Costly precedent?

Germany's biggest money lender on Tuesday lost a key court case pertaining to interest-rate swaps, having argued that defeat would set a dangerous precedent.

Germany's Federal Court of Justice ordered Deutsche Bank to pay just over 540,000 euros ($768,000) plus interest to hygiene technology company Ille Papier Service, after the company lost out on a so-called spread ladder swap.

Such deals are a complex bet on interest rates in which gains and losses are liable to multiply, making them a high-risk investment.

Judge Ulrich Wiechers ruled that Deutsche Bank had sold these swaps to Ille without adequately disclosing information on the risks and fees involved. The bank contested this evaluation. The judge also said in his ruling that the bank - legally obliged to protect consumer interests while simultaneously trying to make a profit for itself - may have been obliged to advise Ille against spread ladder swaps in this instance.

Ille invested in deals that would have earned them money if long-term interest rates had risen more sharply than short-term ones, as is usually expected. Since 2007, however, short-term rates have mostly been equal to or higher than long-term ones - and that's been bad news for holders of spread ladder swaps.

Dozens of disputes

The bank warned that a verdict against it could set a far-reaching precedent. A number of companies and many local governments in Germany invested in these spread ladder swaps - and some of them have been seeking legal compensation. Despite advice from a top governmental organization not to use spread ladder swaps, describing them as an irresponsible use of taxpayers' money, around 700 local governments tried and failed to capitalize on these deals.

Legal representatives of these local governments and companies said that as many as 200 similar cases could be filed against Deutsche Bank, pertaining to losses of around a billion euros.

Author: Mark Hallam (AFP, dpa, Reuters)
Editor: Michael Lawton