2005/691/EC: Commission Decision of 7 May 2004 on State aid C 44/03 (ex NN 158/01) which Austria is planning to implement for Bank Burgenland AG (notified under document number C(2004) 1625)   (Text with EEA relevance)
Date: 2004-05-07
Institutions: European Commission
Subjects: Austria, Burgenland, State aid, aid for restructuring, application of EU law, bank, control of State aid, mortgage bank

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 7 May 2004

on State aid C 44/03 (ex NN 158/01) which Austria is planning to implement for Bank
Burgenland AG

(notified under document number C(2004) 1625)

(Only the German text is authentic)

(Text with EEA relevance)

(2005/691/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

establishing the European
Having regard to the Treaty
Community, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having regard to Council Regulation (EC) No 659/1999 of 22
March 1999 laying down detailed rules for the application of
Article 93 of the EC Treaty (1), and in particular Article 7(3)
thereof,

Having called on interested parties to submit their comments
pursuant to the provisions cited above (2) and having regard to
their comments,

Whereas:

I. PROCEDURE

(1)

By letter dated 18 June 2002 and supplementary
communications dated 3 July and 9 September 2002,
Austria notified the guarantee agreements concluded
by the Province of Burgenland and presented to
the Commission a restructuring plan for Bank Burgen-
land AG.

(1) OJ L 83, 27.3.1999, p. 1. Regulation as amended by the 2003 Act

of Accession.

(2) OJ C 141, 14.6.2002, p. 2.

(2)

(3)

(4)

(5)

(6)

By letter dated 26 June 2003, the Commission notified
Austria of
its decision to initiate in accordance with
Article 88(2) of the EC Treaty the formal investigation
procedure in respect of the State aid measures described.

On 17 September 2003, following its application for an
extension of the deadline, which was granted, Austria
submitted its position on the decision to initiate the
procedure,
together with other documents and infor-
mation.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union (3).
The Commission invited interested parties to submit their
comments on the aid. However, no comments were
received.

as part of

By letter dated 19 December 2003, Austria announced
that,
the process of privatising Bank
Burgenland AG, it intended to amend the aid measures
notified.

By letter dated 21 January 2004,
the Commission
notified Austria of its decision to extend the procedure
under Article 88(2) of the EC Treaty to the planned
amendments to the aid measures for restructuring Bank
Burgenland AG.

(3) OJ C 189, 9.8.2003, p. 13.

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(7)

On 27 February 2004 Austria submitted its comments.

the authority’s guarantor
statutory arrangements
liability came into force on 29 June 1991 and, since
then, the Province of Burgenland has received a liability
fee for providing the statutory deficiency guarantee.

for

(8)

The Commission decision to extend the procedure was
published in the Official Journal of the European Union (4).
The Commission invited interested parties to submit their
comments. However, no comments were received.

BB’s financial difficulties

(9)

(10)

(13)

II. BACKGROUND

Bank Burgenland AG (BB)

is

BB is a regional mortgage bank with its registered office
its business is confined largely to the
in Eisenstadt;
the Federal Province of Burgenland. The
territory of
latter
in BB and holds
97,897 % of
the equity. The remaining 2,103 % is
portfolio investment. BB had a balance sheet value of
some EUR 2,7 billion in 2000 (5) and was ranked 33rd
in the list of Austrian banks.

the main shareholder

Bank Austria

June and
Before the two guarantee agreements of
December 2000,
the Province of Burgenland held
50,63 % of BB’s equity. Other important shareholders
Bausparkasse
(40,34 %)
were
Wüstenrot (7 %). The remaining 2,03 % of the shares
were portfolio investment. Following the purchase of
Bank Austria’s
agreement of 23
October 2000), the Province of Burgenland concluded
to
an option contract with Bausparkasse Wüstenrot
purchase all
its shares. This was to be the first step
towards the privatisation of BB.

(guarantee

shares

and

for

the

auditor’s

the
certificates
submitted by HOWE had been forged.

In the course of the audit of BB’s annual accounts for
1999 a fraud involving the loss of some EUR 189
million was discovered in connection with the credit
management of HOWE Bau AG when it became
annual
insolvent:
accounts
It
emerged that the actual value of the land charge certi-
ficates drawn up as collateral for the loans was far from
sufficient to cover the liabilities. There was therefore a
need for a valuation adjustment of EUR 171 million,
which exceeded the Bank’s core capital of EUR 80
million and would, therefore, have led directly to BB’s
the
insolvency.
Banking Law (BWG), BB would have had to apply for
supervised management
the
procedure, which is
arrangement under
insolvency law for credit institutions, and this would,
in Austria’s opinion, have been tantamount
to bank-
ruptcy for BB.
the
that
It would also have meant
Province of Burgenland’s deficiency liability would have
come into effect. According to the report by KPMG
Austria Wirtschaftsprüfungsgesellschaft m.b.H. of 17
June 2000, the amount to be covered by the Province
of Burgenland in the event of BB’s insolvency would have
been EUR 247 million.

Furthermore, under Section 83 of

imposition of a court

special

a

(11) As a regional mortgage bank, BB’s task is to promote
monetary and credit transactions in Burgenland. Its main
business is to grant mortgage loans and issue mortgage
bonds and municipal bonds. It also provides virtually the
whole range of other banking and financial services. In
2000 its share of
in
Burgenland was 30 % and of the lending market 39 %.

the total bank deposits market

(12) Under Section 4 of the Burgenland Regional Mortgage
Bank Law (LGBl. No 58.1991, in the version published in
if BB defaults,
LBGl. No 63/1998),
the Province of
Burgenland is
as deficiency guarantor under
liable
Section 1356 of the General Civil Code (ABGB) for all
the bank’s liabilities. The Province of Burgenland has
been deficiency guarantor for BB and its legal prede-
cessors in virtually unchanged form since 1928. The

(4) OJ C 37, 11.2.2004, p. 5.
(5) In 2002 it had a balance sheet value of some EUR 2,9 billion.

