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French Towns Suffer as the Swiss Franc Soars

Saint Cast, a sleepy French coastal town in Brittany with 19th-century mansions and a mile-long white, sandy beach, restructured €3.6 million ($5.1 million) of debt in July 2007. The lender, a unit of Belgian bank Dexia, offered what seemed like a good deal: an interest rate of 3.99 percent—as long as the value of the Swiss franc, then trading at 1.6 to the euro, did not rise above 1.44.

It turned out to be a bad bet. As worries about the European debt crisis sent the Swiss franc climbing against the euro, Saint Cast’s interest rate has jumped to 15.25 percent. “There is something abnormal for a little pensioners’ seaside town to be embroiled in a European sovereign debt crisis and for my taxpayers to worry about the currency market,” says Jean Fernandez, 71, a former math teacher who serves as the town’s mayor.

The governments of Saint Cast and other French towns seeking to lower borrowing costs entered into contracts they didn’t always understand. Saint-Tropez has €24 million in debt pegged mainly to the Swiss franc. Argenteuil, a town on the outskirts of Paris where Claude Monet and Alfred Sisley painted, has €40 million of franc-pegged loans and €30 million of debt linked to the dollar-yen rate. The town raised local taxes by 20 percent from March 2008 to March 2010. It now has four full-time employees dealing with the loans from Dexia. “It’s not a rich city,” says Joël Fournié, a financial adviser to Argenteuil. “We are very, very far from Switzerland or a trading floor.”

French Prime Minister François Fillon urged local governments in December 2009 and again in June 2010 to stop using currency-indexed loans. The government is “bringing support to the authorities hit by the problem,” says Valérie Pécresse, a government spokeswoman.

After Fillon’s remarks in 2010, Dexia, which owns the biggest share of French local debt, said it stopped selling Swiss-franc products such as the “dual” loans it marketed to Saint Cast. Interest rates on Dexia’s currency-indexed loans spiked for “a very small number of clients who had their” rates reset after the franc soared, says Jean-Luc Guitard, director of Dexia France. He declined to comment on terms of specific contracts.

The Swiss franc, seen as a haven during global turmoil, began strengthening in early 2010, with the pace picking up in November. It traded at 1.21 by the date of Saint Cast’s annual interest rate adjustment in June, then surged to a record high of 1.03 in August. The Swiss National Bank said on Sept. 6 that it would spend “unlimited” quantities of cash to keep the franc from trading below 1.20. Since the announcement it has traded at about that level. If it stays there, Saint Cast’s interest rate will rise to 15.57 percent the next time it adjusts. “I cannot see how the SNB can rein in their currency in the long term,” says Fernandez. “And that’s now my problem.”

The bottom line: Lured by low rates, French towns took out loans tied to the Swiss franc. As the value of the currency climbed, so did the interest rates.

Fouquet is a reporter for Bloomberg News in Paris.

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