A 'Moral Hazard'? A Look At State Aid And 'Bailouts'

Last week, Boris Johnson refused Thomas Cook's request for financial assistance from the Government, reportedly to avoid a "moral hazard" for other failing businesses. Yet, when Condor - a German subsidiary of Thomas Cook - requested a reported €200m of financial assistance in that same week, the German government is reported to have provided a €320m bridging loan to Condor. What gives?

In this podcast, we separate soundbites from State aid - and take a look at what the EU State aid rules mean for firms facing financial difficulty.

Transcript

Sean Giles: My name is Sean Giles I am an Associate in the EU, Trade and Competition team here at Gowling WLG and I am sitting with Bernardine Adkins who a Partner and Head of the team. We are on a cloudy Friday morning in a room without any windows recording this podcast and Bernardine is absolutely desperate for a coffee so we had better press on otherwise it could get very nasty!

Bernardine Adkins: Sean - a bit of an extensional question for you... Why are we here? What is this podcast about? Why did we decide to do this one?

Sean: Why are we here... I won't go into that, but for this podcast you have probably seen there are lots of things in the news this week about Thomas Cook going into administration. The government are saying they are unable to provide any State aid or support to Thomas Cook on the basis that doing so would be a moral hazard, whereby many other companies if they ever go into liquidation or financial difficulty they would be seeking some funds from the government. People have been up in arms about that because in Germany a subsidiary of Thomas Cook, Condor Airlines, have sought about €200 million reportedly in aid from German states which looks set to be granted according to news reports so we had better clear up what is going on. We had better clear up what is happening here.

Bernardine: OK well I think moral hazard is a fascinating concept and ultimately derives from way back with the turn of inspecting supervision of financial institutions. But basically moral hazard is obviously giving the equivalent of giving your teenage child a credit card and off they go. So there is a situation of moral hazard because they can spend money willy-nilly because no-one is ever going to say OK well now you need to clear that credit card bill at the end of the month. So they will not behave in a responsible way because they will never get the consequence of their actions.

What is interesting is that moral hazard is factored into the State aid rules especially in regard to rescuing and restructuring aid and because certainly the European Commission that oversees the grant of State aid has had its fingers burnt in the past. And I have to say it has been in respect of the French Air France in particular and also Credit Lyonnais when we first saw that expression actually articulated in a decision saying listen France and Credit Lyonnais you cannot keep coming back here. This has to be one time last time and that is an important facet of any rescue and restructuring aid that an EU government can grant is - yes support that failing business - but you can only do it one time, one last time. That guards against this notion of moral hazard that a company or firm...

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