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UPDATE 1-EU eases state aid rules for 2 yrs to tackle crisis

Published 12/17/2008, 10:01 AM
Updated 12/17/2008, 10:05 AM

(Adds detail, economist comment, background)

BRUSSELS, Dec 17 (Reuters) - The European Commission announced on Wednesday a temporary easing of state aid rules to help companies access loans and capital, seeking to mitigate the impact of the global credit crunch on the real economy.

The move is part of the European Union executive's broader economic recovery plan approved last week by EU leaders, which includes fiscal stimulus worth 200 billion euros ($280 billion), or 1.5 percent of EU gross domestic product.

The new rules remain valid until the end of 2010, but the Commission said it may extend them if the crisis continues.

"Due to the drying up of the lending market, even healthy companies may not be able to get the finance they need. This may seriously endanger their business," it said in a statement.

Small and medium-sized enterprises are the backbone of the European economy, accounting for 99 percent of EU businesses and providing around three-quarters of all private-sector jobs.

The Commission said governments would be allowed to grant companies a lump sum of 500,000 euros to pull them out of trouble over the next two years. The threshold so far was 200,000 euros.

Governments may also give guarantees for loans to firms at a reduced premium, subsidise loans and provide risk capital aid of up to 2.5 million euros per company per year, rather than 1.5 million euros as now.

The share of private funds in a venture the state would join can now be 30 percent, instead of 50 percent as before.

Economists said the move was a good idea, especially since European Central Bank interest rate cuts were not fully reflected in the credit market amid a continuing confidence crisis at banks and general risk aversion among investors.

Yet the effectiveness of the easing will depend on how the bloc's 27 members use the new possibilities.

"If member states are willing to put substantial money and energy behind such projects, it can make a significant difference," said Nick Kounis, economist at Fortis bank. (Reporting by Mark John and Jan Strupczewski; editing by Dale Hudson)

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