Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.3.2.2:3.3.2.2 Market economy creditor principle

Public funding of failing banks in the European Union (LBF vol. 19) 2020/3.3.2.2

3.3.2.2 Market economy creditor principle

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Similarly, the EU Courts have developed the ‘market economy creditor principle’ to examine whether debt renegotiations by public creditors involve State aid, comparing the behaviour of a public creditor to that of hypothetical private creditors that find themselves in a similar situation.1 In the case Commission v FIH Holding, the ECJ had to assess whether Denmark acted as a market economy creditor.2

By its appeal in this case, the Commission requested the ECJ to set aside the judgment of the GC3 in which it annulled the decision from the Commission that the asset transfer from FIH Group to the Danish Financial Stability Company constituted State aid. This asset transfer took place following a previous capital injection and guarantee by the Danish State that were both authorized as compatible State aid by the Commission. The GC annulled the decision from the Commission, because it assessed that the Commission had used an incorrect reference framework for its analysis. In its judgment the GC stressed that:

“64 […] an economic operator in a situation such as that in the present case, in which it has previously granted a capital injection and a guarantee to the company concerned, is akin to a private creditor seeking to minimise its losses rather than a private investor seeking to maximise the profitability of the funds that it might invest where it so wishes.”

In the appeal, the ECJ considered that the risks to which the State is exposed and which are the result of State aid that it previously granted are linked to its actions as a public authority and are not among the factors that a private operator would, in normal market conditions, have taken into account in its economic calculations. This consideration applies, in particular, to the obligations arising for the State from loans and guarantees previously granted to an undertaking and constituting State aid. Taking those obligations into account in the assessment of State measures adopted in favour of the same undertaking would be liable to prevent those measures from being classified as State aid even though they do not satisfy normal market conditions, on the sole ground that they prove economically more advantageous for the State than if they had not been adopted. Such a consequence would compromise the objective of ensuring undistorted competition.4 The Commission was therefore correct in not taking into account the risks attached to the previous capital injection and guarantee in its assessment of the asset transfer. The ECJ set aside the judgment of the GC.

This judgment is not undisputed. According to Nicolaides the ECJ does not seem to consider that the aid-equivalent may be less than the total amount of the measures taken, in which case the risks to which the State is exposed as a result of the non-State aid element can be taken into account when assessing the economic rationality of the measure. 5 Van Lambalgen on the other hand approves on the approach of the ECJ, taking the general market economy operator principle as a starting point without specifying whether it concerns the application of the market economy investor principle or the market economy creditor principle. In his view, the true attention point is that risks attached to previous measures cannot be taken into account, when a private market operator would never have taken such previous measures.6 The author tends to concur with the view of Van Lambalgen.

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