(14)

In order to avoid these consequences, the Province of
Burgenland concluded the guarantee agreement of 20
June 2000 for an amount of EUR 171 million to
cover BB’s bad debts, which would have represented
excessive balance sheet debt.

(15)

a

audit

comprehensive

The HOWE fraud was used as an opportunity to
accounts
of
commission
receivable which should show whether
the systemic
shortcomings revealed by the fraud could also affect
other credit exposures. The need for an additional
valuation adjustment of some EUR 189 million identified
by the audit which took place in autumn 2000, put the
bank back in a situation where the necessary valuation
adjustments would have exceeded the bank’s core capital
and only the intervention of the Province prevented the
initiation of the court supervised management procedure.
In order to avoid a further imminent loss in its capacity
as shareholder and deficiency guarantor, the Province of
Burgenland concluded with Bank Austria AG and BB a
framework agreement whereby Bank Austria AG waived
claims against BB.

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III. DESCRIPTION OF THE AID

(16)

The liabilities assumed in 2000 by the Province of
Burgenland vis-à-vis BB were as follows:

Guarantee agreement of 20 June 2000

(17)

The Province of Burgenland assumed vis-à-vis BB a
liability of EUR 171 million, plus annual
interest at
5 %, on a current-account basis in respect of the guar-
anteed amount for the more detailed loan commitments
in connection with the circumstances of the HOWE case.
Under the agreement, BB’s operating profits are used to
cover the amount of
the
the guarantee is reduced by BB’s annual
amount of
are not needed to distribute
profits where
including possible back payments
preferred dividends,
in respect of previous years. The guarantee can be
called by BB at the earliest when the accounts for the
financial year 2010 are closed.

the guarantee. Accordingly,

these

Framework agreement of 23 October 2000

(18)

In order to cover the necessary value adjustment of EUR
189 million discovered during a comprehensive audit of
accounts receivable,
the framework agreement of 23
October 2000 was concluded with BB’s main creditor,
Bank Austria Creditanstalt AG.

Waiver of claims between Bank Austria AG and BB

(19)

Bank Austria Creditanstalt AG waived claims on BB
totalling EUR 189 million.

Better-fortune clause between Bank Austria AG and BB

(20)

to repay the amount of

The claims waiver was in exchange for an interest-
bearing better-fortune clause on the part of BB and
the full amount of Bank
provides for repayment of
Austria’s claims, plus
in seven instalments,
interest
starting on 30 June 2004. From that date, BB has,
the claim waiver,
therefore,
in seven equal
plus interest accrued up to that date,
annual
interest payable each year
(Euribor plus 5 basis points) on 30 June each year
until 30 June 2010. The future redemption of
the
better-fortune clause is based on BB’s annual profits,
taking into account movements in reserves and any
payments to preference shareholders in the previous
financial year.

instalments, plus

Guarantee agreement

(21)

In the event of BB being unable to meet its better-fortune
the Province of Burgenland has, under an
obligation,

additional agreement of 1 December 2000, assumed an
irrevocable deficiency guarantee towards Bank Austria
AG which is effective for each year
in the period
2004-10 and under which the Province of Burgenland
less the
must cover any shortfall
amount paid by BB to Bank Austria AG) towards Bank
Austria AG. Under this agreement, both BB and the
Province of Burgenland are free to meet
the better-
fortune obligation towards Bank Austria AG ahead of
the deadlines set.

instalment

(annual

Sale of shares between Bank Austria AG and the Province of
Burgenland

(22)

Bank Austria AG sold 34,13 % of its shares in BB at
EUR 0,07 per share to the Province of Burgenland.

Reasons for initiating the procedure

(23)

the formal

the EC Treaty,

investigation
In its decision to initiate
procedure under Article 88(2) of
the
Commission provisionally classified the measures to be
assessed as State aid within the meaning of Article 87(1)
of the EC Treaty and Article 61(1) of the EEA Agreement
since the aid was granted through State resources and
was such as to affect the economic position of compe-
titors from other Member States by improving the bank’s
financial situation (6) and, therefore, to distort or threaten
to distort competition and affect trade between Member
States.

(24) On the basis of

assessment,

its provisional

in difficulty (7)

conclusion that

the
the aid
Commission came to the
should be examined in the light of
the Community
Guidelines on State aid for rescuing and restructuring
firms
the guidelines) and
(hereinafter
that no other compatibility provisions in the EC Treaty
or Community guidelines were applicable. It agreed with
Austria that BB was a firm in difficulty within the
meaning of Section 2.1 of
the guidelines. However,
since some information was still missing and a number
of matters were outstanding, there were doubts as to the
compatibility of
the aid measures with the common
market.

Restoration of the firm’s long-term viability

(25)

In accordance with points 31 to 34 of the guidelines, the
Commission must endorse a restructuring plan in the
case of all individual aid measures by assessing whether
the plan is capable of restoring the long-term viability of
the firm within a reasonable timescale and on the basis
of realistic assumptions.

(6) Judgment of the Court of Justice of 14 September 1994,

Joined
Cases C-278/92, C-279/92 and C-280/92, Kingdom of Spain v
Commission of the European Communities [1994] ECR I-4103.

(7) OJ C 288, 9.10.1999, p. 2.

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Commission

doubted whether

(26) As regards the restructuring plan initially submitted to it,
the
the market
assumptions and the forecasts regarding the viability
objective were precise enough to draw any conclusions
as to prospects for the success of the proposed restruc-
turing measures. It was difficult to ascertain on which
market assumptions
the restructuring measures were
based.

the possible privatisation would be implemented on the
basis of a transparent, non-discriminatory procedure and
what the future timetable looked like.

Avoidance of undue distortions of competition

(27) As regards the long-term profitability forecast of 15 % by
2010 given in the notification,
the Commission first
criticised the fact that no basis whatsoever had been
forecast and also doubted whether
provided for that
the target
realistic and hence
whether it could actually be achieved by 2010. Austria
was, therefore, requested to provide detailed forecasting
data and the underlying assumptions.

return of 15 % was

(28)

(29)

The Commission also called on Austria to provide
detailed information (e.g. comparative figures for the
banking sector) in support of its statement that, before
the difficulties materialised, BB did not have too many
staff and did not spend too much on materials, with the
result that the opportunity and the need for the bank to
reduce staff numbers were limited.

