The City That Got Swapped

In 1995 an ambitious Frenchman from the Loire city of Saint-Étienne took a trip to Baltimore. Michel Thiollière had been elected mayor that year, and he was visiting faded industrial cities—Cleveland, Pittsburgh, Glasgow—to pick up urban renewal ideas he could apply in Saint-Étienne, a coal and textile town of 180,000 that had been in decline for decades. A former English teacher at the Lycee Honoré d'Urfé, Thiollière came home with big ideas but needed capital to implement them. By 2001, with the help of his deputy mayor for finance, Antoine Alfieri, he began buying complex financial products to reduce the city's debt and free up cash.

The products—interest rate swaps and other derivatives whose values were based on such exotic metrics as the difference between long-term rates in the U.K. and short-term rates in Japan—performed as advertised for a while. Thiollière and Alfieri cut finance costs by 12 million euros as the city signed deals with French banks Dexia, Natixis, and Crédit Agricole, and foreign lenders Depfa, Royal Bank of Scotland, and Deutsche Bank. The moves allowed Saint-Étienne and its neighboring towns to build a design center, a 7,200-seat theater, a second streetcar line, even a new business district near the train station. Four years ago, Thiollière was named the fifth-best mayor in the world by City Mayors, a London-based think tank.