By Hilary Russ
NEW YORK (Reuters) - New Jersey has terminated all of its interest rate swap agreements under Governor Chris Christie, paying banks $720 million to unravel $4.2 billion of swaps and wiping from its books a potentially big, unpredictable liquidity risk.
The derivative deals, which states and cities use to lower financing costs by hedging interest rate changes, have caused financial turmoil for some, most recently Detroit and Chicago. The deals either soured when rates did not move as expected or led to big termination fees triggered by credit rating downgrades.
In New Jersey, another credit cut would likely have left some of its debt just one notch above the level that would trigger swap termination payments. The state has suffered nine downgrades during Christie's tenure and is at risk of another because of its underfunded public pensions and financial weakness.
Swaps "have been considered to be toxic by market participants and the administration. The state saw an opportunity to clean up its balance sheet and did so," New Jersey Treasury spokesman Christopher Santarelli told Reuters in an e-mail.
The full cost of terminating all the swaps, a figure Santarelli provided, has not previously been reported.
New Jersey and its state bonding entities had $4.2 billion of outstanding swaps when Christie, a 2016 Republican presidential candidate, took office in 2010.
(Reporting by Hilary Russ; Editing by Bernard Orr)