The Commission further noted that
the information
provided by Austria regarding the reasons for the firm’s
difficulties was, for the most part, a summary of the
financial difficulties. However, only one real reason for
those difficulties was given, namely inadequate credit risk
management. There was no detailed analysis of corporate
and management structures or of specific management
failings, but such an analysis was, in the Commission’s
view, necessary to assess the prospects for BB’s restruc-
turing. The Commission thus doubted whether the causes
of BB’s difficulties were sufficiently recognised and
plan. Accordingly,
restructuring
addressed
Austria was asked to submit a detailed analysis of past
failings and future prospects and problems with regard to
corporate
supervisory
methods, control and reporting concepts, and techniques
introducing commercially based decision-making
for
procedures.

structures, management

and

the

in

(30) As regards BB’s possible privatisation, Austria mentioned
that this was its intention and referred to initial steps
taken and to the planned date for completion of the
privatisation process. However, no details at all were
provided,
for example, on the proposed procedure,
conditions and other relevant factors. The Commission
therefore requested Austria to provide further
infor-
mation,
stage which a
possible privatisation procedure had reached, whether

regarding the

in particular

(31)

(32)

to an extent

contrary to the

The derogation in Article 87(3)(c) of the EC Treaty is
conditional on the aid not adversely affecting trading
conditions
common
interest. Points 35 to 39 of the guidelines state that
measures must be taken to mitigate as far as possible
any adverse effects of
the aid on competition. This
condition usually takes the form of a limitation on, or
a reduction in, the company’s presence on the relevant
product markets, a sale of production capacity or subsi-
diaries or a reduction in activities. The limitation or
reduction must be in proportion to the distortive
to the relative
effects of
importance of the firm on its market or markets.

the aid and,

in particular,

the

the description of

it was not possible for

The remedies or compensation measures proposed by
Austria consisted in the sale of holdings, the closure of
a branch and a decision to desist from granting Federal
loans. Since
compensatory
measures and the extent to which they each affected
BB’s assets and employment situation was vague in
places,
the Commission to
assess their overall effect. The Commission therefore
needed detailed information on the effect of each
measure on the assets, the employment situation and
the future market/segment positions of BB, as well as
those
an explicit
measures and their reduction effects (e.g.
in terms of
the balance sheet total).

quantification of

value of

the

(33) As Burgenland is a region which has been consistently
classified as an Objective 1 assisted area since 1995 and
therefore is a region within the meaning of Article
87(3)(a) and qualifies for regional aid, Austria referred
to points 53 and 54 of the guidelines and emphasised
that they must be taken into account in assessing the
compensatory measures without, however, giving any
further explanation or putting forward specific aspects.
The points in question state that the assessment criteria
in the guidelines are equally applicable to assisted areas
but that the criteria for the reduction of capacity on
markets where there is excess structural capacity may
be less stringent. Since Austria did not develop this
aspect further, however, the Commission was unable to
establish whether this criterion applied.

(34)

To sum up, the Commission did not possess enough
information to undertake an appropriate and adequate
assessment of the proposed compensatory measures. It
therefore had doubts, in the light of the available facts,
whether the planned reduction measures were sufficient
to mitigate the distortive effects of the aid on compe-
tition.

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Aid limited to the minimum

(40)

(35)

In accordance with points 40 and 41 of the guidelines,
the aid must be limited to the strict minimum needed to
avoid providing the undertaking with surplus cash which
could be used for aggressive, market-distorting activities
or even for expansion. The guidelines also state that aid
beneficiaries will be expected to make a significant
contribution to the restructuring plan from their own
including through the sale of assets not
resources,
essential to the firm’s survival.

structural

shortcomings

failure to comply with,

In addition to the fraud, BB suffered enormous loan
losses as a result of huge structural problems and the
internal control
lack of, or
systems. These
been
had
resolved, among other things, by implementing a risk
management system and strengthening internal auditing
as part of an extensive organisational restructuring of the
bank. This result and hence the successful
implemen-
tation of the restructuring measures were highlighted in
a review conducted by the Austrian National Bank in
February 2003 on behalf of
the banking supervisory
authority.

the

(36) Austria argued that the State measures to restructure BB
were not an injection of liquidity but that the Province of
Burgenland intervened solely by granting guarantees.
better-fortune
guarantee
Furthermore,
the bank should use all
agreements provided that
receipts
amounts. The
guaranteed
the
Commission was unable on the basis of the available
information to determine precisely whether the aid was
in practice, the
the absolute minimum necessary since,
guarantees have a similar effect
to that of a capital
injection.

to reduce

and

(37)

In addition, the Commission doubted whether BB’s own
contribution, the complete writedown of hidden reserves
and the reduction in staff and operating costs met the
criterion of a ‘significant contribution’.

(41) A comprehensive assessment by BB acknowledged that
the bank differed from most other firms in difficulty
within the meaning of the guidelines in a number of
ways since it did not display some of the characteristics
listed by the Commission as being typical of a firm in
difficulty. For instance,
following the necessary value
adjustments made in 2000 with a view to tidying up
the portfolio, BB’s
activities were
basically viable and would remain so even on a
cautious assessment of
future developments. Devel-
opments in the last two years had shown that deposit
business had stabilised once again and that the losses
suffered in 2000 could be recovered in part. Austria
also provided the results for BB’s ordinary business
activities.

current business

(42) Austria compared BB with the Austrian banking sector.
There was no excess capacity on what was the relevant
market for BB or at BB itself and, with 300 employees,
BB was a rather small regional bank accounting for only
16 of the 264 bank branches in total in Burgenland.

