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French towns launch debt strike over 'toxic' Dexia loans

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* Mayors seek action from state over 13 bln eur of high-riskloans

* Move follows other towns playing hardball over toxic,risky debt

* Rescued bank Dexia declines to comment, state keepsdistance

By Lionel Laurent

PARIS, France, Oct 12 (Reuters) - French towns that say theywere tricked into taking out risky loans from rescued lenderDexia are refusing to repay them in full and areasking President Francois Hollande for a bailout.

Franco-Belgian municipal bank Dexia was propped up withbillion of euros of public money last October, when it becomethe first banking victim of Europe's debt crisis after itsstrategy of using short-term borrowing scheme to financelong-term lending came unstuck.

Those loans included an estimated 13 billion euros of riskystructured products that went sour after the 2008 financialcrisis, saddling thousands of French towns with cripplinginterest rates.

Frustrated by what they perceive as government inaction overthe mounting repayments, mayors in a handful of the towns aretearing up their contracts rather than pay the state-rescuedbank with money raised from tax hikes or spendingcuts.

"I was not elected to raise taxes and to have those taxes godirectly into banks," said Xavier-Martin Le Chevalier, mayor ofthe northwestern coastal town of Tregastel. "Directly orindirectly, the state will end up having to pay the bill."

The payments strike is an unwelcome distraction for Hollandeas he battles to bring France's public deficit back belowEuropean Union limits against a backdrop of economic slowdownand rising unemployment.

The French, Belgian and Luxembourg governments initiallystumped up 45 billion euros of guarantees to cover Dexia'sdebts, a sum that was raised to 55 billion in June. On Saturday,the bank's chief executive warned it may need recapitalisingsoon.

Dozens of municipalities have already sued Dexia forallegedly mis-selling them the "toxic" debt products, which wereindexed to everything from foreign currencies to U.S. loans.

Le Chevalier said he had opted to continue paying his town'sDexia loan at the initial fixed interest rate - in his case, 3percent - rather than the new variable Swiss franc-pegged rate,which at end-July stood at 13 percent.

He is not alone.

"We will repay the principal and the previous interest rate,nothing more," said Sebastien Pietrasanta, mayor of the Parissuburb of Asnieres which, having recently ploughed millions ofeuros into an urban facelift, faces a doubling of loanrepayments to Dexia out of its 182 million-euro debt pile.

"Otherwise it means no more staff in schools and no moredaycare centres."

SPOOKING THE STATE

In its handing of the rebellious mayors, the state has sofar tended to toe the line of least resistance - understandablegiven the size of its own exposure to Dexia'sgovernment-guaranteed loan book.

Responding to the Asnieres case, junior minister Anne-MarieEscoffier said municipalities "must honour their debtrepayments" unless there has been a breach of the rules.

"The amount of money at stake is no doubt spooking the stateat a time of pressure on the public purse," said ChristopheFaverjon, mayor of the central town of Unieux. "But are we goingto let cities fail?...It is fair that the state should step in."

Some mayors believe the debtors' strike has yet to peak,given a recent ruling in the Paris Court of Appeal that upheldthe central-eastern city of Saint-Etienne's refusal to reimburseinterest-rate swaps bought from Royal Bank of Scotlandpending a final resolution of the case.

But in the case of Unieux, the Lyon Court of Appeal ruledlast month the town had broken contract law by unilaterallydeciding not to repay in full.

Dexia said it had "acknowledged" the legal ruling againstUnieux and the statement by Escoffier. The bank declined tocomment further.

As they battle the higher interest rates, manymunicipalities have started raising taxes.

"Most of us (mayors) have been building up provisions... Andthis has already started to cost municipalities," said MauriceVincent, mayor of Saint-Etienne.

"There has been a slight increase in taxation ... between 1and 4 percentage points, depending on the case."

($1 = 0.7657 euros)

(Reporting by Lionel Laurent; Editing by John Stonestreet)

((lionel.laurent@thomsonreuters.com)(+33 1 49 49 56 85)(ReutersMessaging: lionel.laurent.thomsonreuters.com@reuters.net))

Keywords: FRANCE DEXIA/MAYORS