Is NAMA legal under EU law?

Simon gave me a bell in work today. It seems he has been doing some research into rulings by the European Court of Justice and the EU Court of First Instance on asset management and the legalities surrounding the application of state aid.

The beauty of working in journalism is you can spend time checking background information while looking like you’re working, thus getting a somewhat more rounded understanding of interesting subjects, like, ehem, NAMA and EU law. I do check the odd fact. Honest.

Anyway, I did find our conversation interesting, here’s the information discussed laid out in as simple terms as possible. It questions the legality of NAMA on way the Government announced their decision to implement the bank guarantees (state aid). I’ve read through the cited documents myself and will try to explain it as best I can – I had a barrister on the phone explaining word for word and still struggled, hopefully I can be clear… further explanation if required can come in the comments.

Four years ago there was a case in the EU courts, The Commission v. France Telecom. At that time the Court ruled that the telecommunications company had to repay €1.1bn in tax that the French Government had not demanded over the prior ten years – see here for BBC report. This was against competition law, the Court stated. The ruling itself is not all that relevant to NAMA, however, in it there is a definition of State aid.

The Commission Decision can be read here. See Paragraph 196 (on page 34) for the juicy bit [my emphasis]…

Contrary to what the French authorities and France Télécom maintain, the Commission finds that a potential additional burden on the State’s resources was created by the announcement of the provision of the shareholder loan coupled with the fulfilment of the preconditions for such provision (115), by the impression given to the market that the loan had actually been provided…

While it is true that the contract was never signed by France Télécom, this does not mean that there was no potential commitment of state resources. In so far as the document constituted a contractual offer and as long as it was not rescinded, France Télécom could have signed it at any time, thereby acquiring the right to obtain immediate payment of the sum of EUR 9 billion.

Translation: Once a government says it plans to grant state aid, the state aid scheme has begun.

So, under the definition given by the Commission state aid is not necessarily the transfer of funds from State to receiver, it can simply be a sentence from an official with the relevant authority like “we plan on guaranteeing these banks”. Right?

In essence this ruling was made in an attempt to ensure state aid didn’t distort the market, which had happened in the France Telecom case.

Example: Two banks are competing, one is viable, one is going to need state aid. The Government announces its intention to give one bank state aid, thus artificially altering its value and distorting the market – once it has done that, even though it hasn’t passed a penny to any bank, or officially guaranteed any loans, under the above area of EU law it has granted state aid.

But anyway, that means nothing without the additional information from Communications from the Commission.

Earlier this year a communication was published relating to banking. Read the “Communication from the Commission on the treatment of impaired assets in the Community banking sector” here. In paragraph 60.9 the Commission says…

60. The Commission applies this Communication from 25 February 2009, the date on which it agreed in principle its content, having regard to the financial and economic context which required immediate action.

[9] Without prejudice to the necessity of making public the impact on the balance sheet of an asset relief measure implying appropriate burden-sharing, the terms “transparency” and “full disclosure” should be understood as meaning transparency vis-à-vis the national authorities, the independent experts involved and the Commission.

Pretty complicated legalese. However, the accompanying press release, as always, simplifies it (for us simple journos)… the translation:

The guidance for the application of the State aid rules is based on a number of principles:

full transparency and disclosure of impairments, which has to be done prior to government intervention

Put them together… state aid constitutes the announcement of the intention to grant state aid while prior to the implementation of state aid full disclosure of impairments to relevant balance sheets must be made.

As far as I am aware, the Irish Government has not disclosed any of the relevant documents to either the public, national authorities or the Commission. Yet it has announced its intention to grant state aid. This appears to contravene case law and communications cited above, thus making the process taken to implement NAMA illegal…

Of course, I am but a lowly journalist – the details of the this post come from Simon McGarr and McGarr Solicitors, hopefully it’s all correct (from my side) and understandable to the man on the street. Whether right or wrong (as we know, another barrister may well present an opposing argument), it’s worth looking at…