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Inception date: 01 Jan 2009 | Removal date: 01 Jan 2011

Loan guarantee

Latvia submitted a notification on a guarantee scheme and provisions concerning takeover of banks by the state for banks incorporated in Latvia on 16 December 2008 - State aid N 638/2008 .
In response to the ongoing exceptional turbulence in world financial markets, Latvia brought forward a guarantee scheme (together with a law on bank takeovers) designed to restore stability of the financial system and to remedy a serious disturbance in the Latvian economy.
Eligible undertakings will be banks incorporated in Latvia (including the Latvian subsidiaries of foreign banks) that are solvent. The scheme is open to banks of all sizes.
Latvia makes available a state guarantee to new short and medium term debt issuance as well as existing loans. The State guarantees existing loans only in exceptional cases, i.e. when a bank applies for a guarantee because its creditors can validly claim a major default event, which would lead to the bank's immediate bankruptcy without a state guarantee.
Latvia accepted that the notified scheme constitutes state aid within the meaning of Article 87(1) of the EC Treaty. The Latvian authorities claimed, however,that the measures are compatible with the common market, because they are necessary to remedy a serious disturbance in the Latvian economy pursuant to Article 87(3)(b) of the EC Treaty.
The Commission agreed with the position of Latvia that the guarantee scheme constitutes aid to the banks concerned pursuant to Article 87 (1) EC Treaty and gave the following assessment:
" The guarantee on the newly issued debt allows the beneficiaries to refinance at advantageous conditions and the guarantee on the existing debt will allow the respective banks to avoid possible bankruptcy proceedings. This gives an economic advantage to the beneficiaries and strengthens the position of these beneficiaries compared to that of their competitors in Latvia and other Member States and must therefore be regarded as distorting competition and affecting trade between Member States. The advantage is selective since it only benefits the beneficiaries of the scheme and is provided through State resources. In particular, the Commission is convinced that in the current circumstances of the financial crisis no private investor would have granted such a significant guarantee on debt of the participating banks." (par. 31-32 of the EC's letter to Latvia - Brussels, 22.12.2008 C(2008) 8951 final).
Article 87(3)(b) of the EC Treaty enables the Commission to declare aid compatible with the Common Market if it is "to remedy a serious disturbance in the economy of a Member State." This aid has to be applied restrictively and must tackle a disturbance in the entire economy of the Member State according to the interpretation of the Article 87(3)(b) by the Court of First Instance.
 The Commission referred to its Communication on the financial crisis and concludes that the Measure complies with the conditions laid therein. Therefore, despite the measure constituting State aid pursuant to the Article 87(1) EC, it is compatible with the Common Market according to the Article 87(3)(b) EC Treaty. The Commission raises no objections against the measure at issue and authorizes it as emergency intervention in the face of the current financial crisis (par. 36-53 of the letter).
Prolongations of Latvian Bank Support Scheme - N326/2009, N664/2009 and

On 29 May 2009 the Latvian authorities notified a request to extend the scheme until 31 December 2009. The extension was motivated by the persisitence of the financial crisis that was affecting the Latvian economy. Thus, the Latvian authorities considered that the Scheme should stay in place as long as the disturbances in the financial markets persist. The Commission concludes that the prolongation in question does notalter its previous assessment in the decision of 22 December 2008 inState aid case N 638/2008 that the measures under the Scheme arecompatible with the common market. The EC decided not to raise objections.
On 1 December 2009 Latvia notified the Commission a further request to extend the scheme for six months since the financial market did not return to normal conditions yet. The EC decided not to raise objections.
On 4 June 2010 Latvia notified a third extension of the scheme until 31 December 2010. The Latvian authorities consider still the necessity of the scheme since some threats to financial stability in the banking sector remain due to continuously scarce liquidity, especially in the longer-term market segments. The EC decided not to raise objections.
A state measure in the GTA database is assessed solely in terms of the extent to which its implementation affects the extent of discrimination against foreign commercial interests. On this metric, the state aid proposed here is discriminatory.



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