Toxic Loans to Municipalities: Court Orders Dexia to Lower Interest Rates

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For the thousands of local governments and public entities in Europe which were snared into contacting “exotic” bank loans, the ruling handed down Feb. 8 in a French court against the bank Dexia, provides useful ammunition, albeit in a roundabout way. The lawsuit against the Franco-Belgian bank was filed in the Nanterre court by the Seine Saint Denis Department, one of the 101 French administrative departments and among the poorest, which charged the bank with the sale of toxic loans. Similar suits have been filed by over 66  municipalities in France, and many have simply suspended paying interest, pending a court decision.

Contributed To HellasFrappe
www.eir.de

In these cases, the interest rates on loans sold by Dexia were initially below average and highly attractive, but then after a few years, they were automatically pegged to the exchange rate between two currencies. As a result, interest rates on loans taken out by the Seine Saint Denis -- as well as thousands of villages, cities, departments, regions, hospitals, fire fighter companies, etc. -- skyrocketed from 3.5% to 9%, and in some cases to 14% and even 24%!

The banks, including Dexia, clearly intended to dupe naïve public and elected officials. Unfortunately, the Nanterre  court ruled in their favor on the merits of the case, finding that such contracts were neither speculative nor illegal, that local elected officials are indeed “competent” to sign on to such highly sophisticated “structured” debt contracts (many have argued that such loans to public entities should be outlawed), and that Dexia did duly inform its clients of the loan conditions.

However, a legal precedent was also established, in that the Court cancelled the usurous interest rates on three loans (totalling some 200 million euros), on grounds of a technicality. In several loan propositions sent by fax, Dexia “forgot” to indicate the global effective rate (TEG), which indicates the real cost of the loan. Therefore, states the ruling, the current rates must be replaced immediately by the “legal interest rate”, for the entire duration of the loan contract. That reduces the rate on these three loans to 0.71%, whereas it was between 5 and 9%!

Dexia intends to appeal the ruling because of the obvious snowball effect it could have, with thousands of local governments using this precedent to win relief in their own cases.