Swiss Franc Seduction Returns to Haunt German Towns: Euro Credit
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(Bloomberg) — In Germany’s industrial heartland, a sense of betrayal comes with a bill.
Officials overseeing public finances in the city of Essen began taking loans in Swiss francs 14 years ago, enticed by attractive rates and monetary policy they could rely on. Then the Swiss National Bank last week abandoned its three-year cap of 1.20 per euro on the franc.
“I took the SNB at its word,” Lars Martin Klieve, Essen’s treasurer, said in an interview. “Essen didn’t see the need to hedge. That would have devoured the interest-rate advantage.”
The Swiss currency soared as much as 41 percent against the euro following the SNB’s abrupt change of course on Jan. 15, and the implications are playing out across Europe for Polish mortgage holders to French municipalities.
Even after the European Central Bank’s announcement on Thursday that it will inject about 1.1 trillion euros ($1.3 trillion) into the financial system through asset purchases, the euro traded around parity with the franc.
Essen, Germany’s energy capital and home to steelmaker ThyssenKrupp AG, is one of several municipalities in the state of North Rhine-Westphalia facing higher repayment costs. Towns there, also including Bochum, Gladbeck, Gelsenkirchen and Muenster, have more than 900 million francs ($1.04 billion) in cash credit or borrowings tied to the franc, according to data they supplied. Few have hedged the exchange-rate risk.
Leap of Faith
Parity with the euro at the end of 2015 would leave Essen with costs of more than 70 million euros on its franc- denominated loans, said Klieve. The city took 450 million francs of credit in 2001, continually extending the loans as exchange rates moved predictably, he said.
Gladbeck, about 10 miles north of Essen, faces interest payments of 800,000 euros this year instead of the 700,000 euros it had budgeted for on its franc loans, said Michael Chlapek, chief of staff at the mayoral office.
“If we can’t continue the loans in francs then the exchange-rate loss would hit us full on,” he said. “The SNB’s decision took us completely by surprise. The cap was in place for more than three years. We trusted in that.”
Out of Blue
A difference in interest rates of almost two percentage points helped Gladbeck save 3.9 million euros when it took up 65 million francs in credit in 2005 and a further 20 million francs five years later, said Chlapek. “That was tempting,” he said.
Gelsenkirchen has taken impairments of 12.6 million euros on its franc-denominated loans so far. Muenster has a similar tale. It holds about 100 million euros, or about 14 percent, of its obligations in the Swiss currency.
“Usually central banks prepare the financial markets for change,” said Georg Lunemann, Gelsenkirchen’s treasurer. The SNB’s decision “came like a bolt out of the blue.”
North Rhine-Westphalia is Germany’s most populous state. With gross domestic product of about 600 billion euros, its economy is similar in size to Switzerland’s and it generates about 22 percent of German GDP. Yet, with the decline of the steel and mining industries, unemployment lingers above the national average and its cities are among the most indebted.
It’s being affected more than other German regions, according to Andre Kuper, a Christian Democrat lawmaker who raised the exchange-rate risk in questions to the state government last summer. Twenty-five municipalities have foreign- currency loans of about 1.8 billion euros, he said.
Public Money
“Many of these municipalities were advised by their regulator to consider such steps,” said Kuper. He estimates losses at “a three-digit million-euro” level this year.
Efforts to shave borrowing expenses have tripped up German towns in the past when they accepted derivatives deals whose risks they couldn’t measure with embedded financial obligations that began to blow up in the 2008 financial crisis.
“It’s not the first time that towns and cities in North Rhine-Westphalia have had little success with speculation,” said Kuper. “I can speculate with my own money, as a private person or a company. But you can’t play with public money.”
To contact the reporters on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net; Tino Andresen in Dusseldorf at tandresen1@bloomberg.net To contact the editors responsible for this story: Heather Harris at hharris5@bloomberg.net Rodney Jefferson
