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T. Pediaditaki, State Aids in times of economic crisis, 2009

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Presenation at Conference on Competition Law and Policy (Athens, June 2009)

Presenation at Conference on Competition Law and Policy (Athens, June 2009)

Published in: Technology, Economy & Finance

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  • 1. State Aids in times ofState Aids in times of economic crisiseconomic crisis -- The Greek package for theThe Greek package for the enhancement of liquidity ofenhancement of liquidity of the economythe economy Tonia Pediaditaki Legal Counsel to the Greek Minister of Economy and Finance (LLM, DEA) Athens, May 30th , 2009 International Conference Institute for the Competition Law and Policy
  • 2. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 ΔιάγραμμαΔιάγραμμα // OutlineOutline Ι. Κρατικές ενισχύσεις και Οικονομική κρίση  1. Η χρονολογία της οικονομικής «καταιγίδας»  2. Επιλογή εργαλείων για την αντιμετώπιση της χρηματοπιστωτικής κρίσης: Mεταρρύθμιση του Κοινωνικού Κράτους ή βραχυπρόθεσμες λύσεις ;; ΙΙ. Το ελληνικό πακέτο για την ενίσχυση της ρευστότητας της οικονομίας (ν.3723/2008)  1. Οι 3 πυλώνες του συστήματος – βασικά στοιχεία  2. Η απόφαση της Επιτροπής για την έγκριση του ελληνικού καθεστώτος κρατικής ενίσχυσης Ν 560/2008 Ι. State Aids and Economic Crisis  1. The chronology of the economic storm  2. The choice of instruments for the weathering of the credit crunch: Welfare state reform or Short-term solutions?? II. The Greek scheme for the enhancement of liquidity of the economy (Law 3723/2008)  1. The 3 pillars of the scheme – basic features  2. The Commission decision for the approval of the Greek state aid scheme N 560/2008 22
  • 3. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 The Chronology of the Economic StormThe Chronology of the Economic Storm 33
  • 4. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 Rerun of the past ??Rerun of the past ?? Major financial crises, 1992-2008 Country Year Finland, Sweden, UK Autumn 1992 The ERM crisis July 1993 Mexico December 1995 Asia (Thailand, Indonesia, South Korea) Summer 1997 Russia August 1998 Brazil January 1999 Turkey May 2001 Argentina December 2001 USA August 2007 The world economy 2008 44
  • 5. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 ……or return to the future??or return to the future??  Yesterday’s financial catastrophes as patterns for today’s storms?  Or New elements this time? The story in short: A. The rise …:  Starts with financial deregulation and financial innovation combined with expansionary monetary and fiscal policies.  The boom is driven by a rapid rise in credit and by low rates of interest.  The rise in bank lending is channelled into asset markets, notably real estate and stocks.  As real estate increases in price, the higher market value is used as collateral for new loans.  The lending boom becomes a self-fulfiling process. 55
  • 6. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 B. …and fall:  Boom-bust pattern : the boom turns into a bust, as negative news changes the outlook from optimism to pessimism, while credit starts to contract and interest rates rise sharply.  The value of real estate and stocks falls.  Wealth losses lead to lower consumption and investment and increase in private savings.  Investment plummets, most rapidly within the construction sector,  Unemployment soars.  Tax revenues fall and public spending increases.  The government budget deficit increases dramatically.  The economy slides into a deep recession …  At this stage, governments are usually forced to support the financial system with capital injections into banks and other measures to “save” the financial system, as the bank system is the facilitator of the money circulation and the cornerstone of the economy in general… 66
  • 7. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 EC policy response & Greece’s action planEC policy response & Greece’s action plan The reaction of the EC Commission “If Europe acts decisively to implement this recovery plan, we can get back on a path of sustainable growth and pay back short-term government borrowing” (José Manuel Barroso) “We must grasp this opportunity to drive forward a restructuring of global governance” (Commissioner Joaquin Almunia) ******  Commission Communication, 13 October  European Council, 15-16 October 2008  ECB guideliens: 20 October  Article 87 par. 3 (b) EC Treaty : serious disturbance to the economy !  Empowerment procedure for urgent decision-making process  Commission Communications of 5 and 17 December 2008  “State Aid Rules are part of the solution not of the problem” while  “Flexibility doesn’t mean throwing out the rules” (Commissioner Neelie Kroes) The reaction of Greece  Quick reaction to the new reality  23 October 2008  Powerful, systematic and pragmatic approach  Robust coordinated measures:  Guarantee for bank deposits (up to 100,000 €)  3-pillar scheme for the enhancement of liquidity of the economy  Effect as from 24 October 2008 77
  • 8. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 3 pillars of the Greek package approved3 pillars of the Greek package approved under State Aid scheme N 560/2008under State Aid scheme N 560/2008  1. Recapitalisation scheme  2. Guarantee scheme  3. Bond loan scheme 88
  • 9. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 11stst pillar : Recapitalisation schemepillar : Recapitalisation scheme  makes available new capital to credit institutions in exchange of preference shares, to allow them to strengthen their capital base against potential losses.  The State purchases shares which are considered as non core tier 1 capital and will be remunerated with 10% interest. 99
  • 10. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 22ndnd pillar: The guarantee schemepillar: The guarantee scheme  covers against remuneration new debt with a maturity between 3 months and 3 years, issued during maximum 6 months after November 19th , 2008.  Subordinated debt and interbank deposits are excluded from the scheme.  The remuneration is aligned with the ECB recommendations. 1010
  • 11. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 33rdrd pillar: The bond loan schemepillar: The bond loan scheme  provides government bonds against remuneration to credit institutions to enhance their access to liquidity, in particular with the ECB.  The bonds are borrowed by the credit institutions against collateral, which has been subject to significant haircuts and against a fee similar to that of the guarantee. 1111
  • 12. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 Key elements of the Greek schemeKey elements of the Greek scheme Law 3723/2008 + Ministerial decision & Matrix of decisions of banks’ general assemblies and bilateral contracts ** The role of the Bank of Greece Supervisory Council for the monitoring of the scheme State’s representatives to the participating 1212
  • 13. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 Evaluation of the Greek schemeEvaluation of the Greek scheme  Comprehensive  Appropriate & Proportionate  Non-discriminatory  Limited in time and scope  Entry windows of maximum 6 months  Incentives for exit system  Budget caps  Market-oriented remuneration  Targets only fundamentally sound credit institutions  Based on solvency and capital ratio requirements  Growth restrictions on clear benchmarks  Behavioral safeguards to avoid the abusive use of State support  Behavioral constraints (dividend ban, managers’ bonuses)  SUCCESFUL in terms of scope, structure, application and Commission approval 1313
  • 14. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 Games of Institutional DynamicsGames of Institutional Dynamics  The Shock as a catalyst for institutional change? OR  Focused measures to remedy the crisis without changing the perimeter of regulation?  Traditional dichotomy of institutional changes:  Gradual continuous change  minor changes  Shock discontinuous  major changes! 1414
  • 15. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 The Process of Institutional ChangeThe Process of Institutional Change Process of change Results of change CONTINUITY DISCONTINUITY INCREMENTAL Reproduction by adaptation Gradual transformation ABRUPT Survival and return Breakdown and replacement 1515
  • 16. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 The international dimension ?The international dimension ? 1616
  • 17. T. Pediaditaki, Athens, 2009T. Pediaditaki, Athens, 2009 The Greek case nowThe Greek case now SchemeScheme ProlongationProlongation Review phaseReview phase under wayunder way 1717