IV. COMMENTS BY AUSTRIA ON THE DECISION TO
INITIATE THE PROCEDURE

(38) On the basis of the restructuring plan available, Austria
has submitted comments on the decision to initiate the
procedure
in
particular on the
following points, which are of
decisive importance for the Commission decision:

and has provided new information,

(43) As regards the planned privatisation of BB, Austria makes
the point that, according to the plans available at the
moment, BB should be privatised by the end of 2004
at the latest. To this end, a working group had been set
up to prepare the sales procedure and the banking firm
HSBC Trinkaus&Burkhardt had been placed in charge of
the privatisation process.

Restoration of the firm’s long-term viability

(39) Austria submitted an ex post analysis of BB’s corporate
and management structures and gave details of
the
reasons for the bank’s financial difficulties. The main
the difficulties was, according to Austria,
cause of
inadequate credit
risk management, which made the
bank particularly susceptible to fraudulent behaviour.
the value
Similarly,
adjustments discovered in the
the audit were also attributed to this fact.
course of
While the bank’s difficulties thus appeared to be a
limited problem area, the fact that the causes could be
clearly located contributed significantly to ensuring that
the
be
introduced immediately.

compensatory measures

necessary

could

(44) Austria described the general economic position of BB
and its strategic objectives, which had provided the basis
for calculations indicating that there would be a steady
improvement in profitability of around 15 % over seven
years. On the basis of inventory volumes, average interest
and flows from liquidity calculations for January 2003,
planning volumes and conditions had been drawn up as
part of a planning process by the control department in
conjunction with the heads of specialist departments and
the board of management. Interest income was calculated
over the entire planning horizon on the basis of the
current
regarding
rates were made in the calculation.
future interest
Given the present
this
low level of
approach complied in any event with the principle of
cautious planning.

i.e. no assumptions

interest

interest

rates,

rate,

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(45)

(46)

The restructuring measures taken by BB following the
fraud with a view, on the one hand, to addressing in
an appropriate fashion the causes of its financial diffi-
culties and, on the other, to preparing the bank in the
best possible way for market developments and oppor-
tunities in the years ahead could be summed up under
the headings ‘comprehensive reorganisation of credit risk
management’,
‘concentration by BB on core business’,
‘strengthening of BB’s role as a regional bank’ and
‘comprehensive streamlining of cost management’.

Avoidance of undue distortions of competition

the

In view of the small size of BB, Austria made a cautious
assessment of
restoring long-term
criterion of
viability and that of avoiding undue distortions of
competition, indicating that, under the guidelines (point
36), small and medium-sized enterprises are not generally
required to implement any compensatory measures.
Austria then gave the reasons why BB only slightly
exceeded the threshold for an SME.

(47) Austria explained that, given the bank’s small size,

it
came as no surprise that BB was not in a position to
offer any very substantial compensatory measures. It was
true that BB had subsidiaries that were active in key areas
of banking, but a sale of such holdings would signifi-
cantly erode the bank’s substance. Moreover, BB had no
appreciable foreign business and even the number of its
domestic branches (16) was extremely small.

(48) According to Austria, the insignificant market position of
BB ruled out any danger of competition being distorted
and its difficulties were attributable in no way to
aggressive market behaviour but to the events of lesser
magnitude mentioned above, particularly in connection
with the fraud.

(49) Austria also maintained that

the aid for BB had not
increased the bank’s equity but had simply provided
collateral for its non-performing loans, with the result
that no value adjustments had to be carried out and its
liabilities could be prevented from exceeding BB’s core
capital.

and the reduction effect of each measure and gave the
reasons why further reductions would jeopardise the
bank’s viability.

Aid limited to the minimum

(52) Austria stressed that the aid in question was limited to
the minimum since the guarantee agreements alone were
not sufficient to maintain a satisfactory level of solvency
and that BB had made the further value adjustments
totalling EUR 41 million out of its own resources and
also coped with the loss of balances totalling EUR 218
million out of its own resources. Moreover, the Province
had not provided BB with any capital to offset its diffi-
culties, and this bears witness to its attempt to limit the
type and amount of the aid to the minimum.

(53)

BB also made considerable efforts to bring staff costs
down to the average level customary in the banking
sector and planned in the medium term to sell off
property that was not needed.

(54)

Further measures were not,
therefore, possible as the
bank had always striven to be a relatively streamlined
business.

V. AMENDMENTS TO THE AID MEASURES

(55)

By letter dated 19 December 2003, the Austrian autho-
rities notified the Commission that, as part of BB’s priva-
tisation,
they intended to amend the aid measures
notified previously.

(56)

The guarantee agreement of 20 June 2000 is to be
amended as follows:

amount

guaranteed

(a) BB’s annual profits will no longer be used to reduce
of
the
Burgenland, which will be reduced only by the
amounts
that are represented by the guaranteed
claims arising from the HOWE affair and will
accrue to BB in the years ahead.

Province

the

by

(50)

Furthermore, Austria pointed out that BB and its almost
exclusive area of activity were located in an assisted area
covered by Article 87(3)(a) of the EC Treaty. It referred
both to the corresponding rules in the guidelines (recital
20) and to the aggravated circumstances that obtained at
the time of the financial difficulties.

(51) As regards the compensatory measures (sale of holdings,
closure of a branch, decision to desist from granting
loans), Austria provided details on the value
Federal

(b) The guarantee payments will be extended as follows:
BB will be able to call on the guarantee provided by
the Province of Burgenland at the earliest when the
annual accounts for the financial year 2025 (instead
of 2010 as at present) are closed. However,
the
Province will have the right
to make the open
guarantee payment to BB in full or only in part as
from the moment that the annual accounts for the
financial year 2010 are closed. Until 30 June 2011
the current interest rate of 5 % and, as from 1 July
2011, the then five year interest rate will apply each
year on a current-account basis in respect of the

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amount of the guarantee. Similarly, as from 1 July
2016 and 1 July 2021, the then five-year interest rate
will apply each year on a current-account basis in
respect of the guaranteed amount.

the bank could be found since potential buyers would
have little interest in a transaction from which they could
not expect any profits for a number of years.

