Beware state guarantees

Bankers with long memories will remember when a sovereign guarantee from a less developed country was regarded as safe. Then came Mexico's insolvency and the 1980s emerging-market-debt crisis. Now lenders to European borrowers are becoming vigilant - not because they are worried about borrowers' incipient insolvency, but because of EU rules governing guarantees provided by member states or state-owned entities.

Under the EC treaty, anything which threatens to distort competition between member states is deemed to be incompatible with the common market. So the provision by a member state of finance - either directly or (by way of a guarantee, for example) indirectly - can be in breach of the EC treaty and, in particular, articles 92 and 93. These cover the provision of what is called "state aid" by member states.

There is a pre-clearance procedure: basically, the member state concerned informs the European Commission, which then has a set period, usually...