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EC Approves Rescue Package For Fortis Luxembourg

by Carla Johnson, Investors

08 December 2008

The European Commission (EC) has approved under EC Treaty state aid rules a support package granted between September 29 and October 5, 2008 by Belgium, Luxembourg and the Netherlands to Fortis Bank and Fortis Bank Luxembourg following the crisis on the financial markets.

The Commission argued that given Fortis Bank's size, market share in the retail sector and the prevailing crisis on the financial markets, the bank's collapse would have given rise to a systemic risk to the financial sector. "The measures have restored the long term viability of the bank and are limited to the minimum necessary," the Commission stated.

To limit distortions of competition, Fortis Bank has sold its Dutch operations, which accounted for 40% of its size, and thereafter was sold to BNP Paribas. "The aid is therefore, compatible with the EU rules on state aid," the Commission stated.

Competition Commissioner Neelie Kroes said:

"The failure of Fortis would have had critical effects on the economy of several member states. The support measures have addressed the specific causes of the bank’s problems and allow it to return to viability. As they have also reduced Fortis Bank's size by 40%, there is no risk of undue distortions of competition."

Fortis Bank was until recently one of Europe's largest banks. Part of the Fortis group, which included insurance operations, the bank held a pre-eminent position on the markets of Belgium, Luxembourg and the Netherlands. As a result of its participation in the purchase of ABN AMRO and of large investments in structured credits, Fortis Bank found itself very vulnerable when the sub-prime crisis started and the wholesale loans market dried up.

Between September 28 and October 5, 2008, Belgium, Luxembourg and the Netherlands took a series of aid measures because a failure of the bank would have severely compromised the stability of the financial system and the economy. On September 28 they announced a capital injection in exchange for a 49% stake in the bank. As this failed to restore market confidence in the bank and the liquidity crisis worsened, the Belgian authorities put in place on September 29 special liquidity assistance amounting to tens of billions of euros. On October 3, the Dutch operations of Fortis Bank, including ABN AMRO, were sold to the Dutch state. The remainder was bought by the Belgian state, which immediately sold 75% to the French bank BNP Paribas. Through this sale, BNP Paribas will also control Fortis Bank Luxembourg.

The member states involved claimed that they had acted as ordinary private investors and that the measures were therefore free of state aid. However, the Commission found that the interventions constitute state aid to the benefit of Fortis Bank and Fortis Bank Luxembourg.

The Commission concluded that the aid was compatible with EU state aid rules because it was necessary to save the bank and thus to remove a threat to the financial system.

According to the Commission, the fact that Fortis Bank has been taken over by BNP Paribas, one of the world's largest and highest rated banks, indicates that Fortis Bank is likely to return to long term viability. Moreover, the sale of its Dutch operations – which accounted for 25% of Fortis Bank's income in the first six months of 2008, half its net profits, 35% of the retail branches and 47% of the workforce – has radically reduced Fortis Bank’s market presence. This, the Commission believes, in conjunction with other commitments by Fortis, ensures that the aid will not unduly distort competition.

The Commission also found that the sale of 75% of Fortis bank and 16% of Fortis Bank Luxembourg to BNP Paribas does not involve state aid in favour of BNP Paribas, as the latter paid the market price for these acquisitions.

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