(57)

The framework agreement of 23 October 2000 is to be
amended as follows:

(a) BB’s annual profits will no longer be used to meet
the better-fortune obligation towards Bank Austria
Creditanstalt AG;

(b) the Province of Burgenland will meet

the better-
fortune obligation towards Bank Austria Creditanstalt
AG and will pay the amount still outstanding under
the guarantee agreement immediately prior to the
privatisation of BB with a one-off payment to Bank
Austria Creditanstalt AG.

(58) According to Austria, the amendment regarding use of
annual profits to reduce the amounts guaranteed will
the
take effect only if BB is actually privatised.
Province of Burgenland were not to sell BB, the two
guarantees would thus remain unchanged, the amounts
guaranteed would be further reduced by BB’s annual
profits and BB’s better-fortune obligation would remain
unchanged.

If

VI. POSITION OF AUSTRIA ON THE DECISION TO
EXTEND THE PROCEDURE

(59) According

to Austria,

restructuring plan that will provide

Provincial Government
the
regarded BB’s privatisation as the key component of
the
the best
possible guarantee of the bank’s long-term viability. By
decision of the Provincial Government of 12 November
2003 (Zl. 3-12I/48-2003), the corresponding measures
for initiating the sale were put
in place. By way of
announcements placed in the media on 17 November
2003, the call for expressions of interest was published.
By March/April 2004 at the latest, after completion of
the compulsory due diligence process, negotiations with
the individual bidders would begin.

(60)

In order to obtain the best possible price for BB, it would
be necessary, therefore, for the Province of Burgenland to
its obligations under the better-
release BB from all
fortune agreement with Bank Austria Creditanstalt AG.
The same would apply accordingly to the guarantee
agreement of 20 June 2000 between the Province of
Burgenland and BB since, here too, neither BB nor the
buyer of BB should be encumbered in any way.

(62) Abolition of the requirement for BB to transfer its profits
would, therefore, be a necessary condition for its forth-
coming privatisation if the notified restructuring plan, of
which BB’s privatisation was an essential component,
were to have any realistic chance of
success. This
would provide a potential buyer of BB with the
prospect of availing itself immediately of BB’s profits,
which would in turn be a necessary condition for
obtaining the best possible sales price.

VII. ASSESSMENT OF THE AID MEASURE

State aid under Article 87(1) of the EC Treaty

(63)

The two guarantee agreements between the Province of
Burgenland and BB involve State resources. They were
concluded on conditions that would not be acceptable
to a market-economy private investor.

(64) Austria maintained

the

the

that,

prevent

through

guarantee
agreements, the Province of Burgenland avoided greater
financial
loss since the agreements would have been
restricted to providing the absolute minimum necessary
court-supervised
imposition
to
management. If, as a result of the statutory requirement,
the Province had had to step in as deficiency guarantor,
the unlimited deficiency liability would have meant that
the financial obligations under the two guarantees would
have been exceeded. Accordingly, Austria maintained the
legal view that the Province of Burgenland had acted in
accordance with the ‘market-economy private investor’
principle.

of

(65)

In this connection, however,
it must be objected that
Austria has not submitted any calculations that could
have supported this assertion. The KPMG report of 17
June 2000, referred to in paragraph 13, puts at EUR 247
million the amount that would have to be covered by the
Province of Burgenland in the event of BB’s insolvency.
This is lower than the aggregate value of the two guar-
antees, although it should be pointed out that this figure
was calculated before the second comprehensive audit of
accounts receivable conducted in the second half of 2000
and, viewed from today’s perspective, should therefore be
higher. It is, however, uncertain how Austria arrives at a
figure of EUR 247 million. In its judgment in Hytasa (8),
the European Court of Justice ruled that ‘a distinction
must be drawn between the obligations which the State
must assume as owner of the share capital of a company
and its obligations as a public authority’. Since BB was
set up as a limited company, the Province as owner of
the shares in the company is liable for its debts only up

(61)

In the view of Austria, if BB were still required to transfer
its profits, it would be doubtful whether any buyer for

(8) Cases C-278/92, C-279/92 and C-280/92 Spain v Commission [1994]

ECR I-4103, paragraph 22.

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the industrial

to the amount of the liquidation value of its assets. In the
aforementioned judgment, the Court of Justice states that
‘the obligations arising from the cost of redundancies,
payment of unemployment benefits and aid for
the
infrastructure must not
restructuring of
be taken into consideration for the purpose of applying
the private investor test’. It seems that Austria has made
this distinction and that its calculations are also based on
those costs that would be incurred by the Province on
the basis of the statutory default liability. However, those
costs bear no relationship to the role of the Province of
Burgenland as owner of the shares of BB. Instead, they
are the result of a special statutory requirement, namely
the State default liability, that can never concern a private
investor.

(70) However, Article 87 does provide for exceptions to the
principle that State aid is incompatible with the common
market. The derogations under Article 87(2) could
provide grounds for aid to be deemed compatible with
the common market. The aid measures to be assessed
cannot, however, be regarded either as aid having a
social character and granted to individual consumers
(point (a)), as aid to make good the damage caused by
natural disasters or exceptional circumstances (point (b))
or as aid granted to the economy of certain areas of the
Federal Republic of Germany affected by the division of
Germany (point (c)). These derogations are not, therefore,
applicable in the present case.

(66)

(67)

(68)

(69)

financial

in serious

difficulties. All

Both measures were taken for the benefit of an under-
things
taking
considered, the total involved (EUR 359,8 million) is a
considerable amount. When the guarantees were under-
written, the Province could clearly not have expected to
make a return on them that would have been acceptable
to a market-economy private investor.

