Hessen played with derivatives – economics

The citizens’ movement Finanzwende and the opposition factions in the state parliament of Hesse, the SPD, the FDP and the Left Party, called on the black-green government of Hesse to account for the risky hedging transactions. The Hessian Ministry of Finance concluded complex derivative transactions in 2010 and 2011 in order to save interest on loans in the future. But the bet turned out badly. The Hessian State Court of Auditors estimated the resulting damage at 4.2 billion euros in 2020. This corresponds to around 19 percent of all Hessian tax revenue this year. “The Länder and the municipalities should not deal with derivatives at all. And if they do, the national rules should be strict accordingly,” said Gerhard Schick, member of the board of Finanzwende on Thursday. “Many municipalities had to face high losses with these derivative bets as early as the 1990s and 2000s. The Hessian finance ministry should have known about the risks at that time,” Schick said. “It was a gigantic gamble. The responsibility must be clearly stated. You owe it to the taxpayer.”

Hessian opposition parties have been pressuring the state government for years to clarify the background to this case. The budget committee of the Land Parliament of Hesse has dealt on several occasions with derivatives of the Hessian debt administration which became known in 2018. The Court of Auditors then carried out an audit, the shocking result of which intensified the conflict . So far, however, there has been no parliamentary commission of inquiry. “There was a considerable loss for the state of Hesse. The Ministry of Finance had bought high interest rates with derivatives and therefore could not take advantage of the low interest rate phase”, said Jan Schalauske, leader of the parliamentary group of the Left Party. .

The company was the result of a lack of expertise

The expensive derivative transactions under the leadership of the now deceased Hessian Finance Minister Thomas Schäfer (CDU) were the result of a lack of expertise. At the time, the country took advice from investment bankers interested in profit and whose profit increases with the complexity and duration of the product. “In 2011, the state of Hesse set the interest payable over 40 years. It was inappropriate,” former derivatives trader Pius Sprenger said at the joint press conference. “This type of business reminds me of a hedge fund, not a state,” said the expert, who worked for many years for Deutsche Bank in New York and London. The structure of the financial product was inadequate. Importantly, the long term has ensured that tiny changes in interest rates in the financial market could lead to huge losses, according to Sprenger. Shorter-term derivatives would have been more suitable and cheaper. But the expert also specifies: “The use of derivatives is completely unnecessary for municipalities and states. With the simple issuance of bonds, policies have maximum planning security.”

“We need tougher laws for when states and municipalities want to enter into derivative transactions,” demanded Schick. This includes a time limit and the obligation to obtain independent advice before entering into an agreement. The height should also be capped. In addition, the activity of derivatives should only be used to hedge risks, not speculation.

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