More than 90 percent of Seine-Saint-Denis’ borrowing, totaling about $1.25 billion, was in the form of “structured” loans, about two-thirds of which have turned toxic. These floating-rate credits provided an initial, highly favorable teaser rate for several months, and then were pegged to baskets of interest rates or foreign currency exchange rates that turned out to be highly volatile.
In February, Seine-Saint-Denis won a major victory against its main creditor, the Franco-Belgian bank Dexia. The Nanterre court ruled that the bank had provided insufficient information to the district authorities about three particularly risky loans totaling $260 million, and it ordered that the rates on them be cancelled. Instead of paying between 5 percent and 9 percent, Seine-Saint-Denis was only required to pay a rate of 0.7 percent, the court ruled.
The legal case was just one of 17 different suits filed by Seine-Saint-Denis against its banks, but it has quickly been viewed as a precedent in other afflicted towns, including Saint Etienne, which signed on to loans at a preliminary 4 percent rate that were indexed to the Swiss franc-British pound exchange rate. The rate soared as high as 24 percent at one point, doubling the town’s $160 million nominal debt. Saint Etienne, too, is suing its bankers…
In other words, the government has come down clearly on the side of the troubled communities, and against the banks, whose “duty,” in Moscovici’s words, “is to continue lending to local authorities.”
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