PARIS Oct 5 (Reuters) - Dexia "tricked" French towns into taking out complex loans that saddled them with crippling interest payments, mayors told a parliamentary hearing on Wednesday, ahead of an expected break-up of the crisis-stricken bank.
With a restructuring plan for the lender expected as early as Thursday, following a pledge from Belgium and France to guarantee its financing in the face of a dramatic share-price slide, some local authorities said now was the time to bring the business of local-government lending under tight control.
Specifically, they advocate putting the state back in the driving seat and banning risky, variable-rate products.
Several mayors have sued Dexia over these so-called "toxic" loans, which they say were presented as "fixed" interest-rate products pegged to exchange rates such as the euro-Swiss franc.
When the new rates kicked in, the local authorities saw their 4-percent borrowing rates shoot up in some cases to 15, even 24 percent, the mayors told the hearing at France's National Assembly.
"Fixed rate, fixed rate, fixed rate -- every time the same words," said Xavier Martin-Le Chevalier, mayor of the northwestern town of Tregastel, holding up Dexia's marketing documents. "There was indeed serious trickery."
Dexia contests the size of the claims and maintains the local authorities were aware of the risks.
However, some mayors counter that they did not have the manpower or the sophistication to understand the risks.
Christophe Faverjon, mayor of the central French town of Unieux, said the state should seize the opportunity to take back control of the situation.
"We have to ban these types of speculative loans to local authorities," he told the hearing, after explaining that exchange-rate movements had saddled his town with extra interest payments equivalent to an across-the-board tax hike of 30 percent. "We need to create a state-backed financing arm."
This is broadly what France is now pushing to do. Dexia's local government lending arm was, prior to the 1990s, under the control of state bank Caisse des Depots. Now the French government is in talks to essentially put it back there, with an additional backer expected in the form of the banking arm of France's state-owned postal service.
But the uncertainty surrounding this plan, which may be unveiled as early as Thursday, has put the plight of the French mayors under the spotlight.
Claude Bartolone, a lawmaker for the Seine Saint-Denis department north of Paris, said details were urgently needed.
"It would be unacceptable to contaminate the Banque Postale and especially the Caisse des Depots, given the trust that exists between it and local governments," he said.
He added the rescue of Dexia had come at a very difficult time for local authority funding, with tougher capital rules and market volatility tightening the screws for banks. (Reporting By Lionel Laurent; Editing by Christian Plumb and Will Waterman)