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UPDATE - European Commission orders Hungary to recover illegal state aid to Malev

The European Commission on Monday said it ordered Hungary to recover illegal state aid to national airline Malev between 2007 and 2010.

"The European Commission found that financing granted to Hungarian flag carrier Malev between 2007 and 2010 in the context of its privatisation and renationalisation constitutes illegal state aid, as Malev would not have been able to obtain similar financing from the market on the terms conceded by the Hungarian authorities. Hungary now needs to recover the unlawful aid from the beneficiary," the Commission said.

The Commission noted that troubled companies may receive sate aid under strict conditions but the measures in favour of Malev did not meet these criteria "because Malev could not demonstrate how it would become viable again under its current business model".

"Malev’s business plan contained no evidence that a private source would be contributing to the cost of restructuring and the plan contained no compensatory measures to minimise the competition distortions brought about by the significant state support," the Commission said. "Moreover, Malev had already repeatedly received state support over the last few years," it added.

The Commission said it scrutinised in the course of its investigation the takeover in December 2007 of a €76m loan granted to Malev in 2003, a de facto cash facility in the context of the abortive sale of Malev’s Ground Handling subsidiary amounting to HUF 4.3bn, a tax and social debt deferral in the amount of HUF 13.8bn, two capital increases of HUF 25.4bn in February 2010 and HUF 5.7bn in September 2010, shareholder loans granted between May to September 2010 totalling HUF 14.9bn, and the conversion of part of these shareholder loans, with interest, into Malev shares in September 2010.

The National Development Ministry acknowledged the Commission’s decision in a statement and said the government was expected to discuss proposals on Malev’s future at a cabinet meeting on January 16.

The ministry said several possible courses of action had been prepared and their content would now be brought up to date with the Commission’s decision.

The ministry said that keeping a Budapest-based national carrier in the interest of the national economy remained a priority. To achieve this the continued operation of Malev is necessary, it added.

Authorities will take all necessary steps to recover the state aid, the ministry said, adding that it would draw up a package of measures, together with the government, to ease the situation in the coming weeks.

Commission spokesperson Cristina Arigho said on Monday that the Hungarian authorities would have to decide on the form of the recovery and its pace. She added that the Hungarians would also have to calculate the exact amount of the aid to be recovered.

Malev said on Monday that the Commission decision would not require it to repay the state aid immediately.

Malev flights are operating as scheduled and the airline’s business partners will continue to be paid in line with their contracts, said chairman Janos Berenyi. He added that Malev’s owner had ensured the resources necessary for this.

The government told Malev’s management it remained committed to keeping the national carrier, and the management and all of the airline’s staff are going about their work as usual and trying to replicate the improved the improved business performance in the past several months for the whole of 2012, Malev said.

Malev’s performance improved at operating level in Q4 2011, preliminary data show. Malev’s load factor was 78% in December and its Q4 revenue rose by HUF 7bn over the same period a year earlier.

The Commission said later the government had four months to recover the illegal state aid.