Magazine article The Times Higher Education Supplement : THE

Derivative Formula: Dutch Plan Ban on Pure Speculation

Magazine article The Times Higher Education Supplement : THE

Derivative Formula: Dutch Plan Ban on Pure Speculation

Article excerpt

Academy's use of financial instruments worries politicians. Martin Mevius reports.

The Dutch education minister has proposed a ban on a type of financial derivative used by universities after a report found that it could leave the sector exposed.

Similarly to homeowners on fixed-rate mortgages, Dutch universities use derivatives as insurance against interest rate fluctuations on the money they have borrowed or, more controversially, intend to borrow.

But current low interest rates in response to the global economic crisis mean that the total negative value of derivatives in Dutch higher education amounts to EUR216 million (Pounds 160.6 million), according to a report from the Dutch Inspectorate of Education that was published in November.

Normally, even a sum that large does not translate into institutional losses, provided the derivatives are fully linked to existing loans.

But Leiden University, Wageningen University, VU University Amsterdam and several other institutions have purchased so-called "open positions": derivatives on loans they expect to take out in the future.

The losses can be massive when institutions are forced to sell their derivatives. Dutch education conglomerate Amarantis suffered a EUR7 million loss when it was disbanded in summer 2012 and had to get rid of its open positions.

With a negative value on derivatives of EUR80 million, VU has the largest amount of open positions on its books.

But Ton Ruhe, its finance director, said: "People forget that we will only have to pay that sum if we get rid of these derivatives. And we don't intend to get rid of them."

VU purchased its derivatives between 2002 and 2007 when it expected to invest around EUR1 billion in building projects. At the time interest rates were decreasing, so setting them at 5 per cent seemed sensible.

"One could not foresee then that rates would drop still further," Mr Ruhe said. However, he added that he was not worried. "Our derivatives run to 2032. Interest rates could well rise above 5 per cent."

The building projects did suffer "some delays" owing to cuts in government funding and the financial crisis, Mr Ruhe added, "but we are now back on track. The board has approved the first buildings. We have almost concluded negotiations about loans and expect to sign the first contracts soon. I understand the nervousness, but I can now prove that we will be using the derivatives shortly. …

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