guidelines the regulator plans to adopt this week.

European government budgets must stand in the front line to offer “swift and effective action” to help companies suffering economic consequences of the Covid-19 outbreak as real GDP growth risks being “substantially negative” this year, according to the document obtained by Bloomberg News.

Margrethe Vestager, the EU’s competition chief, said Tuesday that the guidelines had been sent to governments for their feedback.

“Our aim is to have the new temporary framework in place in the next few days,” Vestager said in a statement on the EU’s website.

Pointing to the specific risks faced by Europe’s stricken airline industry, she said “urgent action is necessary” if “we want to minimize permanent layoffs and damage.”

The commission is ready to work with member states immediately to find workable solutions that preserve this important part of our economy,” she said.

The EU authority -- which was on the front line during the previous financial crisis when banks risked running out of money -- has the power to approve block subsidies doled out by governments if they distort fair competition.

Here’s a list of the document’s main points:

  • All companies may face a severe lack of liquidity, especially small businesses, which could endanger their survival.
  • Since banks have a key role to keep liquidity flowing, “it is appropriate” that governments can encourage banks to keep lending.
  • Banks are intended to be used a channel to lend to businesses or compensate for damage caused by the virus outbreak. Aid isn’t meant to restore the viability, liquidity or solvency of a bank and handouts that target the virus situation won’t be subjected to the onerous restructuring or investor contributions to losses required under bank-bailout rules.
  • State support such as wage subsidies or suspending corporate or value-added taxes and social welfare contributions can target all companies. Aid could also compensate consumers for canceled services or events.
  • Direct grants or tax or payment subsidies must not exceed 500,000 euros ($553,000) per company.
  • Governments must set up an aid program with a defined budget.
  • Aid can only go to companies that ran into trouble after Dec. 31 as a result of the virus outbreak.
  • Aid can’t support export-related activities and can’t favor domestic over imported goods. Aid must be granted before Sept. 30
  • The EU will allow virus aid for companies that have received a state bailout before, dropping a usual ban on extra aid for companies that already took rescue funding. Vestager explicitly said such aid could go to airlines that had been rescued in the past decade.
  • The EU opens the possibility of loosening aid rules further by declaring financial help necessary “to remedy a serious disturbance in the economy” –- a term it last used during the financial crisis to allow unprecedented aid to banks.
  • For agriculture, aid can’t exceed 62,500 euros per company; there’s a 75,000 euro limit for fisheries and aquaculture.
  • For public guarantees on loans for small businesses, governments can reduce 50% of the annual premium for new guarantees. Larger firms can get a 15% discount. The guarantee is limited to two years and can’t exceed 90% of the loan.
  • The loan can’t exceed twice the company’s annual wage bill; it can be increased to cover liquidity needs for the next 18 months for a small business or 12 months for a large company. Interest rates for loans need to be at least 10 basis points per year

©2020 Bloomberg L.P.

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