Deutsche Bank Settles French Loan Spat as Elections LoomHelene Fouquet and Fabio Benedetti-Valentini
Deutsche Bank AG and Saint-Etienne, a centuries-old town in France’s Massif Central region, settled a four-year-old “toxic” loan spat this week. The town’s woes aren’t over as other banks aren’t playing ball, its mayor said.
“Deutsche Bank was in a constructive mindset,” Mayor Maurice Vincent, who also heads the national association of cities and counties plagued by risky loans, said in an interview. “We had room for discussions, which is still not the case in most disputes between banks and local authorities.”
French towns, with toxic loans of as much as 17 billion euros ($23 billion) from before the global financial crisis in 2008, are putting pressur.e on banks ahead of 36,000 mayoral elections in March. Banks, including Dexia SA’s defunct French unit, face legal disputes on more than 300 loans made to local authorities, representing as much as 10 billion euros.
Towns from Asnieres to Saint-Etienne borrowed money from banks, signing contracts they say they didn’t always understand. Saint-Etienne’s contract with Deutsche Bank, for example, was pegged to the exchange rate between the British pound and the Swiss franc.
The settlement, Saint-Etienne’s first with Deutsche Bank, marks an end to a row that had prompted the town to stop paying the Frankfurt-based lender since 2010. Saint-Etienne agreed to pay 11 million euros over the next 12 years to Deutsche Bank to settle the dispute, said Jean-Gabriel Madinier, the town’s general secretary general. The Deutsche Bank swap contract had covered a Dexia loan worth about 21 million euros, he said.
French towns last year appealed to President Francois Hollande to save them from the toxic loans whose risks they said weren’t made clear. Banks that issued the loans include Royal Bank of Scotland Group Plc, Depfa Bank Plc, Caisses d’Epargne, Credit Agricole SA and Societe de Financement Local, or SFIL, which in 2013 took over most of Dexia’s French risks.
Saint-Etienne’s settlement is one of many clinched by counties and municipalities over debt pegged to foreign interest rates or currencies.
“We’re busy trying to stop the hemorrhaging,” Vincent said. “We’re cleaning the mess from 2008 and earlier.”
Local governments have been hit hard by debt burdens and an economic slowdown in France, which barely grew over the last two years. France’s March municipal elections may hurt Hollande’s Socialist Party. A Jan. 30 Opinion Way poll showed 82 percent of respondents are dissatisfied with his policies and 73 percent said their disenchantment will affect their March vote.
Vincent, Saint-Etienne’s Socialist Party mayor, said the settlement with Deutsche Bank ends a dispute over a swap deal signed in a late 2007 aimed at cutting the cost of a 2005 loan from Dexia.
The agreement is among a dozen settlements the highly-indebted town has reached with banks, including Edinburgh-based RBS, Vincent said.
Yann Couronneaud, a Deutsche Bank spokesman in Paris declined to comment on the settlement with Saint-Etienne.
Saint-Etienne still has legal disputes over four contracts, including three with Dexia’s former unit representing about 60 million euros. Saint-Etienne’s other dispute is over a 20 million-euro loan with Dublin-based Depfa.
A town with 179,000 inhabitants settled after it developed an arms manufacturing industry during the 16th century, Saint Etienne has an annual budget of 350 million euros.
Vincent said the city is not paying interest while negotiating with Dexia-SFIL. He said Saint-Etienne has set aside 20 million euros in provisions.
The town’s loans with Dexia include one linked to the difference between the 10-year British pound constant-maturity-swap and the 6-month Japanese benchmark.
Dexia’s loans at their peak represented 40 percent of French municipal funding. The contracts have now mostly been taken over by state-owned SFIL.
The transfer was part of the break-up of Dexia, the Franco-Belgian bank that was among the first European casualties of the financial crisis and the credit crunch that followed the collapse of Lehman Brothers Holdings Inc. in 2008.
French municipal governments represent 72 percent of the country’s public investments, a La Banque Postale report said in October. Their total new borrowings last year probably dropped to 19.2 billion euros from 21.4 billion euros in 2012, the report showed.
SFIL since the end of February has sent proposals to 492 borrowers to renegotiate contracts on 3.93 billion euros of loans and it has reached deals with 96 borrowers on 574 million euros, said Christine Lair, a Paris-based spokeswoman.
SFIL held 7.6 billion euros of “sensitive” loans at the end of December, down from 8.5 billion euros a year earlier. She declined to comment on the bank’s outstanding contracts with French towns.