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ANNEX - Calculation of the cash grant equivalent of a soft loan.

The following guidance note gives an example of how the grant equivalent of a soft loan can be calculated.

A public authority commits itself to paying an interest subsidy on a ECU 500 000 10year loan to maintain the interest rate to the borrower at 6%. The official reference interest rate accepted by the Commission for the country concerned in that year is 8%. In calculating the cash grant equivalent of the subsidy throughout the term of the loan, it may be assumed that the reference interest rate will remain constant over the period. The cash equivalent of the subsidy depends on whether or not a grace period on principal repayments is granted.

1. No grace period

The loan is paid off in linear instalments starting in year one. The cash grant equivalent of the interest subsidy in the first year is the principal sum multiplied by the interest subsidy in per cent, divided by the reference interest rate, thus:

(1) ECU 500 000 x 0.02/1.08 = ECU 9 259

The subsidy in years 2 to 10 is calculated similarly, but at a compound discount rate, i.e.:

(2) ECU 450 000 x 0.02/(1.08)2 = ECU 7 716

(3) ECU 400 000 x 0.02/(1.08)3 = ECU 6 351

(4) ECU 350 000 x 0.02/(1.08)4 = ECU 5 145

(5) ECU 300 000 x 0.02/(1.08)5 = ECU 4 083

(6) ECU 250 000 x 0.02/(1.08)6 = ECU 3 151

(7) ECU 200 000 x 0.02/(1.08)7 = ECU 2 334

(8) ECU 150 000 x 0.02/(1.08)8 = ECU 1 621

(9) ECU 100 000 x 0.02/(1.08)9 = ECU 1 000

(10) ECU 50 000 x 0.02/(1.08)10 = ECU 463

The total cash grant equivalent is the sum of the discounted subsidies in each year, i.e. ECU 41 123.

2. With grace period

No principal repayments have to be made in the first two years.

The loan is repaid in linear instalments of ECU 62 500 from the third year onwards. The discounted cash grant equivalent of the interest subsidy in each year is:

(1) ECU 500 000 x 0.02/1.08 = ECU 9 259

(2) ECU 500 000 x 0.02/(1.08)2 = ECU 8 573

(3) ECU 500 000 x 0.02/(1.08)3 = ECU 7 938

(4) ECU 437 500 x 0.02/(1.08)4 = ECU 6 432

(5) ECU 375 000 x 0.02/(1.08)5 = ECU 5 104

(6) ECU 312 500 x 0.02/(1.08)6 = ECU 3 939

(7) ECU 250 000 x 0.02/(1.08)7 = ECU 2 917

(8) ECU 187 500 x 0.02/(1.08)8 = ECU 2 026

(9) ECU 125 000 x 0.02/(1.08)9 = ECU 1 251

(10) ECU 62 500 x 0.02/(1.08)10 = ECU 579

In this case the total cash grant equivalent is ECU 48 018.

  
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