The small community of Rheingau-Taunus, nestled in the wealthy German state of Hessen, has a debt of 162 million Swiss francs. The size of the loan is not the problem. It’s the currency.
When Switzerland’s central bank shocked the financial world by ending its peg with the euro in February, the franc rose rapidly in value – and so did the Rheingau-Taunus district’s debt. The expensive foreign currency loan could end up costing Rheingau-Taunus up to €50 million, as the Swiss franc has fallen from its peg of €1.20 to €0.96 currently.
That explosion in debt was enough to get the attention of state government officials in Hessen, which is now the latest state pushing to ban cities and other municipalities in Germany from speculative investments in the future. The local state government, a coalition between the center-right Christian Democrats of Chancellor Angela Merkel and the Green Party has prepared a proposed law in the state’s capital of Wiesbaden, according to information obtained by Handelsblatt.
The need to ban municipal speculation should already have been clear well before the threatened losses in Rheingau-Taunus. Cities and towns across Germany have gambled with taxpayer money in past years. Many investing in complex interest derivatives that went sour in the 2008 financial crisis.