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France’s Towns Demand Rescue From ‘Time Bomb’ of Dexia Loans

March 27, 2013

France’s Towns Demand Rescue From ‘Time Bomb’ of Dexia Loans

Dexia, being wound down after two bailouts by France and Belgium, has about 2 billion euros in risky French municipal loans. Photographer: Balint Porneczi/Bloomberg

French towns from Asnieres to Sainte-Etienne are calling on President Francois Hollande’s government to save them from about 10 billion euros ($13 billion) in Dexia loans whose risks they say weren’t made clear.

Sitting on debt pegged to foreign interest rates or currencies, many troubled municipalities are struggling to service their loans and clamoring for help from the state.

“This is a time bomb for a certain number of local governments,” Sebastien Pietrasanta, the mayor of Asnieres, a Paris suburb, told reporters yesterday. “We need a global solution and not just a case-by-case” treatment from the state, he said. Asnieres sued Dexia’s French unit last year over a loan tied to the dollar-yen exchange rate.

Loans issued by Dexia’s French unit, dubbed “toxic’ by mayors, have now mostly been taken over by SFIL, the state-owned municipal lender created this year. The transfer was part of the break-up of the Franco-Belgian entity, which was among the first European casualties of the financial crisis and the credit crunch that followed in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008.

Although SFIL Chief Executive Officer Philippe Mills has said that among local governments with “sensitive” borrowings “there is a very small minority with high or very high rates,” mayors of several towns say their loans have become an untenable burden, hurting them as France’s economy stalls and unemployment rises to a 13-year high.

Mounting Lawsuits

Dexia, being wound down after two bailouts by France and Belgium, has about 2 billion euros in risky French municipal loans. Dexia spokeswoman Caroline Junius declined to comment on demands made by municipalities, while French Finance Ministry spokesman Laurent Fary didn’t return calls seeking comment.

Meanwhile, lawsuits against Dexia are mounting.

A Nanterre court last month allowed Seine-Saint-Denis, a county on the outskirts of Paris, to lower interest payments on three loans from Dexia, ruling that the final contract signings failed to mention the interest rate on the borrowing.

Dexia said on Feb. 8, after the ruling, that it hadn’t failed in its “information duty” on the loans.

The city council of Saint-Etienne in central France plans to vote in May on whether to take legal action over loans from Dexia’s French unit and at least 100 French municipalities are considering lawsuits by June, mostly over Dexia loans, Saint- Etienne Mayor Maurice Vincent, who heads a group of local governments, said at the press conference in Paris yesterday.

Burdensome Payments

Saint-Etienne has three loans amounting to a total of 61.5 million euros from Dexia’s defunct French unit that are now on SFIL’s books.

The loans include one linked to the difference between the 10-year British pound constant-maturity-swap and the 6-month Japanese benchmark, Jean-Gabriel Madinier, the city’s secretary general, said by phone.

Saint-Etienne in the second part of 2013 faces an 8 percent spot interest rate on this contract, or a 14 million-euro mark- to-market payment, he said.

The Rhone county’s council last week voted to take legal action at the Nanterre court over five loans from Dexia Credit Local with interest rates tied to currency movements, according to an e-mailed document sent by its press office.

The Rhone department’s loans with Dexia amount to 354.7 million euros, the local government said.

New Loans

The troubled loans and the calls for a global government rescue come as Hollande’s government is seeking to cap state spending. France’s economic slump is forcing Hollande to abandon his 2013 deficit target and find additional savings to appease the nation’s European partners.

SFIL said last month it plans to issue between 3 billion euros and 5 billion euros of covered bonds this year to provide resources for new municipal loans that will be sold by a joint venture between La Banque Postale and Caisse des Depots et Consignations.

SFIL, based in Paris, also took over Dexia’s French unit 8.4 billion euros of “sensitive” structured loans and it plans to reduce these risks “progressively and in a definitive way” over coming years, CEO Mills said in Nantes last week at a meeting with local government representatives, according to a press report confirmed by the bank.

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editors responsible for this story: Vidya Root at vroot@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net


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