The aid in question favours BB and gives it an artificial
advantage over its competitors, thereby distorting compe-
tition. In its main lines of business, BB operates at both
regional and national levels. The financial services sector
as a whole is characterised by growing integration, and
the internal market has been achieved in important areas.
There is strong competition between financial institutions
of different Member States, and this is increasing as a
result of the introduction of the single currency. Compe-
tition is being, or threatens to be, distorted by these
measures and their effects on current and potential
competitors from other Member States. Consequently,
the measures constitute State aid within the meaning of
Article 87(1) of the EC Treaty. Austria has not challenged
this view but notified the measures concerned, albeit later
than required.

Compatibility of the aid measures with the common
market

Since the aid measures were not granted under an
approved aid scheme,
the Commission must assess
in the
their compatibility with the common market
light of Article 87 of the EC Treaty and the guidelines (9).

In accordance with Article 87(1) of the EC Treaty, save as
otherwise provided for in that Treaty, any State aid
granted or any aid granted through State resources in
any form whatsoever which distorts or threatens to
distort competition by favouring certain undertakings
or the production of certain goods is,
in so far as it
affects trade between Member States, incompatible with
the common market.

(9) See footnote 7.

(71) As regards the derogations in Article 87(3)(b) and (d), it
should be pointed out that the aid does not serve to
promote the execution of an important project of
common European interest or
to remedy a serious
disturbance in the economy of a Member State and
cannot be regarded either as aid to promote culture
and heritage conservation.

(72)

Consequently,
the Commission is assessing the aid
the derogation in Article
measures on the basis of
87(3)(c). It bases its assessment of aid to facilitate the
development of certain economic activities where such
aid does not adversely affect trading conditions to an
extent contrary to the common interest on the relevant
In the Commission’s view, the
Community guidelines.
only guidelines applicable in the present case are those
referred to in recital 68. The Commission also takes the
view that the aid measures described help to finance the
restructuring of the undertaking and are, therefore, to be
regarded as restructuring aid.

(73)

In accordance with the guidelines, restructuring aid is
admissible only if
to the
it does not
common interest. Under the guidelines, approval of aid
by the Commission is subject to certain conditions:

run counter

Eligibility of the undertaking for aid

(74)

The Commission accepts Austria’s explanation for clas-
sifying BB as a firm in difficulty under point 30, read in
conjunction with points 4 to 8, of the guidelines.

(75)

Point 4 of the guidelines states that a firm is in difficulty
‘where it is unable, whether through its own resources or
with the funds it is able to obtain from its owner/share-
holders or creditors,
to stem losses which, without
outside intervention by the public authorities, would
almost certainly condemn it to go out of business in
the short or medium term’. These circumstances clearly
obtain in the case of BB.

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(76) Without the intervention of the Province of Burgenland,
BB would have been placed under court-supervised
management and would have been condemned to go
out of business within the meaning of the guidelines.

for its long-term viability and enables it to stand on its
own feet, i.e. to cover all its costs including depreciation
and financial charges and to generate enough return on
capital to enable it to compete in the marketplace.

Basic principle

(82)

(77) Under point 28 of the guidelines, restructuring aid can be
allowed only if strict criteria are met and if it is certain
that any distortions of competition will be offset by the
benefits flowing from the firm’s survival,
in particular
where it
the net effect of redundancies
resulting from the firm going out of business would
employment
exacerbate
regional or national
firm’s disap-
problems or exceptionally, where the
pearance would result in a monopoly or a tight oligopo-
listic situation.

is clear that

local,

(78)

The latter can be excluded, however, since BB’s position
is not so strong that bankruptcy and the subsequent
partial sale would create a monopoly or oligopolistic
situation.

(83)

(79) Although Austria argues that, apart from BB, virtually the
only important bank doing business in Burgenland is the
Raiffeisen group (rural credit cooperatives) and that BB’s
disappearance would thus lead to a greater concentration
of market structure and further strengthen that group,
this argument is not, on the basis of the information
currently available, convincing, given that other banks,
and people’s banks
savings banks
in
Burgenland.

are present

individual

The Commission has based its assessment on the infor-
mation provided by Austria, including the planning for
the predicted
restructuring measures,
the
return on investment for the restructuring period 2000
to 2010 based on a cautious appraisal of future devel-
opments, on the one hand, and on the results of normal
business activity as indicated in the annual accounts and
the plan calculation, on the other, and the analysis of the
inadequate credit risk management responsible for the
problems and of the structural deficits. The Commission
information
has also based its assessment on the
provided by Austria concerning progress
in imple-
menting the restructuring plan, the amendments to the
individual measures and the schedule for completing the
planned privatisation of BB.

For want of detailed forecasting data and the underlying
assumptions, the Commission, in its decision to initiate
the procedure, expressed doubts regarding the forecast
long-term profitability of 15 % by 2010. Austria subse-
quently provided a calculation which, based on the
principle of cautious planning and in the light of the
economic
location,
growing resident population, increasing wealth, EU enlar-
indicates a continuing improvement in profit-
gement),
ability of some 15 % over a seven-year period. This is
also borne out by the figures for normal business activity
given in the annual accounts. Accordingly, as regards
the
future developments,
restructuring plan as altogether plausible and complete.

the Commission regards

environment

(thriving

business

(80)

the effects of a
that
It should be noted, however,
hypothetical
liquidation of BB are difficult to calculate.
If BB were to be liquidated or the number of its branches
reduced, the likelihood of a foreign bank establishing
in Burgenland and taking over BB’s business
itself
Province’s
would
small,
economic situation and lack of attractiveness. Instead, it
would appear conceivable that basic financial services
would be in short supply in certain rural regions in
Burgenland.

given the

extremely

be

Assessment of long-term viability

(81) According to point 3.2.2(b) of the guidelines, the grant
of
the
the aid is conditional on implementation of
restructuring plan, which must be endorsed by the
Commission in the case of all aid measures and must
be assessed in respect of its ability to restore the long-
term viability of the firm within a reasonable timescale.
The restructuring plan must be of limited duration and
be based on realistic assumptions. It must describe the
circumstances that led to the firm’s difficulties, thereby
providing a basis for assessing whether the proposed
measures are appropriate. It should enable the firm to
progress towards a new structure that affords prospects

(84)

