Unfulfilled Promise to Telecom Is State Aid

     (CN) – France’s promises to prop up a failing telecom company constituted illegal state aid, Europe’s highest court ruled Tuesday, reinstating a commission decision.
     After France Telecom SA faced staggering debt and falling profits a decade ago, French authorities publicly announced plans to strengthen the company’s capital base and prevent further financial difficulties. In 2002, the French government said it planned to participate in shareholder loan scheme by giving a $10.8 billion credit line to the struggling company in hopes of raising $18 billion total.
     While France Telecom never accepted France’s loan, the European Commission found that even the promise of the credit line – coupled with numerous public statements by French authorities vowing to help the company – constituted illegal state aid under European law. The commission conceded, however, that it could not order the recovery of the aid because it could not identify precisely what market imbalances came from the action.
     Despite this, both the French government and France Telecom appealed the commission’s decision to the General Court of the European Union. That court held that no state aid violations took place because the credit line was never delivered, even though the promises of government help conferred a market advantage on France Telecom.
     The lower court also found that the commission acted improperly by examining the public statements of French authorities together with the proposed state aid, rather than investigating the market implications of each aspect of the state aid separately.
     Bouygues, its telecommunications subsidiary and the European Commission appealed the General Court’s decision, and persuaded the Court of Justice on Tuesday to reinstate the commission finding.
     The commission is not required to separately examine potential violations that are so closely linked, according to the ruling.
     “For the purposes of establishing the existence of state aid, the Commission must establish a sufficiently direct link between, on the one hand, the advantage given to the beneficiary and, on the other, a reduction of the state budget or a sufficiently concrete economic risk of burdens on that budget,” the court wrote. “However, contrary to what the General Court found, it is not necessary that such a reduction, or even such a risk, should correspond or be equivalent to that advantage, or that the advantage has as its counterpoint such a reduction or such a risk, or that it is of the same nature as the commitment of State resources from which it derives.”
     France also failed to show that the commission erred in finding that its public statements of support for France Telecom amounted to tinkering with the free market, according to the ruling.
     “During the period from March to July 2002, Moody’s and S & P downgraded FT’s rating for credit notes to the lowest investment grade, with a negative outlook, stating that this grade was maintained only as a result of the French state’s comments regarding FT,” the Luxembourg-based justices wrote. “The markets could consider that the intervention of the French state had ensured FT’s liquidity with respect to its debts for the following 12 months. On 11 and 12 December 2002 FT launched two successive bond issues for a total amount of EUR 2.9 billion, on 15 January 2003 it raised loans in the form of bond issues for a total amount of EUR 5.5 billion, and on 10 February 2003 it renewed part of a maturing syndicated loan to the amount of EUR 15 billion.”
     The court also upheld the commission’s finding that the $10.8 billion credit line France offered to FT constituted state aid – regardless of whether the company accepted it.
     “It must be held that the shareholder loan concerns the opening of a credit line of EUR 9 billion,” the ruling states. “While, admittedly, it is true that FT did not sign the loan agreement sent to it, as the commission rightly found the beneficiary could have signed it at any time, thereby acquiring the right to obtain immediate payment of the sum of EUR 9 billion.”
     The justices added: “Furthermore, the commission pointed out that, in a presentation to investors on 5 December 2002, FT described the French state ‘back-up facility’ as immediately available, that on the same day S & P announced that the French state would immediately grant a shareholder loan, that it had been indicated to the Finance Committee of the French National Assembly that the shareholder loan ‘has already been made available to [FT],’ and that Moody’s announced on 9 December 2002 that it was confirmed that ‘the EUR 9 billion loan facility has been put in place.’ Having regard to the potential additional burden of EUR 9 billion on the state’s resources and to [European case law], the commission rightly found that the advantage was granted through state resources.”

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