Local firms to take banks to court over ‘swap’ contracts

The federation for small and medium companies in Menorca, PIME, has taken charge of actions that local businesses have decided to take against the different banks with which they have contracted the swap, disguised as an insurance against interest rises and which they later discovered was not linked to their mortgage loans and that to cancel would cost even more than they are currently paying.

In August 2010 the contracts signed by the Banco Cooperativo Español and its client Juan Luis Pons Valverde to formalise a swap were declared null and void by the court in Maó on the grounds that they were "abusive and disproportionate" and infringed the rules for consumer protection.

Now another five Menorcan companies are ready to take legal action against the banks with which they have unknowingly contracted a product that requires a high level of financial knowledge and whose future consequences, in the form of quarterly payments of between 1,500 and 5,000 euros, they were unaware.

Although wishing to remain anonymous at present, all those involved feel they have been swindled and tricked by the banks by not having been given adequate information and not having been warned that the amount they could gain whilst the interest rates were high was negligible compared to the amount they would have to pay if interest rates fell, as they did in subsequent years.

The Balearic delegate for AUSBANC (the association of bank users), Isabel Martorell, has called for everybody affected by 'swaps', whether small companies or individuals, to take their case to court, as many similar contracts with banks such as the BBVA, BSCH, Banesto, Bankinter, Banco Popular and Banc de Sabadell have already been declared null and void by the courts.

The interest rate swap

Around since the early 1980's, swaps are now one of the "most heavily traded financial contracts in the world" according to Wikipedia, with the total amount of interest rate and currency swaps outstanding in 2009 being in excess of 426.7 trillion dollars.

In a swap, two counterparties exchange certain financial benefits, which could be interest rates, currencies, commodities or equities.

Interest rate swaps, used by banks, insurance companies, government agencies etc., involve exchanging a fixed rate loan for a floating rate loan, for a period that could range from 2 years to more than 15, in order to benefit from comparative advantage. Some companies may have comparative advantage in fixed rate markets, others in floating. A company borrowing money will look for the best deal which will be the market where it has comparative advantage, but this may mean that it is borrowing at a fixed rate when it would rather have a floating rate, or vice versa. So it contracts a swap which has the effect of transforming a fixed rate loan into a floating rate loan, or the reverse.