In addition, Austria provided further information on, and
comparative figures for, materials and staff costs relative
to other credit institutions with a comparable structure
and/or of comparable size which show that BB is signif-
icantly below the average as regards both per capita staff
costs and materials costs.

failings which the Commission,

(85) Austria provided additional information in support of the
analysis of company and management structures and of
management
in its
decision to initiate the procedure, had described as
inadequate. Causes of BB’s financial difficulties included
risk
fraud, poorly conceived risk policy, absence of
inadequate
management and internal control systems,
reporting arrangements, no instruments
for overall
bank control and inefficient organisational procedures.
The
following restructuring
measures: introduction of a new risk policy, implemen-
tation of independent risk management, new approach to
asset allocation, creation of a new management and
introduction of a management
operational
information
cost
management.

summary specified the

structure,
system,

streamlining

and

of

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(86)

The Commission regards the operational, functional and
financial measures taken to date or planned as being
suitable for restoring the bank’s long-term viability.

(87) Austria has also notified the Commission that

the

3-12I/48-2003),

necessary measures

the
Provincial Government views privatisation of BB as an
essential component of its restructuring plan. By decision
of the Provincial Government of 12 November 2003
(Zl.
for
launching the sales process were introduced. By way of
announcements placed in the media on 17 November
2003, the call for expressions of interest was published.
Negotiations with the three remaining best bidders would
begin in April 2004, after completion of the compulsory
due diligence process. The Commission assumes that
there is a good chance of the bank’s privatisation being
successful.

(88)

Avoidance of undue distortions of competition

The derogation in Article 87(3)(c) of the EC Treaty is
subject to the condition that the aid does not adversely
affect trading conditions to an extent contrary to the
the guidelines
common interest. Points 35 to 39 of
state that measures must be taken to mitigate as far as
possible any adverse effects of the aid on competitors.
This condition usually involves limiting or reducing the
firm’s presence on the relevant product markets, selling
production capacity or subsidiaries, or reducing activities.

for

regional

aid with an admissible
and qualifies
maximum net aid intensity of 30 % or 35 %. Although
BB appears to have adapted well to the economic circum-
stances of this assisted area as a result of its presence
in the
there for many years,
Commission’s view, that financial difficulties encountered
by the bank in such areas are more acute than would be
the case in an economically and industrially advanced
region.

to reason,

stands

it

(92)

BB is a small enterprise among banks in Austria. With a
balance sheet value of EUR 2,9 billion and total earnings
(interest, revenue, yields from securities, provisioning, net
earnings from financial transactions and other operating
revenue) of EUR 40,4 million in 2002 and with just
under 300 employees, the bank ranks as an SME both
from the viewpoint of the level of employment and on
an assessment of its financial strength.

(93)

It will therefore be examined below whether, in view of
the bank’s small size and its location in an assisted area,
the compensatory measures offered are sufficient
to
mitigate the distortive effects the aid has on competition.

(94) As compensatory measures under the restructuring plan,
Austria had initially offered to sell holdings, close a
branch and desist from granting Federal loans.

(89)

The limitation or reduction should be in proportion to
the distortive effects of the aid and, in particular, to the
relative importance of the firm on its market or markets.

(95)

take the needs of

regional development

(90) According to point 53 of the guidelines, the Commission
must
into
account when assessing restructuring aid in assisted
that an ailing firm is located in an
areas. The fact
assisted area does not, however,
justify a permissive
approach to aid for restructuring. According to point
54, the assessment criteria in the guidelines are equally
applicable to assisted areas, even when the needs of
regional development are considered. In assisted areas,
however,
stringent
the Commission may apply less
conditions as regards the capacity reduction required
on markets with excess structural capacity if regional
development needs justify it, with a distinction being
drawn between areas eligible under Article 87(3)(a) and
those eligible under Article 87(3)(c) so as to take account
of the greater severity of the regional problems in the
former areas.

(91) As Burgenland is a region which has been consistently
classified as an Objective 1 assisted area since 1995, an
assisted area within the meaning of Article 87(3)(a) exists

In its decision to initiate the procedure, the Commission
pointed out that, for want of sufficiently detailed infor-
it could not make a proper assessment of the
mation,
overall effect of
these measures, which were in part
described only in vague terms, and of their contribution
and asked for further information. Austria subsequently
provided further
the
measures and their reduction effect and announced that
all possible ways of offering suitable compensatory
measures on the part of BB had been examined.

information on the value of

(96) Austria made the point in connection with the sale of
that BB had already disposed of holdings
holdings
amounting to EUR 3,5 million that were not necessary
for its operations in the period from 2001 to July 2003,
with the result that the holdings in its portfolio as at 31
December 2000 were reduced by around one third.

(97) According to the information provided by Austria, BB,
apart from the assets already disposed of, did not possess
any strategic holdings or hidden reserves, something that
could be ascertained from the prudential reports prepared
by BB’s auditors in recent years. Further disposals of
business assets would, therefore, erode BB’s substance
to such an extent that its survival would be threatened.

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(98) As a reduction measure, BB closed one of its existing 17
branches (in Parndorf) as part of its restructuring. Closure
of the Parndorf branch was equivalent to a reduction in
market presence of just under 6 %.

(103)

(99) As regards the closure of other branches, Austria has
stated that the number of BB branches now operating
is extremely small and
(16)
on the domestic market
represents a relatively low branch density in rural
regions of Burgenland. With one exception, BB had no
noticeable foreign business.
the
bank had a single subsidiary which, in the light of the
situation in the banking sector, did though
general
represent an important commitment to its future profit-
ability and marketability in the context of international
banking competition. Another closure would, therefore,
result in turnover losses of direct significance and in an
appreciable deterioration in earnings prospects.

