from Bloomberg: and please read this whole article.
Swaps Explode as Financial Weapons Ambush Europe
April 15 (Bloomberg) -- The worst global financial crisis
in 70 years arrived in Saint-Etienne this month, as embedded
financial obligations began to blow up.
A bill came due for 1.18 million euros ($1.61 million) owed
Bank AG under a contract that initially saved the
French city money. The 800-year-old town refused to pay, dodging
for now one of 10 derivatives bombs on contracts so speculative
no bank will buy them back, said Cedric Grail, the municipal
finance director. They would cost about 100 million euros to
cancel today, he said.
Saving 126,377 Euros
The town borrowed 22 million euros in 2001 from Dexia at
4.9 percent to consolidate borrowings for civic projects. The
rate would rise if the benchmark three-month London interbank
offered rate, or Libor,
exceeded 7 percent.
Under Mayor Michel Thiolliere,The risks in the equation hit the town this month. The
Saint-Etienne signed six
swap contracts on that loan between 2005 and 2008, the last
three with Deutsche Bank. That lowered the city’s effective
costs to 4.35 percent in 2006, to 4.07 percent in 2007 and 4.3
percent in 2008 and 2009. The difference in 2009 was a saving of
contract obligated Saint-Etienne to pony up on April 1 a
quarterly payment of 1.18 million euros -- equivalent to an
annual 24 percent on the debt
There will be more of these. As Dennis Gartman likes to say there is never just one cockroach.