If there is a chain reaction of failed cities, Germany is Greece


WUPPERTAL LETTER:Few looking at Spain, Portugal and Ireland realise the danger lurking in their own backyard, writes DEREK SCALLY

WHEN world-renowned choreographer Pina Bausch died last year, the western German city of Wuppertal lost one of its main claims to fame.

The others are the philosopher Friedrich Engels, born here in 1820 and the painkiller Aspirin, invented here in 1897. Today, the city’s greatest attraction is the Schwebebahn, a suspended monorail from 1901 that runs through the city.

But Wuppertal has another hidden attraction which could yet guarantee the city’s infamy: a €1.8 billion mountain of debt. It’s quite an achievement for a city with a population of just 360,000 – less than the greater Cork area. And, even more staggering, three-quarters of the total is in off-balance sheet loans, many of which run just weeks or months.

Wuppertal isn’t alone: German cities are drowning in debt, with no way to save themselves.

But the problem is most keenly felt in the huge urban jungle of North Rhine-Westphalia (NRW), home to 18 million people.

In all, Wuppertal and other NRW cities owe €50 billion in regular loans and an additional €17 billion in bridging loan facilities originally intended only to guarantee civil servant salaries.

After the recent euro-zone drama, few Germans eyeing Portugal, Spain and Ireland as the next Greece realise the danger lurking in their own backyard, in cities like Duisburg, Dortmund and Wuppertal.

Debt crept up slowly on Wuppertal, established in 1929 by merging seven smaller towns to create a model industrial city turning out chemicals, textiles, rubber and metals.

By the 1970s, cheap imports of fuel and industrial goods sent the city into a slow decline. The decline picked up pace in the last decade as local business taxes, the main source of funding for German cities, went into free fall just as social welfare bills rocketed.

Only now have local politicians accepted there is no more money for the concert hall, the botanic gardens and the zoo. The city theatre is closing next year, while streets damaged by winter frost will not be repaired. If things continue as they have, debts will pass €2 billion next year, the city will run out of equity capital and an external commissioner will be appointed.

It gets worse: every second debt-ridden NRW city has been involved in dubious get-rich-quick schemes. The most popular is cross-border leasing, offering cash up-front for city assets – from trams to sewage systems – in exchange for a long-term lease-back.

But many of these complicated deals, regulated by English-language contracts few local politicians understood, turned sour when insurers like AIG went belly-up, costing cities a small fortune. Another scheme saw banks approach cities with a chance to “optimise” their loan interest rates using so-called “spread-ladder swaps”.

This allows a bank to swap a city’s long-term debt for a short-term debt at a lower interest rate. Though the city saves money short term, at the end of the agreed period a new interest rate is calculated at a rate unknown when the deal is signed.

“It’s like betting on the horses the interest payments on your mortgage,” says Dr Louis Rönsberg, a lawyer who has advised many local authorities burned by such deals.

“Town councillors with little financial know-how sign 1,000-page contracts of a complexity that only serves to disguise the high probability that it will end in a loss for the client and a win for the bank.”

Expensive rackets like these have ripped further holes in already desolate city budgets. Now officials in the NRW capital, Düsseldorf, fear a default in a small city like Wuppertal could cause a domino effect across the state.

“If one of these cities can’t pay tomorrow, we’re Greece,” said a senior government official in Düsseldorf, who spoke on condition of anonymity.

“This is a disaster on a scale that few realise, which even fewer people saw coming.”

Only last month did Berlin recognise the looming danger and begin a frantic search for new sources of income for local authorities. Cities are demanding a scheme to offload debts they can no longer hope to repay.

Berlin’s main problem is a constitutional rule that forbids it from bailing out cities in distress. All responsibility for cities falls to the state government, in this case Düsseldorf. And while is is impossible for a city to go bankrupt, officially at least, panic is growing that Düsseldorf would be swamped if a chain reaction of failed cities spreads across the state, then Germany.

“We have water up to our necks here. Berlin has to help us, and the longer a solution takes, the more expensive it will be,” said Dr Johannes Slawig, Wuppertal city director. “I cannot think about what will happen if no help comes. This is a national and a European problem.”