In Sopron (Hungary)

(100)

In addition, Austria has promised that BB will restrict its
activities by desisting from granting Federal loans. Such
lending, accounting for 12 % of
lending, has
become comparatively important. It is also a particularly
since, given the Federal
lucrative area of business
Government’s excellent credit
rating as a borrower,
these loans did not represent any risk for the bank and
were thus not subject to any capital charges. In addition,
they generated considerable risk free interest earnings.

total

(101) The Commission has examined these arguments and the
corresponding information provided and has come to the
conclusion that, given the small size of the bank and its
further compensatory measures
tiny market presence,
would jeopardise its viability.
in past
In addition,
decisions on bank reorganisations,
it has regarded a
reduction in market presence of 10 % as sufficient in
cases where the banks concerned had pursued an expan-
sionary business policy in the years preceding their
economic difficulties (10).
In the case of smaller banks
which were still much bigger than BB, the Commission
did not require any reduction in the branch network (11).

(102)

In the Commission’s opinion,
the compen-
satory measures that have already been implemented,
to
are planned or are promised are sufficient overall
mitigate the competition-distorting effect of
the aid
measures in question.

therefore,

(10) Commission Decision 99/288/EC of 29 July 1998 giving condi-
tional approval to the aid granted by Italy to Banco di Napoli
(OJ
and Commission Decision
2000/600/EC of 10 November 1999 conditionally approving the
aid granted by Italy to the public banks Banco di Sicilia and
Sicilcassa (OJ L 256, 10.10.2000, p. 21).

L 116, 4.5.1999, p. 36)

(11) Commission Decision 1999/508/EC of 14 October 1998 condi-
tionally approving aid granted by France to Société Marseillaise
de Crédit (OJ L 198, 30.7.1999, p. 1) and Commission Decision
2001/89/EC of 23 June 1999 conditionally approving aid granted
by France to Crédit Foncier de France (OJ L 34, 3.2.2001, p. 36).

Aid limited to the minimum

In the Commission’s opinion, Austria has provided
sufficient evidence that the amounts of aid granted are
limited to the strict minimum needed to enable restruc-
the existing
turing to be undertaken in the light of
financial resources of
the bank and its shareholders.
The bank has not been provided with surplus cash or
surplus capital
that could be misused for an inap-
propriate expansion of its business to the detriment of
competitors.

(104) The aid of EUR 359,8 million granted to BB by the
Province of Burgenland under guarantee agreements
was calculated in such a way that, on the one hand,
the need for a value adjustment of EUR 171 million
discovered in the wake of the fraud and, on the other,
the need for a value adjustment of EUR 189 million
discovered during the audit of accounts receivable were
covered. With core capital of EUR 80 million, these were
essential to the bank’s short-term survival as otherwise
the bank would have been placed under court-supervised
management and the default guarantee would have been
triggered. There was, therefore, no injection of additional
the bank’s competitive
capital, with the result
that
position has not been strengthened.

(105) However, the Province’s guarantees for BB were alone not
sufficient to preserve a satisfactory degree of solvency.
Whereas
the
necessary value adjustment in respect of the proceeds
from non-performing loans, they did not take account
of the shortfall in interest on bad loans, which the bank
itself thus had to make good.

agreements

guarantee

covered

the

(106)

In addition, before the guarantee agreement of 20 June
2000 was concluded and at the time the annual accounts
for 1999 were drawn up, BB itself made further value
adjustments amounting to EUR 41 million.

(107)

customers withdrew substantial

following adverse publicity, a large
In October 2000,
credit
number of
balances
(savings and time deposits, and securities
holdings) amounting to EUR 218 million and accounting
for some 10 % of BB’s balance sheet value. These losses
too had to be made good by the bank.

(108) To sum up, BB has, by its own efforts, run down all its
hidden reserves and has in the last three years reduced
staff costs by EUR 1 million and materials costs by 10 %.
Further cost reductions amounting to EUR 285 000 are
planned for 2004.

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(109)

In the Commission’s view, the aid has, therefore, been
limited to the minimum needed.

VIII. CONCLUSIONS

(110) The aid totalling EUR 359,8 million consists of

two
measures: the guarantee agreement dated 20 June 2000
between the Province of Burgenland and BB (EUR 171
million plus 5 % interest) and the framework agreement
of 23 October 2000, which consists for its part of a
claims waiver on the part of Bank Austria for BB, a
better-fortune agreement between these two contracting
parties and a guarantee agreement on the part of the
Province of Burgenland for BB amounting to EUR 189
million.

(111) All the conditions for the presence of State aid pursuant
to Article 87(1) of the EC Treaty are met: State resources,
treatment favouring a specific undertaking, competition-
distorting effects and effect on trade between Member
States. Of the derogations from the principle that State
aid is incompatible with the common market, only the
derogation in Article 87(3)(c), taken in conjunction with
the Community guidelines on State aid for rescuing and
restructuring firms in difficulty, is applicable.

(112)

In its assessment and in the light of the criteria laid down
to the
in the guidelines,
conclusion that the restructuring measures already imple-
mented and planned are reasonable, logical and appro-
priate for enabling BB to restore its long-term viability.

the Commission comes

(113)

In the Commission’s view, the disposals, closures and
cutbacks already implemented, planned and promised
are sufficient overall to offset the competition-distorting
effect of the aid measures in question.

(114) The two guarantee agreements of 20 June 2000 and 23
October 2000 are limited, in the Commission’s view, to
the strict minimum needed to enable restructuring to be
undertaken in the light of the existing financial resources
of the bank and its shareholders. The bank has not,
therefore, been provided with surplus cash and surplus
capital which it could misuse for an inappropriate
expansion of its business to the detriment of competitors,

HAS ADOPTED THIS DECISION:

Article 1

The following State aid measures for Bank Burgenland AG (BB)
are compatible with the common market:

(a)

the guarantee agreement of 20 June 2000 on the part of the
Province of Burgenland amounting to EUR 171 million plus
5 % interest;

(b) the framework agreement of 23 October 2000, which
the
comprises a guarantee agreement on the part of
Province of Burgenland amounting to EUR 189 million.

Article 2

This Decision is addressed to the Republic of Austria.

Done at Brussels, 7 May 2004.

For the Commission

Mario MONTI
Member of the Commission