In March 2010, the government of Latvia announced a change in private-sector financial support.



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the letter from the EC to Latvia - Brussels, 19.11.2009 C(2009)9127 final. Available from < >
the letter from the EC to Latvia - Brussels, 26.1.2012 C (2011) 9762 final. Available from : < >

Inception date: 28 Oct 2009 | Removal date: 27 Dec 2011

Capital injection and equity stakes (including bailouts)

In June 2009, the Commission became aware of an envisaged recapitalization of 'The Mortgage and Land Bank of Latvia LHZB'.
LHZB was established by the Latvian government on 19 March 1993 as 100 % State-owned bank. The bank has a market share of around 5 % in terms of total assets and ranks fifth among banks operating in Latvia. LHZB has a dual role, meaning that it operates both as a development bank and a universal commercial bank. Due to the economic and financial crisis, LHZB's overall profitability weakened considerably in 2008.
The Latvian government notified the intended recapitalization measure in favor of LHZB in the amount of LVL 43.29 million in the form of a debt-for-equity conversion.
The Commission found that the measure constitutes aid within the meaning of Article 87(1) EC Treaty and gave the following assessment:
"Given that LHZB is active in the financial sector, which is open to intense international competition, any advantage from State resources to the bank would have the potential to affect intra-Community trade and to distort competition. Therefore, the aid measures must be regarded as liable to distort competition and affecting trade between Member States. The advantage is provided through State resources and is selective since it only benefits one bank." (par. 43 of the letter from the EC to Latvia - Brussels, 19.11.2009 C(2009)9127 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 (Temporary Framework) and concluded 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. 45 - 58 of the letter).

Additional aid measures to the Latvian Mortgage and Land Bank - SA.30704 (2012/C) (ex NN 53/2010)
On 23 March 2010, Latvia granted a recapitalisation measure of LVL 70.2 million (EUR 100 million). It was officially notified to the Commission only after it was granted, on 6 April 2010.
In contrast to the recapitalisation measures approved in the November 2009 decision which were mainly attributed to the development part of the bank's activities with a beneficial side-effect on the commercial activities, the notified measure aims at strengthening the capital base of the remaining commercial activities. The capitalisation of 23 March 2010 alone would amount to 10.2% of risk weighted assets (RWA). Taken together with the recapitalisations approved in the November 2009 decision, the figure would be 20.76% of RWA.
The measure aims to facilitate the phasing out of the commercial activities of the bank.
By letter of 2 November 2011, Latvia sought from the Commission a temporary approval of the additional aid measures needed for the transformation of MLB into a development bank. The capital was initially allocated to the development segment, whilst the commercial segment was charged a fee of 5% to compensate the commercial part's under-capitalization. In December 2010, the capital was reallocated to the commercial segment of the bank and, in particular, for the bank's alienation of its commercial activities.
The following measures were required:

- A standby liquidity facility up to LVL 250 million to be made available as from 1 January 2012 until the completion of the process.

- Guarantees to '...' of MLB up to LVL 49 million - required to ensure that '...' do not require the pre-payment of loans to MLB as the sale of the commercial segment and transformation of MLB into a development bank can be considered as a default event, according to the existing agreements. Only part of the guarantees (LVL 32 million) is required by the commercial segment of the bank. The State aid to the commercial segment of the bank in the form of guarantees is expected to be granted in the beginning of 2012 and to terminate after the sale. In particular, in July 2012, after the majority of assets and liabilities of the commercial segment are sold, the commercial segment is to be liquidated, but loans from '...' to the commercial segment are to be transferred to the development segment and used there as a source of financing. According to Latvia, it means that effectively the guarantee support of LVL 32 million is related to the commercial segment solely in the period January-July 2012.

- A liquidity support measure of LVL '30-75'million granted at the end of 2011 is to be converted into capital in 2012 and applied to the commercial segment of the bank. The capitalisation is needed to cover part of the losses from the sale of assets so as to ensure that minimum regulatory capital adequacy ratios are met.

- Up to LVL 60 million of liquidity support to the State-owned entity (JSC "Privatisation Agency") acquiring bundle 4 with the bad assets - required, if the bundle is not sold.
Concerning the new measures, the commission gave the following assessment:
"In the light of the foregoing, the Commission concludes that the State aid in favour of MLB, consisting of a recapitalisation of LVL 70.2 million granted on 23 March 2010, a recapitalisation measure of LVL '30-75' million granted at the end of 2011 (granted as liquidity measure to be converted into capital), a standby liquidity facility of up to LVL 250 million, guarantees '...' of the commercial segment of MLB of up to LVL 32 million and liquidity support of up to LVL 60 million for the solvent liquidation of the bad assets within HipoNIA, is temporarily approved until the final decision is taken and all those measures are considered temporarily compatible with the internal market pursuant to Article 107 (3)(b) TFEU.
In the light of the information yet outstanding, as set out above, the Commission needs to further examine the conditions of the transformation plan and of the sale process so as to ascertain their compatibility with the internal market. At this stage, the Commission doubts that the transformation plan would fulfil all the conditions laid down in the Restructuring Communication." (par. 224-226 of the letter from the EC to Latvia - Brussels, 26.1.2012 C (2011) 9762 final.)

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.