Update 01/2020 Negativzinsen by municipalities

Update 01/2020 Negativzinsen by municipalities

Current situation for claims from non-compliant interest rate adjustments by municipalities

Negative interest rate indicators continue to occupy the municipalities in Austria in the new decade and have generally existed since March 2015. This is reflected both on the credit side of assets and on the debit side of variable financing in the municipalities’ budgets. Overall, this long period of low interest rates has led to a significant relief for the public sector, including the Republic of Austria. This situation, which is fundamentally favorable for municipalities and their businesses, is unfortunately clouded by the fact that the advantages of low or negative interest (hereinafter “negative interest”) are often not passed on to the municipalities.

First judgments are available …

The starting point for an assessment of the topic is usually the existing contract situation for the floating-rate municipal financing (a negative indicator does not play a role in existing financing with fixed interest rates).

In the case of so-called “old contracts”, no lower interest rate limit has been agreed in the loan contract. In the event of the negative indicator not being passed on, this will certainly lead to a positive starting situation for the municipalities with regard to possible solutions. Things are different at least at the moment with “new contracts”, where from 2013/14 onwards a lower limit on interest rates in a wide variety of forms has often been agreed in the loan agreement. Although certain measures should also be taken in the case of new contracts, in this case there is a first judgment of the Supreme Court in favor of the bank in the area of ​​corporate finance (real estate). In my opinion, this judgment can only be applied to a limited extent for communities.

The focus should be on legacy contracts with no minimum interest rate, where a number of lawsuits have been brought against banks in the past. The first-instance judgments have recently been regularly passed in favor of the borrowers. At least I do not know of any final judgments in this contractual situation.

In practice, you will encounter a wide range of different legal starting situations that need to be taken into account in individual cases. It can therefore be assumed that the present judgments will currently not clarify the overall legal situation and will not be able to do so. The borrowers affected will ultimately not be spared an individual intervention, so that both the borrowers and the banks continue to seek solutions by way of comparison.

Due diligence and initial analysis

At this point it must be mentioned that municipalities (as well as banks) and their officials are subject to a general duty of care and are ultimately responsible for their actions and actions. This also applies to the issue of (not) passing on negative interest rate indicators, which will increasingly be subject to ex post evaluation by supervisory bodies.

For this purpose, the municipalities should get a compact overview as part of an initial analysis as to whether they are adversely affected and what (damage) amounts are. After evaluating a few hundred municipal accounts, I dare to argue that Austrian municipalities are definitely affected with a higher double-digit million amount. Interestingly, I also found that at least two large municipal finance houses, along with a few smaller regional banks, passed on the negative reference interest rate from the start for old contracts with no lower interest rate limit, and continue to pass it on up to an absolute interest rate of at least 0%. This uneven approach leads to further questions and a feeling of possible disadvantageous or unfair treatment for the communities.

As a result, limitation periods and limitation waivers also play a role, since in the present case, according to information, there is a shortened limitation period of three years. This means that new interest periods can become statute-barred. This situation is sometimes not easy for the communities to understand.

In addition, the initial analysis can also be used to check whether the financing is generally customary in terms of interest rates or whether there is a need for action. On this basis, the municipality and its governing bodies can also secure their legal position.

Comparative solutions through the involvement of expert experts …

After a first result is available and the community may be adversely affected by the non-disclosure of negative interest rate indicators, one should think about the workup. This can be done either by the community alone or through the involvement of external specialists. In the past few months, I have been able to accompany a large number of communities in individual negotiations by negotiation. In addition to the historical loss, the economic results should also take into account the “inclusion of the future value in the damage assessment” (the historical loss is the amount that the bank has offset too much since the negative values ​​of the interest rate indicators were reached). By including the future value, comparative solutions can be achieved that are significantly above the historical damage.

This is made possible by a mathematically correct valuation of the lower interest rate limit drawn by the bank. This makes it possible to measure the value of the lower limit of interest claimed by the bank and to find a future tangent in the damage calculation, which is of even greater importance due to the latest interest rate development. This forward-looking value is regularly astonishingly high. The comparison solutions achieved can thus be significantly higher than the historical damage.

… lead to attractive solutions

In addition to the repayment of overpaid interest and the recognition of the negative indicator for future interest statements, there are also solutions in which the conditions of existing financing can be significantly reduced in the future and the contract for the future is legally established. This should ensure a sustainable result for the communities. Such forward-looking, legally compliant solutions also make sense because it cannot be ruled out that the banking sector will ultimately respond to the negative judgments for the banks by increasing market premiums across the board.

As an alternative, debt rescheduling for loans that cause costs that are higher than the market is a tried and tested means of solving the issue. In addition to the classic tender process, digital financing platforms for municipalities will also become more important in the future. Read more about the digital financing platform here …

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About The Author

Heinz Hofstaetter
Over 20 years of international experience in senior management positions in the areas of consulting, banking, finance, asset management, valuation and Real Assets.